Source: https://www.acerislaw.com/going-concern-arbitration/
Timestamp: 2019-04-26 01:50:03+00:00

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In one of our previous blogs, we provided several methods used in international arbitration to estimate damages caused by treaty violations by host States.
This article will focus on one of those methods, the income method (commonly known as the discounted cash flow ‘DCF’ method) and, in particular, on the notion of a ‘going concern’ for the purposes of investment arbitration.
The term ‘going concern’ has turned out to be crucial in arbitral tribunals’ assessment of damages via the DCF method, since it removes doubt about the speculative nature of the future profitability of a foreign investment.
Despite the current use of the term ‘going concern’ in international arbitration, we will discuss whether this notion has been employed accurately.
The notion of a ‘going concern’ stems from accounting standards.
Arbitral tribunals have widely referred to the notion of a going concern while applying or rejecting a DCF valuation of an investment. For instance, the Iran-US Claims Tribunal in Amoco ruled that in order to establish a going concern, one has to prove that “an undertaking … had demonstrated a certain ability to earn revenues and was, therefore to be considered as keeping such ability for the future.” The same standard of proof has been required by investor-State arbitration tribunals.
Thus, if a foreign investor is seeking compensation from a host State for harm to its investment, it should avoid relying on a DCF valuation in the absence of a track record of profitability. Conversely, if a State is going to expropriate a foreign investment, it should do so before the foreign investment establishes a track record of profitability in order to lessen the risk of paying compensation.
 See for example Phelps Dodge Corp. v. Islamic Republic of Iran, 10 Iran-US CL. Trib. Rep. 121 (1986), para. 30: “The Tribunal cannot agree that SICAB had become a “going concern” prior to November 1980 so that such elements of value as future profits and goodwill could confidently be valued. In the case of SICAB, any conclusions on these matters would be highly speculative.“ See also Siemens A.G. v. Argentina, ICSID Case No. ARB/02/8, Award, 6 February 2007, para. 355: “… the DCF method is applied to ongoing concerns based on the historical data of their revenues and profits; otherwise, it is considered that the data is too speculative to calculate future profit”. See generally, I. Marboe, Calculation of Compensation and Damages in International Investment Law, Oxford University Press (2017), pp. 242-244.
 Proposed Accounting Standards Update, Disclosure of Uncertainties about an Entity’s Going Concern Presumption, FASB (2013), p. 5.
 International Standard on Auditing (ISA) 570, “Going Concern”, p. 8.
 Amoco International Finance v. Islamic Republic of Iran, 15 Iran-US CL. Trib. Rep. 189 (1987), para. 203.
 Asian Agricultural Products LTD. V. Republic of Sri Lanka, ICSID Case No. ARB/87/3, Award, 27 June 1990, paras. 105-108; Metalclad Corporation v. The United Mexican States, ICSID Case No. ARB(AF)/97/1, Award, 30 August 2000, paras. 119-121.
 Vivian Mai Tavakoli v. Islamic Republic of Iran, 33 Iran-US CL. Trib. Rep. 206 (1997), para. 95.
 Asian Agricultural Products LTD. V. Republic of Sri Lanka, ICSID Case No. ARB/87/3, Award, 27 June 1990, para. 103.
 See for example Mohammad Ammar AL-Bahloul v. The Republic of Tajikistan, SCC Case n° V (064/2008), Final award, June 8, 2010, para. 71.
 World Bank Guidelines on the Treatment of Direct Investment, 1992; Section IV 6.
 Although, under special circumstances, the DCF method can be used even when the investment had not started operation. See Mohammad Ammar AL-Bahloul v. The Republic of Tajikistan, SCC Case n° V (064/2008), Final award, June 8, 2010, para. 74.
 M. Kantor, Valuation for Arbitration, Kluwer (2008), p. 95.

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