Awarding Lost Profits in International Investment Disputes

Awarding Lost Profits in International Investment Disputes

Dr. Mohamed Karbal is licensed to practice law in Libya, New York, and Washington D.C. and served as an expert witness on Libyan law for Tekfen-TML Joint Venture v. Man-made River. Karbal & Co is a full-service international law firm that serves the needs of businesses and governments in Libya,  Washington D.C. and Turkey.

For more information on our legal services relating to Libyan law, please visit our page.


Tribunals, whether national or international, exercise discretion when awarding lost-profits claims since such claims involve complex economic and financial data.  In lost-profits claims, the common practice is to award claimants damages to place the claimant in the same pecuniary position they would have been in had the contract been performed.  However, in general, tribunals use various methods to calculate lost-profits such as the “Benchmark” and the “Before and After” methods. 

Calculating lost-profits is complex and has resulted in courts awarding damages for lost-profits inconsistently or arbitrarily. This article will examine and compare how two tribunals analyzed the facts and explain the methodology and reasoning it relied on to issue its damages in lost-profits claims. 

In this article, we will review the case of PSEG Global Inc. and Konya Ilgin Elektrik Uretim ve Ticaret Limited Sirketi v Republic of Turkey[1] (“PSEG v Turkey”) as decided by the International Centre for Settlement of Investment Disputes (“ICSID”) in applying Turkish law.  As a comparison, we will discuss the case of Mohamed Abdulmohsen Al‐Kharafi & Sons Co. v. the State of Libya, et al.[2], which was decided under the Unified Agreement for the Investment of Arab Capital in the Arab States (Unified Agreement) and applied Libyan law. 


PSEG v Turkey

​​​​​​ As the ICSID is considered “the international body” designated to arbitrate and settle international investment disputes arising between investors and states, the ICSID has tried hundreds of cases on various procedural and substantive topics ranging from decisions on provisional measures to decisions on annulment of agreements, and matters relating to lost-profits. 


In PSEG v Turkey,PSEG Global applied to the Turkish Ministry of Energy and Natural Resources in 1994 to build a lignite-fired thermal power plant in Turkey. Authorization was granted in 1994 to prepare a feasibility study which was submitted in early 1995, and the project was approved late that year. The Implementation Contract required PSEG to conclude several agreements and protocols, most notably the Energy Sales Agreement, the Fund Agreement, and the Treasury guarantee ICSID arbitration.[3] After the Concession Contract was signed, a performance bond for USD 8.04 million was posted by PSEG on February 23, 1999,[4] which was terminated at a later time.

In its claim, registered with the ICSID on May 2, 2002, the PSEG estimated the pre-construction costs to be in excess of USD 10.5 million, which included engineering and consultant studies, development costs, and legal fees.[5]  The Project envisaged thirty-eight (38) years of commercial operation and a total investment cost of USD 804.8 million.

Assessing Lost-Profits

Based on the experts’ reports submitted, PSEG proposed to the ICSID tribunal  (“ICSID Tribunal”) three approaches to assess the damages: the fair market value, the lost-profit valuation, and the actual investments made and out of pocket expenses incurred by the Project sponsors.[6] A claim by PSEG against Turkey was based on the lost-profit valuation approach and was calculated as the equivalent to the amount of profits that PSEG would have obtained under the Concession Contract. Using the lost-profit valuation approach, PSEG estimated its lost-profits to be USD 223.742 million, where the interest incurred on the lost-profits would amount to USD 334.756 million at the end of 2006.[7]

In return, Turkey argued that the PSEG should show a record of profits in addition to performance records. Turkey convincingly invoked the awards granted in AAPL159 and Metalclad,160, which required the plaintiff to show that it had a record of profits and a performance record. Turkey explained that the for awards under Wena161 Tecmed162 and Phelps Dodge163, the ICSID refused to consider profits that were too speculative or uncertain. Furthermore, Turkey noted that in cases where lost profits were awarded to plaintiffs, such as Aminoil, the claim was based on the fact that the plaintiff had a long history of operations.[8]

The ICSID Tribunal examined other ICSID decisions whose awards were granted based on the precedent in Aucoven.  The PSEG Tribunal concluded that previous ICSID tribunals were “reluctant to award lost profits for a beginning industry and unperformed work.” As decided in Aucoven, the PSEG Tribunal added that compensation based on the lost-profits, is “normally reserved for the compensation of investments that have been substantially made and have a record of profits.”  Otherwise, compensation for lost-profits is “refused when such profits offer no certainty.”[9]

PSEG argued that its claims are based on contractual arrangements “that establishes the expectation of profit at a certain level and over a given number of years.” An identified period of investment specified in a contract renders calculating future profits an easy task.  On the contrary, the PSEG Tribunal considered that long term contracts subject to adjustment mechanisms and other possible variations with time were the “most difficult if not impossible to calculate such future profits with certainty.”[10]

In explaining the basis for its decision not to award PSEG lost-profits, the PSEG Tribunal stated:

Even assuming that none of those difficulties existed, in this case the exercise becomes moot because the parties never finalized the essential commercial terms of the contract, and as a result neither could the additional agreements concerning the sale of electricity, the Fund payments and the Treasury guarantee be finalized.

Relying on cash flow tables that were a part of proposals that did not materialize does not offer a solid basis for calculating future profits either.[11] The future profits would then be wholly speculative and uncertain. By definition, the concept of lucrum cesans requires in the first place that there is a lucrum that comes to an end as a consequence of certain breaches of contract or other forms of liability. Here such an element is not only entirely absent but impossible to estimate for the future.[12]

As a result, the PSEG Tribunal awarded PSEG compensation in the amount of USD 9,061,479.34 out of the claimed estimated lost profits of USD 223,742,000 with interest at the six months average LIBOR rate plus two (2) percent per year for each year during which amounts are owing to be compounded semi-annually.  In addition, Turkey was ordered to pay sixty-five (65) percent of the costs of the arbitration and legal costs and fees of USD 20,851,636.62.

Unified Agreement for the Investment of Arab Capital

Mohamed Abdulmohsen Al‐Kharafi & Sons Co. v. State of Libya, et al

Signed on November 26, 1980, and entering into force on September 7, 1981, the Unified Agreement for the Investment of Arab Capital in the Arab States (“Unified Agreement”) is a regional agreement limited to the Arab States which are willing to solve investment claims raised by an Arab national in its territory.  The Unified Agreement called for the establishment of an Arab Investment Court (“Al‐KharafiTribunal”), and the draft statutes of the said court came into force on February 22, 1988.

Even though it was decided in 2013, the case of Mohamed Abdulmohsen Al‐Kharafi & Sons Co. v. the State of Libya, et al. (“Al‐Kharafi v Libya”) is considered the first arbitral award issued under the Unified Agreement and was the first to apply Libyan law.


In 2006, the Libyan Ministry of Tourism approved an investment project proposed by Al-Kharafi & Sons Co. for the construction and operation of a tourism complex (the “Project”). Shortly thereafter, the Kuwaiti company signed a Built-Operate-Transfer contract with the Libyan Tourism Development Authority for a ninety (90) year land-leasing contract comprised of twenty-four (24) hectares of state-owned land in Tajura, a city in the Tripoli District. The Project was to build a small town consisting of a four-star hotel, hotel apartments, residential apartments, townhouses, villas, a shopping mall, offices, public areas, and a beach totaling 69,500 sqm.    The Project was to start in 2007, but construction work never commenced. The Ministry of Economy annulled the project’s approval in 2010 and as a result, the land-leasing contract was also invalidated.

Expert Witness

At the beginning of the dispute with the Libyan government, Al‐Kharafi was satisfied to receive USD 5 million as compensation for the loss. However, the amount of compensation was revised until it reached the amount stated in the expert’s reports submitted by Al-Kharafi.  The submitted financial reports prepared by international financial experts showed that the value of the lost-profits during the investment period of the Project covered by the contract ranged between USD 1.74 million and USD 2.55 million.

All financial experts used the data and documents provided by Al-Kharafi to prepare their scientific and unbiased reports on the estimation of the company’s lost profits for eighty-three (83) years according to commercial practice and the international accounting and financial standards.

Al‐Kharafi Tribunal’s Reasoning  

The Al‐KharafiTribunal described the experts’ reports submitted by Al-Kharafi as being:

prepared by highly renowned, specialized and expert accounting firms with vastly reliable and credible research, studies, and results… All financial experts have built on the data and documents provided by the Plaintiff to write their scientific and unbiased reports on the estimation of the company’s 83-year-long lost profits, pursuant to the commercial practice and the international accounting and financial systems.[13]

In its decision, the Al‐KharafiTribunal failed to analyze the reasoning and analysis contained in the experts’ reports. The Al‐KharafiTribunal instead reached its decision for the plaintiff based on the following reasons:

  • The experts’ “reports are considered among expertise works that the defendants could have objected to and refuted by means of response expert reports prepared by specialized firms having an excellent professional reputation.”
  • “The defendants did not submit any response expert report to refute the content of the reports submitted by the [Al-Kharafi].”

The Al‐KharafiTribunal added, “the [d]efendants’ discussion of these four reports was limited to the form and did not tackle the details and calculations through the submission of reports characterized by the same level of expertise as the submitted four reports.”[14]

Concerns with the Experts’ Reports

Instead of questioning the experts’ method of forecasting the lost profit of the Project which had never commenced, the Al‐KharafiTribunal asked the same question twice framed differently to the two experts.   The Al‐KharafiTribunal first asked if the damages mentioned in the reports were real and certain lost opportunities and constitute a lost profit.”[15]  The experts replied that the lost profit was certain and represents the minimum.” 

After the Al‐KharafiTribunal repeated the same question (for an unknown reason), and the experts’ answer was, “[t]hese are certain profits that the Plaintiff has lost and which it would have otherwise certainly realized in the normal conditions currently prevailing in Libya.”[16] In cases where a court rewards the claimant compensation for lost-profits based on the breach of a contract  if for goods and/or services, the contract would refer to the amount of items/service to be provided and the corresponding price.

For the case at hand, the Al‐KharafiTribunal appears to have failed to review the facts. The case did not involve the purchase and sale of products or the provision of services: The case involved a land lease on which the Project will be built and there was no guarantee on the number of clients would seek the service provided by Al-Kharafi. Furthermore, the Project never commenced.    

In Al-Kharafi v. Libya, the experts relied on the fair market value based on the “conditions currently prevailing in Libya.”  The experts calculated how much profit the Project would generate during the first year and later multiplied such a figure by the number of years remaining of the land lease agreement (i.e., eighty-three).

The experts, in theory, should have obtained a performance record to establish that the Project is generating a profit in order for Al-Kharafi to be awarded damages of lost-profits. Logically, Al-Kharafi should not have been awarded loss-profits as the Project did not have a performance record.

The Status of Al-Kharafi v Libya

Since Al-Kharafi v Libya’s award was published in 2013, both parties became involved in legal proceedings.  Al-Kharafi filed for proceedings to seize Libyan properties around the world, as an attempt to enforce the award. In 2015 and 2016, Al-Kharafi Construction Group failed to take ownership of the luxurious Libyan plane, previously used by Kaddafi.  The aircraft was on a maintenance program in France.

On the other hand, the Libyan authorities filled legal proceedings with the Egyptian courts.  At first, the Cairo Court of Appeal rejected the Libyan request to annul the award in Al-Kharafi v. Libya.  The Court of Appeal’s decision was appealed before the Supreme Court, who in December 2019 overturned Cairo’s Court of Appeal decision and ordered rehearing.   

In June 2020, the Cairo Court of Appeal found that the arbitral award should be set aside. The court based its decision to annul the award on two significant issues.  The first issue was that the judicial system, from a public policy view, is always entitled to examine and ensure that the core procedural standards, such as standards of fairness, have been adhered to by the arbitral trial.

The second issue was the judges are entitled to evaluate whether the award was based on reasons and conclusions that represent a clear and real violation of public policy.  The court concluded that the award was unproportioned to the actual damage, especially when Al-Kharafi, at the beginning of the dispute, was only demanding five (5) million dollars as compensation. 

This article was first written in 2018.

[1] PSEG Global Inc. and Konya Ilgin Elektrik Uretim ve Ticaret Limited Sirketi v Republic of Turkey, ICSID Case No. ARB/02/5

[2] Mohamed Abdulmohsen Al‐Kharafi & Sons Co. v. State of Libya, et al. Final Award Document downloaded from

[3] Id. para.24.

[4] Id. para.21.

[5] PSEG Global Inc. and Konya Ilgin Elektrik Uretim ve Ticaret Limited Sirketi v Republic of Turkey, ICSID Case No. ARB/02/5, para.19.

[6] Id. para.283.

[7] Id. para.285.

[8] Id. para.311.

[9] Id. para.310.

[10] Id. para.312.

[11] Id. para.313

[12] Ibid.

[13] Mohamed Abdulmohsen Al‐Kharafi & Sons Co. v. State of Libya, et al. Final Award Document downloaded from p.378.

[14] Ibid.

[15] Ibid.

[16] Ibid.