Johan Maunsbach

IA Reporter has put out an extensive review of the award in the case of Metlife v Argentina, which arose from a governmental decision to abolish the private pension regime in 2008 (the article is behind a paywall, but clearly it won’t be long before the award is published in its entirety). Metlife’s claim was for more than 500 million dollars, but the amount awarded came to barely over 8 million, plus around 6 million in legal costs. Around three quarters of the Metlife claim actually consisted of pre-award interest, calculated from a date going back more than 8 years before the arbitration was filed (2017). Over this period of time, interest rates were exceedingly low, but the reason why the pre-award interest claim was so large was that the rate at which interest was assumed to accrue was the Weighted Average Cost of Capital (WACC) of Metlife (11%). The rationale behind such a claim is that a governmental measure like that at issue in the case sequesters funds that an investor would have had available to invest but for the perfidy of the government that took measure, and for which the investor would expect to receive no less than their WACC. While such a rationale might sound superficially plausible, it is absurd. For one thing, capitalist firms are not guaranteed to recoup their WACC (in fact, the essence of the system is a process of Schumpeterian creative destruction whereby most firms don’t manage this). But even more tellingly, consider this thought experiment: assume two firms with different risk profiles and, hence, different WACCs, but identical market value (as calculated by the discounted cash flow methodology). The firms are expropriated on the same day. Their respective owners file for arbitration eight years down the line. Under the sequestration theory delineated above, the owner of the riskier firm with the higher WACC would supposedly be owed more in compensation than the owner of the firm with the better risk profile. Go figure. The sequestration theory underlying the Metlife claim was comprehensively pulverized in a classic paper by Romaine and Fisher with the peerless title of “Janis Joplin's Yearbook and the Theory of Damages” (https://lnkd.in/eJHyiKEQ). However, arbitrators may not be familiar with this paper and, furthermore, submitting inflated damages claims is something that is not penalized or sanctioned in international arbitration. Thus, as in Metlife, claims of the utmost dubiousness may be advanced by claimants who know that exaggeration may be (and often is) rewarded by generous increases to reasonable compensation. This is a manifestation of an empirically attested characteristic of decision-making under uncertainty referred to as ‘anchoring’, which in turn explains the phenomenon of runaway claim inflation discussed in Chapter 10 of Rethinking Investment Law (edited by David Schneiderman and Gus Van Harten), and of which Metlife v Argentina is yet another excellent example.

46