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To revert to takings or destruction of property in violation of international law proper, there seems to be no doubt that the capital value of the property for the purpose of compensation or damages is generally assessed on the basis of ‘fair market value’ of the property concerned. In the American International Group Inc Case the Iran-US Claims Tribunal stated that under general international law ‘the valuation should be made on the basis of the fair market value of the shares’. 74 As for the application of the ‘fair market principle’, in the Starrett Housing Corp Case the same tribunal accepted its expert's concept of fair market value ‘as the price that a willing buyer could pay to a willing seller in circumstances in which each had good information, each desired to maximize his financial gain, and neither was under duress or threat’. 75
However, there are variations in the methods used to assess ‘fair market value’ which must depend on the nature of the asset concerned. Each case must be considered on its own and there may be difficulties associated with the process of establishing ‘fair market value’.
There is some case law, to be found mainly in the jurisprudence of the Iran-US Claims Tribunal, dealing with the establishment of ‘full’ value generally, in the context of the taking of property as expropriation. ‘Full’ value covers the concept of ‘fair market value’, whether the taking being considered is lawful or unlawful. 76
To deal with the transnational awards first, in the LIAMCO Arbitration 77 the sole arbitrator dealt differently with physical assets—plant and equipment—and contractual rights under the concession expropriated. Under the former the value given to current assets at market rates was accepted, while for other assets the ‘market value’ given by the investor was accepted. The value of seventy oil wells was based on the original cost as shown on the books adjusted for variation in construction costs by application of the appropriate international Middle East construction index. Reductions were made for current liabilities as for income tax. The acceptance of these amounts was also referred to the terms of the concession contract. The claim for the loss of the concession rights to exploit oil wells which (p. 302) entailed an estimate of lost profits was based on an evaluation of production over the period of the concession determined by reference to the official market price of crude oil for July 1976, without heeding any probable future increase, less costs, expenditures, taxes, etc. But because the arbitrator had decided that only an ‘equitable’ amount should be awarded for lost profits, taking into account certain other variables, the claimant's estimate of $193,770,000 was reduced in the award to $66,000,000. From the point of view of valuation methods what is important there is that (a) for physical assets the original cost, as shown on the books of the claimant adjusted for variation in construction costs by the appropriate index less actual liabilities and as claimed by the claimant, was accepted for the calculation of market value; (b) for current assets the claimant's estimate of their value market rates was accepted; and (c) for lost profits the value of crude oil at the market price on a fixed day in the past on the basis of the claimant's reasonable estimate of volume determined by past experience was not accepted as the true estimate of lost profits, because there was a discrepancy between the claim and an estimate which could have been made the basis of the Libyan partner's share of the possible profits from the operation of the concessions. Separately the arbitrator awarded an ‘equitable’ amount to cover lost profits. In the Aminoil Arbitration the tribunal accepted a joint report by the respective accountants of the parties as the basis for its award, taking the mean of the two totals reached and modifying this by reference to certain other factors in respect of which it did not posses any data as numerically worked out as those included in the joint report. 78 The accounting was based on the ‘going concern value’ of the enterprise, the anticipated profits on a reasonable basis being reckoned over the relevant period of years and discounted at an annual rate of interest and the depreciated replacement value of the fixed assets (not the net book value) being added to that. 79From this amount was deducted liabilities. The original cost could not be used as a basis for the valuation of fixed assets in this case, as it might have been, if the investment had been a recent one. It should be observed that in this case the parties produced figures based on the principles of valuation accepted by the tribunal and it was only because there was a discrepancy in the results that the solution of adopting the mean was accepted.
The Iran-US Claims tribunal, as an international tribunal, has had to determine the full value of expropriated property on several occasions. With regard to land and tangible assets, whether their value has been claimed as part of the going concern value of a business or by themselves, the tribunal has accepted a variety of valuation methods, depending largely on the proposals put forward by the claimants. In the Sedco Inc Case 80 the claim was for the value of land and tangible assets per se. The claimant proposed that two parcels of land be valued but in different (p. 303) ways. For one parcel of land, while it was alleged by the claimant that prices had risen in the past year, the historic cost of the land based on the price paid for a similar parcel of land one year earlier was awarded as the fair market value. In the other the value was determined by means of current cost accounting. This involved: ‘(1) increasing the historical or book cost of an asset through application of an appropriate price index to arrive at an estimate of “current cost new” of the asset, and (2) subtracting from the “current cost new” a “current depreciation” amount derived by application of the same price index to the book depreciation of the asset.’ 81 In the absence of substantiated argument against the figures proposed by the claimant, the tribunal awarded the sums claimed. In addition the value of tangible assets, oil rigs, equipment, and warehouse stock was claimed. The claimant proposed that the ‘liquidation value’ be accepted on the assumption that the affairs of the enterprise had been wound up and its assets disposed of on the open market but presumably with no discount from this value as might occur in actual distress liquidation circumstances. The tribunal accepted this criterion. In order to prove the value of the assets on the open market the claimant produced evidence, including data as to comparable sales and appraisals, the value placed on oil rigs in its insurance policies, what it would have cost in 1979 to replace the rigs, the rigs' current net book value on the books of account of the company, and the appraisal of an expert. The respondent contested the amount claimed on this basis, giving a value of less than half that amount. The tribunal held that the respondent's figures were based on several incorrect assumptions and awarded about 79 per cent of the amount claimed, having adjusted the figure downward on the basis of its own analysis of the relationship between the claimant's net book value and actual value. In another aspect of the case the tribunal awarded as a part of what it described as damnum emergens lost profits for the use of oil rigs for nine months—the time considered necessary to procure and assemble replacement rigs. 82 The tribunal had decided to include this element in damnum emergens in the second interlocutory award in that case. 83 In this case, the tribunal proceeded on the basis that full compensation, including its conception of damnum emergens, had to be paid. 84
There were four other cases in which tangible assets were valued in the awards made. These may be summarized in the following manner. 85 In the Sola Tiles Inc Case 86 the value of the physical assets and inventory of a luxury building tiles business was fixed by a determination of the market value of the assets on the basis of an appraisal that had been performed by an interested investor approximately (p. 304) one year before the business was expropriated. In the Computer Sciences Corporation Case 87 the tribunal awarded net book value of office equipment and furniture as had been requested by the claimant, but in the Dames and Moore Case 88 in which the claimant requested US $354,924 as the actual purchase price of vehicles, office equipment, instruments, and other equipment, the tribunal awarded an estimated value of US $100,000 in the absence of evidence of the relationship between the purchase price and the value on the date the assets were expropriated. Similarly, in the William L Pereira Associates Inc Case 89 the tribunal awarded 1,000,000 Rials for office equipment and a company car, citing likely depreciation and nominal resale value for small items, although the claimant had asked for 5,455,990 Rials as the actual purchase price.
In the three so-called ‘nationalization’ cases, where the tribunal purported to award full compensation by whatever route it took in interpreting the law, different methods were used for ascertaining the value of the property. In the INA Corporation Case 90 (nationalization of an insurance company), which was the simplest in this regard, the tribunal proceeded to award the claimant the full amount which it had invested in the enterprise approximately one year before the nationalization took place. In the American International Group Inc Case, 91 where also an insurance company was nationalized, the award indicated that full compensation in this case meant fair market value of the claimant's share interests (35 per cent) in the enterprise as a going concern, including goodwill and likely future profitability. The court went on to say that any effects of the nationalization or subsequent events should not be considered in arriving at that value, 92 but that the impact of changes in the political, economic, and social conditions as a result of events which took place prior to the nationalization should be included in measuring that value. The technique of valuation used by the tribunal was that of ‘approximation’ based on evidence produced by the parties. The claimant produced the reports of two independent actuaries, one Swedish and one British. The respondent produced two reports of experts, one of which showed the book value of the company, while the other gave the value of the entire company. The latter was between four and five per cent of the figure quoted by the claimant's experts. The valuations were widely disparate. The tribunal, therefore, made ‘an approximation of that value, taking into account all relevant circumstances in the case’. 93 This sum (US $10,000,000) was about five or six times the highest value proposed by the respondents and about 25 per cent of the value requested by the claimant. In the third case, the Phillips Petroleum Company of Iran Case, 94 (p. 305) the tribunal's terminus ad quem was also the establishment of the fair market value of the enterprise. The respondent argued in favour of the net book value as the amount of compensation, while the claimant presented a claim based on the discounted cash flow (DCF) method. The tribunal, noting that there was no active and free market, declared that it was necessary to resort to various analytical methods to construct the market value and to consider all factors relevant to the valuation, not merely those which were components of particular methods of valuation. 95 The tribunal adverted also to the ‘underlying asset valuation method’ as being useful for its purposes, in addition to mentioning the DCF method. The ‘underlying asset valuation’ method was described as taking as a starting point previous investment and determining future profitability on the basis of historical performance. The tribunal disagreed with several factors used in the claimant's DCF calculation and also took the view that it was not an exclusive method of analysis, though it did say that the method could make a relevant contribution to the evidence of market value. Finally, it awarded the claimant about 32 per cent of what had been claimed on the basis of the DCF method, after itself reducing the figure reached on its own calculations based on the method of valuation preferred by it. Presumably, this was the tribunal's notion of full value.
In the cases where interests in business enterprises had been expropriated a variety of valuation methods have been accepted by the tribunal. In two cases, the Tippetts, Abbett, McCarthy, Stratton Case and the Sedco Inc Case, 96 the tribunal made determinations on the basis of the dissolution value of the businesses expropriated, because the claimants requested this. The dissolution value was described in the former case as the value of the enterprise after the collection of all assets and the discharge of all obligations. 97
In the case of ongoing business enterprises the approach was different. In the Starrett Housing Corp Case 98 compensation payable was taken to be the fair market value of the claimant's interest in the business as a going concern. The fair market value was defined as the price the willing buyer would pay a willing seller in circumstances in which each had good information, each desired to maximize his financial gain, and neither was under duress or threat, the willing buyer being a reasonable business man. 99 The tribunal found that the DCF method had been highly emphasized by the expert to whom they had referred the matter and the respondent had not objected to the use of the method. The tribunal ultimately questioned some of the expert's judgments on key elements and awarded less than one-third of the original amount claimed. This seems to be the only case in (p. 306) which the claimant's use of the DCF method was totally accepted as a means of establishing the market value, even though the claim was drastically reduced.
In the Phelps Dodge Corporation Case 100 the going concern value was rejected as a measure of value of the business because the business was not a going concern on the date of expropriation. It was also found that the business of the enterprise was likely to have been diminished as a result of the Iranian Revolution, and that there was no market for that kind of business or shares in the business. The respondent offered net book value but this the tribunal did not accept as a fair value of the business. Instead the tribunal awarded the amount of the claimant's original investment which had been made not long before the property was expropriated. In the Sola Tiles Inc Case 101 the going concern value was rejected in respect of a business involving the import and distribution of tiles for luxury housing, because the business had operated for only two years and there had been a loss in the first year and a small profit in the second and the demand for luxury tiles would have diminished as a result of the revolution. This meant that no value would be assigned to goodwill or future profitability. On the other hand, it was recognised that the business did have some market value which should be the basis of the award of compensation. On the basis of evidence produced by the claimant the tribunal placed a value on what it saw as the elements of the business which covered the value of the physical assets including inventory and a reasonable estimate of accounts receivable. It awarded less than 20 per cent of what had been claimed. In both these cases going concern value was rejected on the facts. 102
The Thomas Earl Payne Case 103 concerned a business for the distribution of motion picture films, sales representation, and technical laboratory services. The enterprise had been operating at a substantial profit level for several years before it was expropriated. The claimant proposed that the business should be valued as a going concern by taking a multiple of ten times the net average earnings of the three years preceding the taking. The respondent contended that only the net book value which showed a negative net worth should be considered. The tribunal conceded that the going concern value should be awarded. However, it found, upon considering the effects of the revolution upon the kind of business conducted by the enterprise and other factors which had affected the level of business, that it must make an approximation of the value of the interest expropriated. It awarded less than one-third the amount claimed. In the more recent CBS Inc Case 104 the tribunal found that because of the effects of the revolution upon the nature of the business which had been expropriated the enterprise had a negative net worth at the time of expropriation. A valuation based (p. 307) on past net profits or on an estimate of profits which induced the investment was therefore rejected and no compensation awarded.
An important contribution was made by the Amoco International Finance Corp Case 105 in which the DCF method of establishing going concern or fair market value was not adopted as such. The business involved the building and operating of a plant for the production and marketing of sulphur and various kinds of gas. The tribunal was of the view that a lawful expropriation demanded ‘just’ compensation in the sense of the full equivalent of the property taken, which meant, inter alia, that extraneous factors such as excessive past profits or the rate of return on the initial investment should not be considered.106 Market value, on the other hand, was said to be ambiguous when ‘an open market does not exist for the expropriated asset or for goods identical or comparable to it’. 107 In this case the claimant valued the property taken according to the DCF method and arrived at a value of $183,232,986. The respondent argued for the net book value of the property and arrived at a figure of $14,650,000. The tribunal seems to have had some concerns about the relevance of lost future profits as a major element in the calculation of the market value on the ground that they could be too speculative. 108 While it acknowledged that the DCF method could provide useful information about profitability, it, nevertheless, felt that it could be applied in such a way that lucrum cessans became the sole element of compensation, which was not acceptable. A distinction was made between profitability as an intangible that could be included in the value of total assets whose net value would be payable when an expropriation was lawful and the value of revenues that the owner would have earned if the expropriation had not taken place which was only relevant in the case of an unlawful expropriation.109 Having concluded that neither the DCF method nor the net book value was per se appropriate in the case, the tribunal ordered that the parties provide additional information to the tribunal in order to make the determination of the exact amount of the award which must represent the going concern value of the expropriated interest, also stating that:
264. Going concern value encompasses not only the physical and financial assets of the undertaking, but also the intangible valuables which contribute to its earning power, such as contractual rights (supply and delivery contracts, patent licenses and so on), as well as goodwill and commercial prospects. Although those assets are closely linked to the profitability of the concern, they cannot and must not be confused with the financial capitalization of the revenues which might be generated by such a concern after the transfer of property resulting from the expropriation (lucrum cessans).
(p. 308)
265. The value of a going concern—of Khemco in this case—is ‘made up of the values of the various components of the undertaking separately considered, and of the undertaking itself considered as an organic totality or going concern—therefore as a unified whole, the value of which is greater than that of its component parts’, to take the words of the award in the Aminoil Case … The arbitral tribunal in that case added that account should also be taken ‘of the legitimate expectations of the owners’. This last remark, however, has to be understood in relation to a previous finding of that tribunal, which noted that this concept of ‘legitimate expectations’ had been used by the parties in their contractual relations with a specific meaning. In the present Case, the legitimate expectations of the Parties can only be deduced from the history of the concern and from its various components, as well as from the terms of the Khemco Agreement, taking into account the circumstances prevailing at the time of the taking. Finally, the liabilities of Khemco at the valuation date have to be deducted from the total value so determined. 110
The precedents discussed above show a variety of approaches to establishing full compensation. As for methods of valuation, there is certainly no rule of thumb or magic in any particular method. Much depends on the nature of the property or interest taken as well as on the circumstances of the taking. Different approaches may be demanded for tangible assets and business concerns. Even so there is no single accepted method of valuing either of those categories, as has been seen.
As for the valuation of interests in business concerns, it is not always the case that ‘going concern value’ is the criterion. This depends on the circumstances of the case—was the business in fact a going concern? Whether the business was (p. 309) a going concern or not, the method of valuation may vary. In the event that the business is held to be a going concern, still there is no single accepted method of valuation that tribunals have applied. The DCF method, for instance, was fully accepted only in one of the many cases concerning businesses which the Iran-US Claims Tribunal decided, though even so the valuation based on that method was drastically reduced in the award. Further, the respondent virtually agreed to the use of this method in the case by not objecting to it. It was also rejected outright in one such case. Another factor which may be of some importance in determining the approach a tribunal may take are the methods of valuation used by the parties. If the parties are in agreement on the method, the tribunal may be inclined to adopt the method agreed upon as at least the basis for an award. If the parties disagree, the tribunal may or may not use the claimant's method but will be more ready to find a third way or a compromise.
There are a few more observations to be made. Net book value as a method of establishing full compensation is not generally accepted, especially for going concerns, 111 although it has been used on one or two occasions, where the circumstances have been very special and it has been fancied, particularly by the respondent. It may be noted in this connection that in the Amoco International Finance Corp Case the view was taken that the doctrine of unjust enrichment, even if relevant to the calculation of compensation payable, did not require that only net book value be paid. 112
Future profitability and goodwill which are different from actual profits may well be elements to be considered in the assessment of full value regardless of whether lost profits must be compensated. This principle emerges particularly from the Amoco International Finance Corp Case, where it was understood that the Chorzów Factory Case did not permit the inclusion of lucrum cessans or probable future profits in the value of the undertaking as such. 113
To sum up the methods used to establish the value of property and the problems associated with the process the commentary to Article 31 of the ILC's Articles on State Responsibility may be cited: 114 (p. 310)
(22) … Where the property in question or comparable property is freely traded on an open market, value is more readily determined. In such cases, the choice and application of asset-based valuation methods based on market data and the physical properties of the assets is relatively unproblematic, apart from evidentiary difficulties associated with long outstanding claims. 115 Where the property interests in question are unique or unusual, for example, art works or other cultural property, 116 or are not the subject of frequent or recent market transactions, the determination of value is more difficult. This may be true, for example, in respect of certain business entities in the nature of a going concern, especially if shares are not regularly traded. 117
(23) Decisions of various ad hoc tribunals since 1945 have been dominated by claims in respect of nationalised business entities. The preferred approach in these cases has been to examine the assets of the business, making allowance for good will and profitability as appropriate. This method has the advantage of grounding compensation as much as possible in some objective assessment of value linked to the tangible asset backing of the business. The value of goodwill and other indicators of profitability may be uncertain, unless derived from information provided by a recent sale or acceptable arms-length offer. Yet, for profitable business entities where the whole is greater than the sum of the parts, compensation would be incomplete without paying due regard to such factors. 118 , 119
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