Compensating uncertainty: the case of mineral resource exploration in ISDS

Abstract This article uses the concept of Knightian uncertainty to analyse reparation and damages valuation in the context of mining disputes in Investor–State Dispute Settlement (ISDS). The mining cycle is divided into two major phases: exploration and exploitation. Most investment mining claims involve projects in the exploration phase. The article conceptualizes the exploration phase as a process of accumulating information to turn Knightian uncertainty into knowable probability regarding the existence of a mineral reserve. However, in the exploration phase, investment in mine construction and exploitation has yet to occur, and therefore the project is affected by Knightian uncertainty. The article argues that the valuation method of Discounted Cash Flow, as it has been used in ISDS, cannot account for Knightian uncertainty. Therefore, the use of this valuation technique in the arbitration context can depart from Fair Market Value and lead to compensation of speculative damage, contrary to the principle of full reparation.