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The Guide to Damages in International Arbitration

Compensatory Damages Principles in Civil and Common Law Jurisdictions – Requirements, Underlying Principles and Limits

Introduction

Compensatory damages – as the name indicates – are intended to compensate a claimant for losses suffered as a result of the other party’s (wrongful) conduct. Those losses can be pecuniary (i.e., arising from a breach of contract, loss of profit, related expenses) or non-pecuniary (i.e., for pain and suffering, loss of reputation).[2] The basic rule, in its common law formulation, is that a claimant is entitled to ‘that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation’.[3] This rule is formulated in similar terms in civil law jurisdictions – for example, French law recognises the principle of full compensation, the objective of which is to put the injured party in the position in which it would have been if the act that gave rise to the damage had not occurred.[4]

This chapter will provide a comparative overview of the legal principles and elements of compensatory damages in civil law and common law jurisdictions, focusing on English and French law for illustrative purposes. There are several reasons why such a comparative analysis is important for international arbitration practitioners. It is common for the disputes underlying international arbitrations to be governed by a range of applicable national laws, so it is important to be familiar with the broad principles of their substantive content – or, at least, of two of the main legal traditions,[5] though the differences among national laws within those traditions should not be underestimated. While there is certainly a lot of common ground in relation to the legal principles and elements of compensatory damages claims in common and civil law jurisdictions, there are also differences, as described in more detail in the sections below. As advocates, it can be useful to be attuned to these differences when formulating written or oral pleadings, particularly where the arbitral tribunal is of mixed legal backgrounds.

While certainly less prevalent than national laws in international arbitration, transnational principles can also play a role in damages analyses in international arbitration, either where parties have agreed to apply them or where tribunals have cited them as a means of reinforcing or supplementing the applicable law.[6] These principles include those codified in instruments such as the 2010 UNIDROIT Principles of International Commercial Contracts (the UNIDROIT Principles), which ‘reflect concepts to be found in many, if not all, legal systems’.[7] Understanding the origin of these transnational principles is important preparation for their application.

As a final note, arbitration clauses sometimes contain broadly worded consents to arbitration that may be interpreted to include non-contractual (i.e., tortious) claims.[8] However, the focus of this chapter will be on compensatory damages arising out of contractual claims. In addition, we do not consider non-compensatory damages, damages principles under the Convention on Contracts for the International Sale of Goods (CISG), contractual limitations on damages, damages in investment arbitration, interest and costs. These topics are addressed in other chapters of this publication.

The law applicable to damages

The law applicable to damages can have a significant impact on the assessment of damages, as the law determines the conditions to obtain damages, the categories of damages available and provides guidance regarding the amount of damages to be awarded.

The parties’ agreement is paramount in international arbitration. This is of course also true in relation to damages. In the absence of a statement to the contrary, the right to damages, the categories and the amount of damages recoverable, and the nature of the proof required are first and foremost governed by the parties’ agreement.[9] Parties often choose to specify the conditions to the recovery of damages, as well as the categories and the amount of damages recoverable (e.g., with liquidated damages, penalty clauses or limitation clauses),[10] broadening or limiting the rights available under national laws. However, the parties do not always agree on such arrangements, and, in any event, their agreement will unlikely be exclusive of all provisions of the applicable rules of law. Further, some national law rules and principles, such as public policy rules and principles, are of mandatory application.

In the absence of the parties’ agreement relating to damages or to supplement it, arbitral tribunals have to determine the applicable rules of law. The tribunal first has to determine whether damages-related issues are substantive or procedural issues. Most damages-related aspects are usually analysed as issues of substance. However, certain aspects, such as standard of proof, are sometimes analysed as procedural matters, so that different laws or rules of law can apply to different aspects of damages.

The arbitral tribunal will again be guided by the parties’ agreement and, absent such agreement, the relevant conflict of laws rules, in order to determine the applicable rules of law. Some arbitration rules and laws favour a ‘direct’ approach to determining the applicable rules of law (i.e., without considering conflict of laws rules), referring to the rules of law that the arbitral tribunal considers appropriate[11] or those that have the closest connection to the dispute.[12] Others rely on a conflict of laws approach.[13]

The applicable rules of law can be a national law or a convention, principles or sets of rules – such as the CISG,[14] the UNIDROIT Principles or the 2002 Principles of European Contract Law (PECL) that have been developed to reflect internationally accepted rules or principles or to achieve a compromise between various legal systems. These international instruments, however, often have to be complemented by national rules of law to the extent that they do not cover specific issues and therefore do not necessarily exclude the application of national laws.

In addition to national laws, arbitral tribunals at times take a transnational approach, referring to principles applicable to damages in international arbitration, such as a generally recognised duty to mitigate.[15] Such principles, however, are not uniformly identified or applied.

Assessing the proof relating to damages

The assessment of damages is driven by a factual determination and often involves complex data and economic issues, such that parties and arbitral tribunals often rely on experts. The parties first have to establish their right to damages, before justifying the type and amount of damages requested. It is thus essential to determine who bears the burden of proof and what standard should apply.

The burden of proof

In international arbitration, as under national laws, the burden of proof lies with the party making an assertion.[16] This general rule, expressed by the Roman law expression actori incumbit probatio,[17] is one that achieves a consensus in common and civil law jurisdictions.[18]

This rule should not, however, be understood to mean that the burden of proof necessarily lies with the claimant. Rather, the burden lies with the party making a claim, a counterclaim or any assertion. The burden of proof thus moves from one party to another depending on who makes assertions on specific aspects of a claim.[19]

The standard of proof

While the burden of proof determines which party should prove the relevant facts and law underlying an assertion, the standard of proof sets the level of proof required and thus goes to the heart of the case.

There is no unanimously recognised standard of proof in international arbitration as there is with the burden of proof – national laws vary. Yet, the standard of proof is often considered to be a ‘balance of probability’, ‘preponderance of the evidence’ or ‘more likely than not’ standard – that is, a standard that does not rise to the ‘beyond all reasonable doubt’ standard that applies, for instance, in criminal matters in the United States or England.[20]

Arbitral tribunals usually refer, cumulatively or exclusively, to the applicable substantive national law to determine the applicable standard of proof.[21]

Although the standard of proof varies from one legal system to another, the standard is often similar or leads to a similar analysis. In common law jurisdictions, the party making the claim for damages must meet the standard of proof for civil cases – that is, the ‘balance of probabilities’ test.[22] Under Swiss law, for example, the regular standard of proof (Regelbeweislast) refers to the judge’s or arbitrator’s inner conviction, whereby he or she should be convinced of a fact and have no serious doubts about its existence, although absolute certainty is not necessary.[23]

Some civil jurisdictions, however, have no defined standard of proof and instead grant the judges extensive leeway to determine damages-related facts. Under French law, for instance, the judge enjoys wide discretionary powers to assess the evidence before him or her.[24] Judges particularly make use of these discretionary powers in the allocation of damages.[25] Likewise, under German law, the German Code of Civil Procedure grants full discretion to judges. It refers to the judge’s free conviction (freie Überzeugung) to decide allegations of facts, in general, (Section 286 of the German Code of Civil Procedure) and with respect to the existence and scope of damages in particular (Section 287 of the German Code of Civil Procedure). The standard of proof that the aggrieved party must meet to demonstrate its damages requires establishing the existence of loss and causation regarding the extent of the loss. In this context, a finding of preponderant probability of the existence of damages and their extent is sufficient.[26]

Entitlement to damages

This section presents the conditions that are to be fulfilled in order to obtain damages and analyses – in particular, the foreseeability requirement and duty to mitigate.

Establishing entitlement to damages

Before assessing damages, the claimant first has to establish that it is entitled to damages. Under English law, the requirements are as follows. First, one must prove the existence of a ‘wrong’[27] – that is, a breach of contract. Second, one must establish that the damage is not too remote and that the losses were reasonably foreseeable at the time the parties entered into the contract.[28] Third, any damages awarded are subject to deductions for any failure to mitigate (or contributory negligence in the case of breaches of duty of care).[29] Fourth, any damages awarded are also subject to any breaks in the chain of causation.[30] Irrespective of factual causation, English law can treat some losses as not having been legally caused by the breach, on the basis that it is not fair to hold the defendant responsible for them due to a ‘break in the chain’ or novus actus interveniens.[31] If the breach of contract was the ‘effective’ or ‘dominant’ cause of the loss, damages may be recoverable even if the cause was not the sole cause of the loss.[32] Where there are competing causes, a balance of probabilities test applies.[33]

Civil law jurisdictions embrace similar conditions. The French Civil Code has recently undergone a substantial revision and restructuring with respect to contract law, with Ordonnance No. 2016-131 dated 10 February 2016, which entered into force on 1 October 2016.[34] The reform has made changes to the damages regime and has reshuffled the relevant articles of the Civil Code but has not significantly changed the applicable principles.

In contrast to English law, where a party has not performed its contractual obligations, French law favours specific performance over damages, unless specific performance is not possible or if there is a manifest disproportion between the costs of the specific performance for the debtor and the creditor’s interest in the specific performance (Articles 1221 et seq. of the French Civil Code[35]).[36] If the aggrieved party has requested specific performance from its debtor and if the debtor does not comply, the debtor can be liable for damages, pursuant to Article 1231 of the French Civil Code. A claimant then has to prove the fulfilment of three conditions to recover compensatory damages for breach of contract, drawn from Articles 1231 to 1231-2 of the French Civil Code.[37] First, the claimant must establish that there has been a breach of contract. Second, the claimant must have suffered a loss. Third, there must be a causal link between the breach and the claimant’s loss.[38] Article 1231-1 provides for one exception to the recovery of compensatory damages, in case of force majeure (rather than an external cause, cause étrangère, as was previously required under the former Article 1147). The revised version of the French Civil Code defines a force majeure event in this context as an event that is outside of the debtor’s control, that could not have been reasonably foreseen at the time of conclusion of the contract, the effects of which cannot be avoided by appropriate measures, and that now prevents the debtor from performing its obligation (Article 1218).[39]

As under French law, specific performance is the rule under German law (Section 241(1) of the German Civil Code). However, a party cannot request specific performance if performance is impossible for the debtor or anyone else (Section 275 of the German Civil Code). Regarding the entitlement to damages, German law has adopted similar conditions to French law. The claimant has to establish three objective conditions, as under French law: first, a breach of an obligation; second, the existence of a loss; and third, a causal link between the two. A subjective element is added under German law in the form of a fault on the part of the debtor.[40]

Similar conditions to those found in these civil law jurisdictions are found in international instruments or transnational principles. Article 74 of the CISG requires the proof of a breach of contract by one party and a loss suffered by the other party as a consequence of the breach. Article 7.4.2 of the UNIDROIT Principles entitles an aggrieved party to full compensation for harm sustained as a result of non-performance.

Where some civil law jurisdictions do depart from common law jurisdictions is on the requirement of notice. There is no notice requirement under English common law, unless a notice requirement is imposed by the contract. Under French law, however, the claimant must give notice to the respondent that it is in delay or in breach of the agreement and request performance of its obligation, unless – and this was added by the 2016 reform – the non-performance is permanent; if the respondent does not perform upon receiving the notice, the claimant will be entitled to damages.[41] This requirement is consistent with the emphasis that French law puts on specific performance.

The foreseeability requirement

Foreseeability refers to the notion used in common law jurisdictions. Civil law jurisdictions do not necessarily refer expressly to foreseeability in the texts relating to damages, although courts and commentators often rely on this requirement. The notion of foreseeability acts as a limitation on the amount of damages that have to be paid in common and civil law systems.

Under English law, as set out above, damages for breach of contract are recoverable only to the extent the loss that has occurred was reasonably foreseeable by the parties at the time they entered into the agreement. This test is closely connected to and sometimes identical to one of ‘remoteness’. This rule was first expressed in the 1854 case of Hadley v. Baxendale as follows:

Where two parties have made a contract, which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the breach of it.[42]

Thus, loss is recoverable only if the type of loss[43] that occurs is ‘in the contemplation of the parties’ (i.e., foreseeable)[44] and ‘not unlikely’[45] at the date of contracting (rather than the date of breach).[46] What is in the contemplation of the parties is assessed objectively on the basis of the ‘ordinary course of things’ and subjectively on the basis of special circumstances or knowledge attributed to the parties.[47] If the remoteness test is satisfied, the respondent is seen as having assumed the responsibility for the loss.[48]

In civil law systems, damages are generally recoverable only if they were foreseen or ought to have been foreseen at the time the contract was made. Under French law, the defaulting party is liable only for damages that were foreseen or foreseeable at the time of conclusion of the contract, pursuant to Article 1231-3 of the French Civil Code.[49] The idea is that the parties should be in a position to understand the extent of their potential liability for breach of contract when entering the contract.[50] Foreseeability is applied in abstracto – meaning what is ‘normally’ foreseeable – but this notion is flexible.[51] This condition does not have to be examined if the parties have not put this argument forward.[52]

However, the defaulting party cannot reduce its liability for damages on an argument that the loss was not foreseeable if it has been grossly negligent (faute lourde) or has committed an intentional breach (faute dolosive).[53] Before the 2016 reform, the French Civil Code referred only to an intentional breach. However, the French courts already analysed gross negligence as an intentional breach; the reference to gross negligence in the 2016 reform, therefore, only codifies applicable case law. In case of gross negligence or an intentional breach, the defaulting party is liable only for damages that are the immediate and direct consequence of its breach, pursuant to Article 1231-4 of the French Civil Code.[54] The notions of foreseeability in Article 1231-3 and direct consequence of a breach in Article 1231-4 – which refers to causation as opposed to foreseeability – appear, at first sight, to be different. However, they are not well distinguished in practice.[55]

Other jurisdictions do not refer to foreseeability per se. German law provides, however, for compensation of losses that are within the scope of protection of the contractual obligation breached (Schutzzweck der Norm, Normzweck), to the exclusion of damages that were not contemplated by the parties in their contract.[56] Some specific provisions also include an element of foreseeability, such as Section 252 of the German Civil Code on lost profits, which refers to profits lost that ‘could probably have been expected’ in the ‘normal course of events’ or in ‘special circumstances’, particularly due to the measures and precautions taken.

Mitigation

In common law jurisdictions, it is accepted that the aggrieved party is under a duty to take steps to minimise and not increase its loss. Briefly, damages may be reduced if that party has not taken steps to mitigate its loss. While mitigation and other means of reducing damages will be discussed in detail in the chapter ‘Overview of Principles Reducing Damages’ in this publication, a brief discussion of the comparative law aspects will be presented here.

Under English law, the claimant must take all reasonable steps to minimise its loss as a result of the respondent’s breach of its obligation. The claimant cannot recover losses that it could have, through reasonable action or inaction, avoided. Second, as a consequence of the first rule, the claimant can recover the costs that it has incurred in taking reasonable steps to minimise its loss. This is true even if the steps taken have in fact increased the loss. Reasonable attempts to mitigate will not reduce damages payable, if they are unsuccessful.[57] Third, where the claimant has minimised its loss, the damages owed by the respondent are reduced by the amount of the reduction achieved by the claimant.[58] The burden of proof in this context is on the defendant.[59] This duty is present in other common law jurisdictions as well.

Contributory negligence – that is, contribution to the loss by the aggrieved party through its action or inaction – is a separate doctrine in common law jurisdictions. In a contractual context, contributory negligence can apply if there is a contractual duty of care and the contractual duty of care is concurrent with a tortious duty of care.[60] Contributory negligence reduces the damages payable in accordance with the court’s assessment of the parties’ respective responsibilities for the loss.

Civil law jurisdictions have not necessarily developed or embraced a doctrine of mitigation. As mentioned above, civil law jurisdictions favour, contrary to common law jurisdictions, specific performance over the monetary compensation of damages, at least in theory. Nonetheless, civil law jurisdictions have over time evolved to include mechanisms similar to mitigation. Under German law, for instance, there is no duty to mitigate per se, but a similar result is achieved through the regime on contributory negligence. Section 254 of the German Civil Code makes the entitlement and scope of damages dependent on the circumstances, in particular when a fault or negligence of the aggrieved party has contributed to the occurrence or the amount of damages. The Japanese Civil Code provides that courts can take account of a claimant’s fault – but not its negligence – in determining the entitlement and scope of damages.[61] Other civil law countries, such as Italy, Austria, Portugal and Finland, are said to have similar provisions.[62]

There are, however, exceptions where an approach similar to common law jurisdictions has been adopted. For example, the Quebec Civil Code includes an express obligation to mitigate under Article 1479, which provides that ‘[a] person who is bound to make reparation for an injury is not liable for any aggravation of the injury that the victim could have avoided.’ Similarly, Article 404 of the Russian Federation Civil Code allows a judge to reduce the scope of damages if the aggrieved party, intentionally or not, increased the amount of damages or failed to take reasonable measures to reduce it.[63]

French law is generally presented as a legal system that does not embrace the duty to mitigate, and it is true that the French Civil Code does not include an obligation or duty to mitigate.[64] The French Court of Cassation has confirmed that there is no obligation to minimise the damages the aggrieved party has suffered in the context of non-contractual liability.[65] This solution is generally understood to apply to contractual liability too.[66] Indeed, the duty of mitigation has been viewed by some as being in contradiction with the French principle of full compensation. If the aggrieved party is entitled to recovery of all of its damages, it should not have to minimise its loss.[67]

However, the duty of mitigation finds its way in through the backdoor in French law, and several commentators have welcomed this idea.[68] Various avenues have been considered to integrate the idea of mitigation in French law. Some judges have taken the aggrieved party’s behaviour, in particular his or her inertia, into account in assessing damages, relying on the judge’s full discretion to do so.[69] Commentators have also referred to the obligation of good faith in this context.[70] The better legal justification appears, however, to be the requirement for a causal link to establish the damages: had the aggrieved party taken some actions or, on the contrary, refrained from taking them, the amount of damages would have been lower; the aggrieved party should therefore not be entitled to the full amount of damages that it requests. This reasoning can be easily applied in connection with the judge’s full discretion to assess damages.[71]

Further, the absence of an obligation to mitigate under French law does not amount to a French public policy principle – or to a principle of French international public policy relevant in the context of international arbitration – and parties can include such a duty in their contracts.[72] Finally, it has been suggested that a duty of mitigation could be taken into account in international arbitral awards applying French law, without fear of being challenged before the French courts. The reasoning is that the duty to mitigate amounts to a transnational principle, a principle of the lex mercatoria, which arbitral tribunals can rely on in international arbitrations applying French law.[73]

Indeed, the duty of mitigation is widely recognised as a transnational rule, so much so that several international and transnational instruments refer to it (see Article 77 CISG and Article 7.4.8 of the UNIDROIT Principles). This principle is generally considered to be part of general principles of law, in particular in the context of international arbitration.[74]

Assessment of the amount of damages

General approach to damages in common law and civil law traditions

In common law jurisdictions, damages are seen as the primary remedy for non-performance of contract, with specific performance seen as an exception. For example, the Restatement (Second) of the Law of Contracts, a treatise that seeks to restate common law principles that is frequently cited in US courts, states that ‘[s]pecific performance… will not be ordered if damages would be adequate to protect the expectation interest of the injured party’.[75]

This is one area in which civil and common law jurisdictions differ in a more significant manner, as the primary remedy in most civil law jurisdictions has traditionally been to have the contract performed as agreed, with damages in lieu of performance as only a secondary remedy.[76] This remains the case in Germany, which has a strong position on the principle of pacta sunt servanda.[77] However, the recent reform to the French Civil Code puts less emphasis on specific performance, listing it among the options that are available to the aggrieved party in case of a breach of contract (Article 1217 of the Civil Code[78] refers to exceptio non adimpleti, specific performance, price reduction, termination of the contract, damages). Yet, as these reforms have only recently been implemented at the time of publication, it remains to be seen how this will be interpreted by French courts.[79]

Categories of recoverable loss

In common law jurisdictions, there are three basic categories of recoverable damages.[80] The main category is expectation damages, according to which damages are awarded on the basis of putting the claimant in the position it would have been in, but for the breach. A claimant’s ability to recover lost profits will depend on the subject of the breach of contract – for example, it is more likely that a claimant will be able to recover lost profits in a contract for the sale of goods than in a contract for the carriage of goods, as lost profits in the latter situation are generally held to be too remote.[81] The second is performance damages – i.e., the cost of curing the defective performance. The third is reliance or ‘wasted expenditures’ damages – i.e., expenditures or other losses that have been incurred by the claimant in reliance on the contract.[82] The purpose of reliance damages is to put the claimant in as good a position as it was in prior to the promise.

Within the category of expectation damages in common law jurisdictions, there are two sub-categories – normal or direct damages (also known as general damages) and consequential damages (also known as special damages). Normal damages are those damages that are the natural and probable consequence of the breach.[83] Consequential damages are those that do not flow directly from the breach; they are recoverable only in limited circumstances, they are particular to the injured party, and they may be more difficult to calculate in financial terms.[84]

In most civil law jurisdictions, there are also two categories of loss – damnum emergens (actual losses or damage already suffered) and lucrum cessans (loss of profits or wasted costs), which have their origins in Roman law. In France, these two principles are codified at Article 1231-2 of the Civil Code,[85] which states that ‘[d]amages due to a creditor are, as a rule, for the loss that he has suffered and the profit of which he has been deprived.’[86] These categories of damages roughly correspond to the common law categories of expectation and reliance damages.[87] In practice, French courts tend to apply terminology such as préjudice commercial (damages and loss of profits), préjudice économique (commercial damage, which includes loss of profits and diminution in value of assets) and préjudice financier (loss of profits, loss of exploitation, non-monetary damages and expenses incurred as a result of the breach), although those terms are sometimes used interchangeably.[88]

Assessment of the amount of damages[89]

Under English law, the normal measure of damages is the difference in value between the performance that should have occurred, had the contract been performed, and the actual performance.[90] This follows from the principle that the compensation should put the injured party in the position it would have been in but for the wrong.[91]

Under French law, the assessment of the amount of damages is based on the principle of full compensation, the objective of which is to put the injured party in the position they would have been in if the act that gave rise to the damage had not occurred.[92] Full compensation may be achieved through calculation of the difference in value (i.e., the normal measure of expectation damages under English law) or through the calculation of the cost of cure (i.e., as for performance damages under English law).[93] However, it is important to understand that French courts have a significant amount of discretion on how damages are calculated and do not provide details in their justification of the amount of damages awarded.[94] Importantly, the assessment of damages is the responsibility of the first and second instance courts and cannot be reviewed by the Court of Cassation unless there has been an error of law.[95] In addition, French courts are not required to set out detailed reasoning in relation to their assessment of the amount of damages.[96] In practice, French courts tend to use this discretion to take account of the degree of fault of the breaching party; i.e., where the degree of fault is serious, they will take a ‘heavy hand’ in relation to the assessment of damages.[97]

Certainty of damages

Under English law, one has to be able to prove the fact of loss and the amount of the loss on the basis of the balance of probability. Where it is difficult to prove the amount of loss with certainty, the wrongdoer should not be relieved of his or her responsibility to pay.[98] Damages can be recovered for loss of a chance, which is an inherently uncertain head of loss and raises difficult issues of causation and quantification.[99]

In contrast, in civil law systems, there is no requirement of certainty per se, and it has been observed that ‘French lawyers … tend to be relaxed about the legal requirement of assessing damages with certainty’[100] because, as noted above, French judges have a significant amount of discretion when making an assessment of damages.[101]

In relation to international arbitration, it has been observed that even when faced with uncertainty, ‘arbitral tribunals will find juridical ways and means to arrive at a figure which, given all the circumstances of the case, will lead to an equitable finding.’[102]

Conclusion

While there are differences in the approach to compensatory damages in common and civil law jurisdictions – or among those jurisdictions – they often lead to similar results, albeit through different paths. So much so that arbitrators, but also national judges and commentators, have identified and applied international principles applicable to damages, such as the duty to mitigate, in particular in international arbitration.

However, the analysis of damages is first and foremost driven by the facts of a case. While the – often subtle – differences from one legal system to another might not lead to different results in most cases, they might have a significant impact in specific circumstances. It is, therefore, as important to ensure a proper analysis of the facts and of the assessment of the damages, often with the help of experts, as it is to determine the applicable rules of law that the arbitrators will refer to.

At the end of the day, all jurisdictions give substantial leeway to judges and arbitrators in the determination of damages. It is therefore also important to take into account the legal background of the arbitrators, which might, more or less consciously, impact their decisions.

Notes

  1. Clare Connellan and Elizabeth Oger-Gross are partners at White & Case LLP. Angélica André and Heather Clark are associates at White & Case LLP.
  2. H. McGregor, McGregor on Damages (19th ed. Sweet & Maxwell, London 2016), Section 2-001. As discussed below, there are restrictions on a party’s ability to recover non-pecuniary losses in common law jurisdictions. See, e.g., Common Law Series: The Law of Damages/Part I General Principles/Chapter 4 Damages for non-pecuniary loss/E Disappointment, distress, humiliation and loss of enjoyment/Contract.
  3. H. McGregor, McGregor on Damages (19th ed. Sweet & Maxwell, London 2016), Section 2-002, citing Livingstone v. Rawyards Coal Co [1880] 5 App Cas. 25 at 39.
  4. Full compensation is the authors’ translation of the French term ‘réparation intégrale’. See A. Bénabent, Droit des obligations (16th ed. L.G.D.J. Précis Domat, 2016) 680. See also H. Wöss and others, Damages in International Arbitration under Complex Long-Term Contracts (OUP, Oxford 2014) paragraph 2.03.
  5. A discussion of compensatory damages principles under other legal traditions is beyond the scope of this chapter.
  6. See E.F. Agrò, ‘The Impact of UNIDROIT Principles on International Dispute Resolution in Figures’, www.unidroit.org/english/publications/review/articles/2011-3-finazzi-e.pdf, 721. The UNIDROIT provisions on damages were among those most frequently invoked by arbitral tribunals and domestic courts. See also P. Gélinas, ‘General Characteristics of Recoverable Damages in International Arbitration’ in Y. Derains and R.H. Kreindler (eds), Evaluation of Damages in International Arbitration, Dossiers of the ICC Institute of World Business Law, Volume 4 (Kluwer Law International; International Chamber of Commerce (ICC) 2006) 20-29.
  7. UNIDROIT Principles of International Commercial Contracts (UNIDROIT 1994), Introduction, xxiii (PDF 22).
  8. See, e.g., ICC Case 9517, Interim Award, November 1998: ‘The Arbitrators find that the scope of the wording of the arbitration clause “any dispute arising in connection with this Agreement” is clear and does not lend itself to construction. It is very wide and covers any claim which arises, directly or indirectly, with any relationship to the Management Agreement, and whether the claim is contractual or delictual of nature. There is also no basis for constructing the clause or the ICC Rules as applicable only to commercial disputes. The claims raised are, therefore, within the scope of the arbitration clause.’
  9. C. T. Salomon and P D. Sharp, ‘Chap 10: Damages in International Arbitration’, in J. Fellas and J. H. Carter (eds), International Commercial Arbitration in New York (OUP New York 2010) 295.
  10. See the chapter ‘Contractual Limitations on Damages’ in this publication.
  11. See, e.g., French Code of Civil Procedure Article 1511; Austrian Code of Civil Procedure s 603; Belgian Code of Civil Procedure Article 1710; 2010 UNCITRAL Arbitration Rules Article 35.1; SCC Arbitration Rules Article 22; DIAC Arbitration Rules Article 33.1.
  12. See, e.g., German Code of Civil Procedure Article 1051; Swiss Private International Law Article 187; 2012 Swiss Rules of Arbitration Article 33; 1979 CRICA Arbitration Rules Article 35.1.
  13. See, e.g., English Arbitration Act 1996 Section 46(3) (‘the law determined by the conflict of laws rules which it considers applicable’); UNCITRAL Model Law Article 28(2); Danish Arbitration Act Article 28(2); 1961 European Convention on International Arbitration Article VII(1).
  14. See the chapter ‘Damages Principles under the Convention on Contracts for the International Sale of Goods (CISG)’ in this publication.
  15. See, e.g., ICC case No. 2478, Award, Clunet 1975, 925 (‘we should not lose sight of the fact that, by virtue of the general principle of law which is reflected in Article 42(2) and 44(1) of the Swiss Federal Code of Obligations, it belongs to the aggrieved party to take all necessary measures in order not to increase the damage.’). See further, the chapter ‘Overview of Principles of Reducing Documents’ in this publication.
  16. N. Blackaby, C. Partasides and others, Redfern and Hunter on International Arbitration (6th ed Oxford University Press, 2015) paragraph 6.84; G. Born, International Commercial Arbitration (2nd ed. Wolters Kluwer, 2014) 2314.
  17. H. Wöss and others, Damages in International Arbitration under Complex Long-Term Contracts (OUP, Oxford 2014) paragraph 2.14; G. Born, International Commercial Arbitration (2nd ed. Wolters Kluwer, 2014) 2314.
  18. See, e.g., Article 27(1) of the UNCITRAL Arbitration Rules; Article 1353 of the French Civil Code (formerly Article 1315); Article 8 of the Swiss Civil Code; Article 1315 of the Belgian Civil Code.
  19. H. Wöss and others, Damages in International Arbitration under Complex Long-Term Contracts (OUP, Oxford 2014) paragraph 2.14; N. O’Malley, Rules of Evidence in International Arbitration: an Annotated Guide, 2012, paragraphs 7.15, 7.32.
  20. N. Blackaby, C. Partasides, and others, Redfern and Hunter on International Arbitration (6th ed Oxford University Press, 2015) paragraph 6.85; G. Born, International Commercial Arbitration (2nd ed. Wolters Kluwer, 2014) 2314; G.M. von Mehren, C. Salomon, ‘Submitting Evidence in an International Arbitration: The Common Lawyer’s Guide’, 20(3) J. Int’l Arb. 285 (2003), 291.
  21. G. Born, International Commercial Arbitration (2nd ed. Wolters Kluwer, 2014) 2315; N. O’Malley, Rules of Evidence in International Arbitration: an Annotated Guide, 2012, paragraph 7.27.
  22. Defined in English law by Lord Denning as ‘more probable than not’ in Miller v. Minister of Pensions [1947] 2 All ER 372; and described in the US as the preponderance of the evidence (the standard is satisfied if there is a greater than 50 per cent chance that the proposition is true).
  23. Swiss Federal Tribunal, BGE/ATF 130 II 321 dated 29 January 2004; R. Groner, Beweisrecht, 2011, 180; P Guyan, in K. Spühler, L. Tenchio, D. Infanger, Basler Kommentar Schweizerische Zivilprozessordnung, 2013, paragraph 7; H.P Walter, in H. Hausheer, H.P. Walter (eds), Berner Kommentar, ZGB, Band I/1, Einleitung, Articles 1-9, 2012, paragraph 134.
  24. D. Guével, JurisCl. Civil Code, ‘Art. 1315 et 1315-1: Preuve, Charge de la preuve et règles générales’, 2016, paragraph 63, and, e.g., French Court of Cassation (1st Civil Chamber), 14 January 2010, No. 08-13160; French Court of Cassation (Commercial Chamber), 6 September 2011, No. 10-17963.
  25. C. Boismain, ‘Etude sur l’évaluation des dommages-intérêts par les juges du gond’, Petites affiches, 2007, No. 39, p 7.
  26. H. Wöss and others, Damages in International Arbitration under Complex Long-Term Contracts (OUP, Oxford 2014) paragraph 4.330.
  27. H. McGregor, McGregor on Damages (19th ed. Sweet & Maxwell, London 2016), Section 1-001.
  28. Wagon Mound (No. 1) [1961] AC 388; J. Chitty, H. Beale, Chitty on Contracts, 6th ed., 2008, Ch. 26, paragraph 111. The notion of foreseeability will be further analysed below.
  29. The notion of mitigation will be further analysed below.
  30. C. T. Salomon and P D. Sharp, ‘Chap 10: Damages in International Arbitration’, in J. Fellas and J. H. Carter (eds), International Commercial Arbitration in New York (OUP New York 2010) 295.
  31. See, e.g., Corr v. IBC Vehicles Ltd [2008] 1 AC 884, per Lord Bingham: ‘The rationale of the principle that a novus actus interveniens breaks the chain of causation is fairness.’
  32. Galoo v. Bright Grahame Murray [1994] 1 W.L.R. 1360, 1374-1375.
  33. Nulty and others v. Milton Keynes Borough Council [2013] EWCA Civ 15 (‘[T]he court must be satisfied on rational and objective grounds that the case for believing that the suggested means of causation occurred is stronger than the case for not so believing’).
  34. Where relevant, this chapter refers to both the new and the former versions of the provisions of the French Civil Code.
  35. Replacing Articles 1142-1144 and 1184 of the French Civil Code.
  36. D. Mainguy (ed), Le nouveau droit français des contrats, du régime général et de la preuve des obligations (après l’ordonnance du 10 février 2016) (UMR-CNRS 5815, 2016) paragraph 229.
  37. Formerly Articles 1146-1147 of the French Civil Code.
  38. P. Malaurie, L. Aynès, P. Stoffel-Munck, Droit des obligations (8th ed L.G.D.J., 2016) paragraph 39.
  39. D. Mainguy (ed), Le nouveau droit français des contrats, du régime général et de la preuve des obligations (après l’ordonnance du 10 février 2016) (UMR-CNRS 5815, 2016) paragraph 242.
  40. H. Wöss and others, Damages in International Arbitration under Complex Long-Term Contracts (OUP, Oxford 2014) paragraph 4.263. The requirement for a fault arguably also exists under French law (H. Wöss and others, Damages in International Arbitration under Complex Long-Term Contracts (OUP, Oxford 2014) paragraphs 4.198-4.201).
  41. Article 1231 of the French Civil Code; formerly Article 1146). See D. Mainguy (ed), Le nouveau droit français des contrats, du régime général et de la preuve des obligations (après l’ordonnance du 10 février 2016) (UMR-CNRS 5815, 2016) paragraph 242.
  42. Hadley v. Baxendale (1854) 9 Exch. 341.
  43. H Parsons (Livestock) Ltd v. Uttley Ingham & Co Ltd [1977] EWCA Civ 13.
  44. Hadley v. Baxendale (1854) 9 Exch. 341.
  45. Koufos v. C Czarnikow Ltd (The Heron II) [1969] 1 AC 350.
  46. Hadley v. Baxendale [1854] EWHC Exch J70.
  47. Victoria Laundry (Windsor) Ltd v. Newman Industries Ltd [1949] 2 KB 528.
  48. Transfield Shipping Inc v. Mercator Shipping Inc (The Achilleas) [2008] UKHL 48; Supershield Ltd v. Siemens Building Technologies FE Ltd [2010] EWCA Civ 7; Rubenstein v. HSBC Bank plc [2012] EWCA Civ 1184.
  49. Formerly Article 1150 of the French Civil Code.
  50. B. Fages, Droit des obligations (6th ed L.G.D.J., 2016) paragraph 326.
  51. P. Malaurie, L. Aynès, P. Stoffel-Munck, Droit des obligations (8th ed L.G.D.J., 2016) paragraph 965.
  52. French Court of Cassation (1st Civil Chamber), 15 July 1999, No. 97-10268.
  53. Before the 2016 reform, Article 1150 of the French Civil Code only referred to intentional breach (dol).
  54. Formerly Article 1151 of the French Civil Code.
  55. P. Gélinas, ‘General Characteristics of Recoverable Damages in International Arbitration’ in Y. Derains and R.H. Kreindler (eds), Evaluation of Damages in International Arbitration, Dossiers of the ICC Institute of World Business Law, Volume 4 (Kluwer Law International; International Chamber of Commerce (ICC) 2006), p 10, sp 15.
  56. H. Wöss and others, Damages in International Arbitration under Complex Long-Term Contracts (OUP, Oxford 2014) paragraph 4.261.
  57. Lagden v. O’Connor [2004] 1 AC 1067, Lord Scott, paragraph 78.
  58. H. McGregor, McGregor on Damages (19th ed. Sweet & Maxwell, London 2016), Section paragraphs 9-002 – 9-006.
  59. Lombard North Central plc and Automobile World (UK) Ltd [2010] EWCA Civ 20. A claimant should nevertheless consider whether to take steps to show how it has mitigated its loss, as failure to do so can be risky. Bulkhaul Ltd v. Rhodia Organique Fine Ltd [2008] EWCA Civ 1452.
  60. Forsikringsaktieselskapet Vesta v. Butcher and others [1989] AC 852; Barclays Bank plc v. Fairclough Ltd [1995] QB 214.
  61. Japanese Civil Code, Article 418. See also Y. Taniguchi, ‘The obligation to mitigate damages’ (2006), in Y. Derains, R.H. Kreindler (eds), Evaluation of Damages in International Arbitration, Dossiers of the ICC Institute of World Business Law, Vol. 4 (Kluwer Law International; International Chamber of Commerce ICC 2006) p 79, sp pp 81-82.
  62. Finnish Sales of Goods Act Section 70(1); Italian Civil Code Article 1227; Austrian Civil Code s1304; Portuguese Civil Code Article 570; Y. Taniguchi, ‘The obligation to mitigate damages’ (2006), in Y. Derains, R.H. Kreindler (eds), Evaluation of Damages in International Arbitration, Dossiers of the ICC Institute of World Business Law, Vol. 4 (Kluwer Law International; International Chamber of Commerce ICC 2006) p 79, sp p 81; C. Larroumet, ‘Obligation de modérer le dommage et arbitrage du point de vue du droit français’, Gaz. Pal. 2008, No. 290, p 5, paragraph 1.
  63. A. Komarov, ‘Mitigation of Damages’ (2006), in Y. Derains, R.H. Kreindler (eds), Evaluation of Damages in International Arbitration, Dossiers of the ICC Institute of World Business Law, Vol. 4 ((Kluwer Law International; International Chamber of Commerce ICC 2006), p 37, sp p 39.
  64. B. Fages, Droit des obligations (6th ed L.G.D.J., 2016) paragraph 327; A. Komarov, ‘Mitigation of Damages’ (2006), in Y. Derains, R.H. Kreindler (eds), Evaluation of Damages in International Arbitration, Dossiers of the ICC Institute of World Business Law, Vol. 4 (Kluwer Law International; International Chamber of Commerce ICC 2006), p 37, sp p 39; Y. Taniguchi, ‘The obligation to mitigate damages’ (2006), in Y. Derains, R.H. Kreindler (eds), Evaluation of Damages in International Arbitration, Dossiers of the ICC Institute of World Business Law, Vol. 4 (Kluwer Law International; International Chamber of Commerce ICC 2006), p 79, sp p 81.
  65. French Court of Cassation (2nd Civil Chamber), 19 June 2003, No. 01-13289, JCP G 2003.II.10170, note C. Castets-Renard; with respect to contract law, French Court of Cassation (1st Civil Chamber), 3 May 2006, No. 05-10411, D. 2006, p 1403, obs. I. Gallmeister).
  66. French Court of Cassation (3rd Civil Chamber), 10 July 2013, No. 12-13851; B. Fages, Droit des obligations (6th ed L.G.D.J., 2016) paragraph 327; P. Malaurie, L. Aynès, P. Stoffel-Munck Droit des obligations (8th ed L.G.D.J., 2016) paragraph 963.
  67. C. Larroumet, ‘Obligation de modérer le dommage et arbitrage du point de vue du droit français’, Gaz. Pal. 2008, No. 290, p 5, sp paragraph 2.
  68. P. Malaurie, L. Aynès, P. Stoffel-Munck Droit des obligations (8th ed L.G.D.J., 2016) paragraph 963; B. Fages, Droit des obligations (6th ed L.G.D.J., 2016) paragraph 327; C. Larroumet, ‘Obligation de modérer le dommage et arbitrage du point de vue du droit français’, Gaz. Pal. 2008, No. 290, p 5.
  69. French Court of Cassation (1st Civil Chamber), 2 October 2013, No. 12-19887; P. Malaurie, L. Aynès, P. Stoffel-Munck Droit des obligations (8th ed L.G.D.J., 2016) paragraph 963.
  70. P. Malaurie, L. Aynès, P. Stoffel-Munck, Droit des obligations (8th ed L.G.D.J., 2016) paragraph 963. This justification has, however, been criticised (see J. Ortscheidt, La réparation du dommage dans l’arbitrage commercial international, 2001, paragraphs 233 et seq.; C. Larroumet, ‘Obligation de modérer le dommage et arbitrage du point de vue du droit français’, Gaz. Pal. 2008, No. 290, p 5, paragraph 10).
  71. C. Larroumet, ‘Obligation de modérer le dommage et arbitrage du point de vue du droit français’, Gaz. Pal. 2008, No. 290, p 5, paragraph 11.
  72. C. Larroumet, ‘Obligation de modérer le dommage et arbitrage du point de vue du droit français’, Gaz. Pal. 2008, No. 290, p 5, paragraph 5.
  73. C. Larroumet, ‘Obligation de modérer le dommage et arbitrage du point de vue du droit français’, Gaz. Pal. 2008, No. 290, p 5, paragraphs 6-9.
  74. A. Komarov, ‘Mitigation of Damages’ (2006), in Y. Derains, R.H. Kreindler (eds), Evaluation of Damages in International Arbitration, Dossiers of the ICC Institute of World Business Law, Vol. 4 (Kluwer Law International; International Chamber of Commerce ICC 2006), p 37, sp pp 40-41; C. Larroumet, ‘Obligation de modérer le dommage et arbitrage du point de vue du droit français’, Gaz. Pal. 2008, No. 290, p 5, paragraphs 5-9; G. Born, International Commercial Arbitration (2nd ed. Wolters Kluwer, 2014) p 3825; E. Gaillard, J. Savage (eds), Fouchard Gaillard Goldman on International Commercial Arbitration (Kluwer Law International, 1999), paragraph 1491.
  75. Restatement (2d) of the Law of Contracts, § 359.
  76. See, e.g., in relation to French law, P. Malaurie, L. Aynès, P. Stoffel-Munck, Droit des obligations (8th ed. L.G.D.J. 2016), paragraph 975, explaining that there is little point in initiating an action for compensatory damages where performance of the contract is possible or the failure to perform cannot be proved.
  77. H. Wöss and others, Damages in International Arbitration under Complex Long-Term Contracts (OUP, Oxford 2014) paragraphs 4.256-258.
  78. This article was introduced with the 2016 reform of the French Civil Code and replaces various provisions under Articles 1142 to 1184 of the previous version of the Civil Code.
  79. See discussion in D. Mainguy (ed), Le nouveau droit français des contrats, du régime général et de la preuve des obligations (après l’ordonnance du 10 février 2016) (UMR-CNRS 5815, 2016) paragraphs 178-179.
  80. There are various other categories of loss that may be recoverable, such as moral damages, punitive or exemplary damages, non-monetary damages (i.e. specific performance), but these topics are addressed in other chapters of this publication.
  81. H. McGregor, McGregor on Damages (19th ed. Sweet & Maxwell, London 2016), Sections 4-0018-19.
  82. Halsbury’s Laws of England, §503.
  83. For the position under English law, see H. McGregor, McGregor on Damages (19th ed. Sweet & Maxwell, London 2016), Section 4-002; for the position under New York law, see C. T. Salomon and P D. Sharp, ‘Chap 10: Damages in International Arbitration’, in J. Fellas and J. H. Carter (eds), International Commercial Arbitration in New York (OUP New York 2010) 299.
  84. For the position under English law, see Halsbury’s Laws of England, §317 and H. McGregor, McGregor on Damages (19th ed. Sweet & Maxwell, London 2016), Section 3-008; for the position under New York Law, see C. T. Salomon and P D. Sharp, ‘Chap 10: Damages in International Arbitration’, in J. Fellas and J. H. Carter (eds), International Commercial Arbitration in New York (OUP New York 2010) 300-302.
  85. Formerly French Civil Code, Article 1149.
  86. D. Mainguy (ed), Le nouveau droit français des contrats, du régime général et de la preuve des obligations (après l’ordonnance du 10 février 2016) (UMR-CNRS 5815, 2016) paragraph 199; B. Fages, Droit des obligations (6th ed L.G.D.J., 2016) paragraph 327.
  87. Practical Law Company UK, Damages in International Arbitration, online resource ID 0-519-4371. See also J. Paulsson, ‘The Expectation Model’ in Y. Derains and R. H. Kreindler (eds), Evaluation of Damages in International Arbitration, Dossiers of the ICC Institute of World Business Law, Volume 4 (Kluwer Law International; International Chamber of Commerce ICC 2006), 63.
  88. H. Wöss and others, Damages in International Arbitration under Complex Long-Term Contracts (OUP, Oxford 2014) paragraph 4.191.
  89. In this chapter, we will not discuss contractual limitations, the metric of compensation or the treatment of expert evidence as these topics are being addressed in other chapters of this publication.
  90. See e.g. H. Wöss and others, Damages in International Arbitration under Complex Long-Term Contracts (OUP, Oxford 2014) paragraph 4.38.
  91. H. McGregor, McGregor on Damages (19th ed. Sweet & Maxwell, London 2016), Section 2-002, citing Livingstone v. Rawyards Coal Co [1880] 5 App Cas. 25 at 39.
  92. A. Bénabent, Droit des obligations (16th edn L.G.D.J. Précis Domat, 2016), [680].
  93. H. Wöss and others, Damages in International Arbitration under Complex Long-Term Contracts (OUP, Oxford 2014) paragraph 4.207.
  94. C. Boismain, ‘Etude sur l’évaluation des dommages-intérêts par les juges du gond’, Petites affiches, 2007, No. 39, p 7; H. Wöss and others, Damages in International Arbitration under Complex Long-Term Contracts (OUP, Oxford 2014) paragraph 4.206.
  95. The French Court of Cassation, which is France’s highest court in civil matters, only reviews issues of law; it does not revise the findings of fact. See H. Wöss and others, Damages in International Arbitration under Complex Long-Term Contracts (OUP, Oxford 2014) paragraph 4.206; B. Fages, Droit des obligations (6th ed L.G.D.J., 2016) paragraph 327.
  96. H. Wöss and others, Damages in International Arbitration under Complex Long-Term Contracts (OUP, Oxford 2014) paragraph 4.208.
  97. A. Bénabent, Droit des obligations (16th edn L.G.D.J. Précis Domat 2016), paragraph 680.
  98. H. McGregor, McGregor on Damages (19th ed. Sweet & Maxwell, London 2016), Section 10-001.
  99. H. McGregor, McGregor on Damages (19th ed. Sweet & Maxwell, London 2016), chapter 10(4).
  100. P. Gélinas, ‘General Characteristics of Recoverable Damages in International Arbitration’ in Y. Derains and R.H. Kreindler (eds), Evaluation of Damages in International Arbitration, Dossiers of the ICC Institute of World Business Law, Volume 4 (Kluwer Law International; International Chamber of Commerce (ICC) 2006) 12
  101. C. Boismain, ‘Etude sur l’évaluation des dommages-intérêts par les juges du gond’, Petites affiches, 2007, No. 39, p 7.
  102. P. Gélinas, ‘General Characteristics of Recoverable Damages in International Arbitration’ in Y. Derains and R. H. Kreindler (eds), Evaluation of Damages in International Arbitration, Dossiers of the ICC Institute of World Business Law, Volume 4 (Kluwer Law International; International Chamber of Commerce ICC 2006), p 11.

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