Causation and the Broken Chain: An Analysis in light of the Lone Star Award

In August 2022, a tribunal in Lone Star v Korea (summarized in the previous ITN issue) issued its decision, reiterating the principle that an investor’s own contributory actions can break the chain of causation and reduce the damages awarded.[1] However, this decision highlights how little attention has been paid under international law to the issue of causation, especially when it comes to formulating the common standards governing causation, including the investor’s contributory conduct.

The tribunal’s approach in this case is also reminiscent of the recurring problem under present international investment law, that is, that tribunals have seldom applied a common set of standards when assessing the causation inquiry. On this effect, Plakokefalos (2015) notes that there is no clarity as to the steps of the reasoning that are being employed in order to establish causation.[2]

Background to Dispute and Decision

Lone Star, a Texan investment fund (consisting of LSF-KEB Holdings SCA (“LSF-KEB”) and group companies (“claimants”), brought a claim against the Republic of Korea (“respondent”) on the grounds that a delay by Korea’s financial regulator, the Financial Services Commission (“FSC”) in approving LSF-KEB’s sale of its majority shareholding (“Hana Approval”) in Korean Exchange Bank (“KEB”) resulted in it losing a substantial portion of its control premium.

The respondent argued that the FSC, being a statutory regulator, had a statutory obligation to protect the Korean financial market. This obligation was statutorily triggered post LSF-KEB’s conviction in a stock manipulation case (“financial crime”) whereby the FSC, in light of statutory edict, required LSF-KEB to dispose of its shareholding in excess of 10% to an approved purchaser with a fixed date and for a reduced sale price via its compliance order dated October 25, 2011 (“compliance order”). It is the position of the claimants that as a result of the compliance order and constant pressure exerted through the media,  LSF-KEB was forced into signing a new share purchase agreement (“new SPA”) with the Hana Financial Group and Hana Bank (“Hana” or “purchaser”) at a price below KEB’s current trading value and, in the process, it lost value equivalent to USD 433 million.

The tribunal held that FSC had violated its obligations of providing fair and equitable treatment to the claimants by delaying a fair and expeditious processing of the application. However, applying the principle of contributory fault, the tribunal concluded that Lone Star “materially contributed to the damage” by its wilful criminal conduct, without which FSC would not have the leverage to engage in its treaty-violating behaviour. The tribunal, therefore, apportioned liability between the claimant and respondent and ordered the respondents to pay half of the claimed amount, a total of USD 216.5 million.

Establishing a Causal Link Between State Conduct and Injury

Under international law of state responsibility, a state is only liable for any harm attributed to the state’s actions or omissions.[3] Under Article 34 of the Report of the International Law Commission on the work of its Fifty-Third Session [hereinafter the “draft articles”], any liability of the respondent state is dependent upon the establishment by a claimant of a causal link between the state’s conduct and the harm complained of. Therefore, even if such state acts or omissions are in breach of an international treaty, failing to establish an injury caused by such international breach can lead to a finding of liability but no damage.[4]

Revisiting the facts of the dispute would be useful in understanding the causal link. Lone Star was convicted of a financial crime under Korean law. The tribunal notes that this conviction gave impetus for FSC to apply pressure upon Lone Star to reduce the price at which it would sell its shareholdings to Hana. The tribunal reasoned that the FSC’s actions were in contravention of statutory duties and that it was rather acting out in self-interest in light of the intense media spotlight and political scrutiny upon it for its failing to act upon the pejoratively described “eat-and-run” investors like Lone Star. The tribunal reasoned that this pressure caused Lone Star to reduce the price at which it sold its shareholding in KEB.

The Standards Applicable to Causation

The causation inquiry has two components.[5] The first is an analysis of the factual causation whereby it must be shown that the loss suffered was a natural consequence of the wrongful act.[6] The second is the legal causation component, in which it must be shown that the loss was proximate as opposed to being “too indirect, remote, and uncertain to be appraised.”[7] There is not often a neat division between these two prongs of inquiry.[8] In fact, it has been argued that there is no material difference between the two.[9]

The most widely applied test for factual causation is the “but for” test, which poses the question of whether the damage would have occurred but for the wrongful act.[10] However, the tribunal’s reasoning in this case was problematic in that it erred in applying the substantive rules on causation. The tribunal held that the injury occurred due to two “concurrent” misconducts: a criminal conviction of LSF-KEB and the misconduct of the FSC. In other words, it held that “but for” the concurrent actions by competing parties, the Hana transaction would have been approved and the loss avoided.[11] Therefore, the tribunal equates “concurrent events” divided in time as “parallel” causes.

The respondent had argued that the underlying cause behind the loss was Lone Star’s criminal misconduct, and that was the “efficient” cause of loss as “but for” the conviction, the approval of the Hana transaction would have been given by the FSC at its scheduled meeting. Indeed, on analysis of the case facts, which are not contested by the tribunal, following its criminal conviction, Lone Star, by statutory application, was not entitled by law to shares above 10% and, by extension, any control premium. Its position, aptly described by the tribunal, was that of a “dead man walking.”[12] The compliance order issued by FSC mitigated the possibility of Lone Star suffering only partial and not total loss of its control premium. Therefore, the proximate cause of Lone Star’s loss was indeed the conviction for the criminal conviction.

In what seems a troublesome exposition, the tribunal stated that the concept of contributory fault does not depend on whether the contributing causes were concurrent or sequential. The tribunal merely treated this distinction as a “formalistic listing” of the sequence of events and declared the event last in time to have erased the prior misconduct of the other party. The chain of causation often has a logical correlation that really should rarely be treated in such a perfunctory manner.

No Remedy for the Breaker of the Chain?

If indeed a liability is attributed to the respondent, under international law, contributory negligence is one of the concurrent causes which could deny or reduce any damages awarded. Ripinsky and Williams (2008) note that tribunals have considered that where the claimants’ actions have “materially contributed” to the loss suffered, it was a mitigating factor for reducing compensation awarded.[13] An action would be considered to have materially contributed to the injury if it was “imprudent” conduct. In fact, the tribunal noted that the action of stock manipulation was not only imprudent but outright illegal and a financial crime under Korean law.

In the present case, the tribunal observed that in the absence of the Hana transaction, the statutory effect of not selling shareholdings in KEB would leave Lone Star without an approved buyer and cause it to lose its entire control premium instead of only a portion of it. Therefore, it decided that the claimant’s action was not based on duress. The tribunal, however, contradicted itself by saying that the decision to lower the price was not made in commercial interest. By extension, it can be then argued that Lone Star had willingly agreed to reduce the price at which it sold KEB shares out of its own commercial interest. Indeed, as noted by Stern in the dissenting opinion, if the sale to Hana did not go through, the claimant would have to sell its shares on the open market in the 6 months after the sale order.[14]

If we observe the usual scenarios where state responsibility is attributed, the state’s actions are usually either an act of legislative or administrative power or a decision of a court or an act of the police or the army resulting also in a forced interference with an investor’s property. In all these cases, the state’s actions leave the claimant with no choice. In Lone Star, in the absence of any state conduct that established duress, the claimants’ own “free action” of reducing the price was, therefore, the “free act” that broke the chain of causation.

Need for a Dedicated Causation Analysis

In investment law practice and academic literature, the analysis of causation is seldom treated as a separate step distinct from the analysis of liability and quantum.[15] The distinction is, however, important. Causation is a bridge or connecting link between liability and quantum.[16] The tribunal’s findings on breach should determine the scope of the causation inquiry, but not necessarily its outcome.[17] Even under the draft articles, the determination of a causation link is a separate analysis and sits at the inflection point between a query of breach and an assessment of damages. In other words, a causal inquiry is a separate analysis from the question of breach, and any assignment of damages will depend on a further finding of “injury,” where causation will be the determinative factor.[18] Therefore, the requirement to pay damages will not be automatic upon finding a breach of treaty.

In the present case, the tribunal held that there was a single indivisible loss to which both the claimants and the respondent materially contributed and, therefore, the loss had to be allocated equally between the parties. As established above, even if blame could be attributed to FSC for the delay, a causal link for the loss cannot be attributed to the respondent. In other words, even if there is a breach of the treaty by the respondent, failing to establish an injury caused by the alleged breach of an investment treaty can lead to a finding of liability but no damage.[19]

A relevant case in this regard is the Biwater Gauff v. Tanzania case.[20] The majority in this decision decided that the state’s act, though wrongful, had not caused “injury” to the investor’s investments. It rather held that injury “must mean more than simply the wrongful act itself . . . otherwise the element of causation would have to be taken as present in every case, rather than being a separate enquiry.” This was opposed to the argument forwarded by Gary Born in the concurring and dissenting opinion, who equated an injury to encompass any impairment of a legal right.

Reforming Causation and Valuation

Causation analysis is an area requiring further attention at both the primary source level[21] and in academic commentaries, although it is an integral element of liability in investment disputes. Tribunal inquiry leaves a lot of discretion due to the absence of any specific standards of causation in investment treaties. The causal analysis is also important for issues of valuation, and currently, as noted by commentators, awards generally do not discuss the effect of causation on damages and valuations.[22]

Indeed, this has caused states and other stakeholders to ask that UNCITRAL WGIII discuss causation among the so-called “cross-cutting issues” and formulate rules and policies that address tribunals’ varied approaches to questions of causation. Questions of when a supervening event should be understood as breaking a chain of causation between the host state’s breach of an investment treaty and a loss suffered by the investor (among other issues) are among the crucial causation topics to be addressed in various reform processes.[23]


Tathagata Choudhury (LLM, Geneva Graduate Institute and Queen Mary, University of London) is an Indian lawyer specializing in international disputes, with a focus on energy and construction matters.


[1] LSF-KEB Holdings SCA and others v. Republic of Korea, ICSID Case No. ARB/12/37

[2] Plakokefalos, I. (2015). Causation in the law of state responsibility and the problem of overdetermination: In search of clarity. European Journal of International Law, 26(2), 471–492.

[3] Report of the International Law Commission on the work of its Fifty-Third Session, at 92, ¶ 9, U.N. Doc. A/56/10, reprinted in United Nations. (2001). Yearbook of the International Law Commission (Vol. II, Part 2).

[4] See Urbaser S.A. & Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. Argentine Republic, ICSID Case No. ARB/07/26, Award (Dec. 8, 2016); MNSS BV & Recupero Credito Acciaio N.V. v. Montenegro, ICSID Case No. ARB(AF)/12/8, Award (May 4, 2016).

[5] See Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Reconsideration and Award, ¶ 333 (Feb. 7, 2017); Biwater Gauff (Tanzania) Ltd. v. Tanzania, ICSID Case No. ARB/05/22, Award, ¶ 785 (July 24, 2008).

[6] Jarett, M. (2019). Contributory fault and investor misconduct in investment arbitration. Cambridge University Press.

[7] Commentaries to the Draft ILC Articles, supra note 3, para. 10.

[8] Pearsall, P., & Benton Heath, J. (2018). Causation and injury in investor-state arbitration. In C. L. Beharry (Ed.), Contemporary and emerging issues on the law of damages and valuation in international investment arbitration. Nijhoff International Investment Law Series, Vol. 11. Brill.

[9] Alexandrov, S. A., & Robbins, J. M. (2009). Proximate causation in international investment law. In K. P. Sauvant (Ed.), Yearbook on International Investment Law and Policy: 2008–2009, at 317.

[10] Weigand, T. A. (2019). Tort law – the wrongful demise of but for causation. Western New England Law Review, 41(1), 78.

[11] Lone Star, para 804.

[12] Lone Star Award, para 833.

[13] Ripinsky, S., & Williams, K. (2008). Chapter 4: General approach to compensation by cause of action. In S. Ripinksy & K. Williams (Eds.), Damages in international investment law. British Institute of International and Comparative Law p. 314.

[14] Dissenting Award, para 117.

[15] Alschner, W. (2017). Aligning loss and liability – Toward an integrated assessment of damages in investment arbitration. In M. Jansen, T. Carpenter, & J. Pauwelyn (Eds.), The use of economics in international trade and investment disputes. Cambridge University Press; Sabahi, B. (2011). Compensation and restitution in investor-state arbitration: principles and practice. Oxford University Press, 170.

[16] Victor Pey Casado & Foundation “Presidente Allende” v. Republic of Chile, ICSID Case No. ARB/98/2 (Resubmission Proceeding), Award (Sept. 13, 2016).

[17] Pearsall & Benton Heath, supra note 8.

[18] Ibid.

[19] Urbaser S.A. & Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. Argentine Republic, ICSID Case No. ARB/07/26, Award (Dec. 8, 2016); Rompetrol Group N.V. v. Romania, ICSID Case No. ARB/06/3, Award (May 6, 2013).

[20] See Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22, Award (July 24, 2008); Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22, Concurring and Dissenting Opinion of Gary Born (July 18, 2008), at 803.   

[21] Knoll, J. & Singla, T. (2020). Causation in international investment law: Putting Article 23.2 of the India model BIT into context. Indian Journal of International Law, 8(2).

[22] Wälde, T. W., & Sabahi, B. (2008). Compensation, damages, and valuation. In P. T. Muchlinski, F. Ortino, & C. Schreuer (Eds.), The Oxford Handbook Of International Investment Law. Oxford University Press.

[23] Bonnitcha, J., Langford, M., Alvarez-Zarate, J. M., & Behn, D. (2023). Damages and ISDS reform: Between procedure and substance. Journal of International Dispute Settlement, 14(2), 213–241.