Expert Opinion: A new paradigm for damage claim valuation?

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Estimating damage claim values is at the heart of any litigation proceeding. The Traditional Discounted Cash-Flow approach (“Traditional DCF”) is the most standard approach used to value a damage claim, and the approach courts generally rely on. However, in the 2019 Tethyan Copper Company Ltd v Republic of Pakistan arbitration, the ICSID Tribunal awarded the claimant US $7 billion using a new valuation approach referred to as “Modern DCF”, whereas the valuation using the Traditional DCF approach was negative.
 
The striking difference between these valuation results raises questions for practitioners: How does the Modern DCF approach work? What drives the difference between the two approaches? Has the Modern DCF approach sound economic foundations and can it, therefore, be considered in other proceedings? If so, in which cases may the Modern DCF approach prove more suitable than the Traditional DCF approach to provide an accurate valuation of a damage claim?
 
In this Expert Opinion, economists Frédéric Palomino, Senior Vice President, and Guillaume Duquesne, Vice President, from Compass Lexecon seek to address these questions.

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