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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
Introduction
This short paper will discuss the following five subject areas that may be relevant in dealing with the obligation to mitigate damages in international commercial arbitration: (1) treatment of obligation to mitigate damages in national laws; (2) inclusion of obligation to mitigate damages in various non-national laws; (3) arbitrator's duty to apply law unless acting as amiable compositeur and arbitrator's choice of "law"; (4) possible conflict with rules of public international law; and (5) examination of some sample cases. Thereafter, a brief conclusion will follow.
The obligation to mitigate damages originates in English law. In order to simplify the matter, let us take an example of a sales contract. If the seller does not deliver the good sold, the buyer should not simply wait to see the damage he suffers increase, but should take an appropriate measure to mitigate the damage by purchasing, for example, the same good in the market. He can then claim the amount of damages, which is the difference between the purchase price and the price he has paid in the market. This rule seems quite simple and reasonable from the point of view of the good faith which must prevail in the area of contract law. [Page79:]
National laws vary, however, for historical and other reasons. In order to overcome difficulties arising from varying national laws, efforts have been made to create certain non-national laws incorporating what is considered most appropriate and widely acceptable. The UN Convention for Contract for International Sales of Good (CISG) is the most successful legal document, and the UNIDROIT Principles of International Commercial Contracts is another achievement.
Our question is how an international commercial arbitrator must treat the obligation to mitigate damages. If the national law designated by the parties has provisions for such an obligation, he or she can simply resort to them. In doing so, can the provisions of CISG or UNIDROIT also be taken into consideration in order to implement and supplement the national law? When designated national law does not have such provision, what can be done? If no applicable law is designated, can an arbitrator resort directly to CISG or UNIDROIT? These are questions we must ask in this paper.
1. Obligation to mitigate damages in national laws
Common law systems
English law - Traditionally in common law, the remedy for a contractual breach has been damages. Specific performance is an exception. This seems to have been the background in which the very idea of the obligation to mitigate damages arose. In fact, it arises immediately when a non-performance (including anticipatory breach) occurs. The aggrieved party must immediately resort to the market in order to minimize his loss. Strangely, there is no leading case nor an abundance of judicial precedents on this point. 1 This principle is reflected in the manner in which the amount of damages is to be determined. Thus, the English Sale of Goods Act of 1979 (SGA) provides that when a seller neglects or refuses to deliver the goods to the buyer, the measure of damages is to be ascertained by the difference between the contract price and the market price at the time when they ought to have been delivered or at the time of the refusal to deliver (SGA 51(3). A similar provision is found for buyer's non-acceptance in 50(3)). The damages are determined without regard to whether the buyer actually bought a replacement. Obligation to mitigate damages expresses itself in a pure and abstract form. [Page80:]
American law - American law today, being based on the same principle, seems to take a more sophisticated approach. The Uniform Commercial Code, which has been adopted in most states, provides that the seller may resell the goods in case of the buyer's non-acceptance, or the buyer may purchase substitute goods ("cover") from elsewhere in case of the seller's breach. If such action has been taken in good faith and in a commercially reasonable manner or without delay, the difference between the two prices and incidental costs can be recovered by the aggrieved party (UCC §2-706, §2-712). The difference from English law seems to be that English law fixes the amount of damages as of the time of breach, while the American law depends on actual resale or purchase conditioned on good faith and reasonableness or promptness. Nevertheless, the basic principle of obligation to mitigate damages behind these rules is apparent. American law is more flexible than its English counterpart, because it introduces general principles like good faith and reasonableness. The Restatement of Contract 2d. of 1981 provides for a similar rule with a slightly different formulation. 2
Civil law systems
German law - civil law contract law differs from its common law counterpart in that the specific performance is the rule, and a remedy of damages is rather subordinate and supplemental, at least in theory. If the seller does not deliver the goods, the seller should pursue obtaining the delivery through litigation. There may be damages resulting from late delivery, but there is normally no room, under such a system, for the obligation to mitigate damages to play a role. It has been pointed out, however, that "several Civil Law systems treat the aggrieved party's contributory negligence and his duty to mitigate his loss on an equal footing." 3
Under German law, generally speaking, the buyer has no obligation to buy the same good from elsewhere in order to prevent or reduce the damage he is going to suffer, and likewise, the seller has no obligation to look for another buyer in order to prevent a loss, unless there are exceptional circumstances, such as a rising or falling market price or perishable goods involved. In this connection, German BGB Art. 254 deals with contributory negligence (Mitverschulden). In its first paragraph, it provides that the liability and scope of damages depend on the relative degree of contribution to the loss by the parties and, in the second paragraph, that the same applies when the aggrieved party neglected to prevent or mitigate the loss. Thus, the obligation to mitigate damages is included under the general principle of contributory negligence. [Page81:]
Further research is needed to understand the actual functioning of these provisions in practice and court decisions. But it can be assumed that, because of the priority of specific performance as remedy, the sphere in which such obligation works may be more limited than in common law.
Other civil law countries, such as Italy, Austria, Greece, Portugal, Belgium, Spain and Finland, are said to have similar provisions. 4
French law - The French Civil Code does not have a provision similar to BGB §254, but the principle of contributory negligence seems well recognized by jurisprudence. It has been said in connection with Art. 1147 of the Civil Code, "At the present time, legal authors are almost unanimous in recognizing, in the areas both of contract and of delict, that whilst force majeure alone can totally exonerate the defendant, fault on the part of the victim remains a cause of partial exoneration [citing Mazeaud and Tunc … ]. Case law has gone the same way …".5 Another author has pointed out, citing Pothier, "Despite the absence of a direct reference to mitigation of damages, it is quite clear that the French classical writers whose work preceded the enactment of the Code Civil did not doubt that a party aggrieved by the wrong of another was expected at least to attempt to prevent the expansion of the damage he had sustained, and that the party would be denied recovery for a failure to do so." 6
Under French law, however, damages are generally assessed as of the time of the judgment. If the seller is in default and the price of the good sold has been rising, it has been pointed out by a critical commentator that the result runs counter to the duty to mitigate damages. 7
Incidentally, it is interesting to note that the Quebec Civil Code was amended in 1991 and introduced an express provision for the obligation to minimize damages (Art. 1479). 8
Japanese law - Japan still belongs to the civil law camp. When a French-style civil code drafted by Gustave Boissonade, a French advisor, was rejected by the newly established parliament in 1890, the drafters turned to the first draft of the German BGB. Thus, the Japanese civil code is basically German, but some other elements are also found in it. It has been pointed out that the basic provision for damages (Civil Code Art. 416) is based on[Page82:] the English rule of Hadley v. Baxendale of 18549 and elements of French law. There is no specific provision for the obligation to mitigate damages. The only relevant provision is Art. 418 for contributory negligence and a general provision for the good faith principle (Art. 1(2)). Moreover, Art. 418 has an equivalent only in the first paragraph of BGB Art. 254. It simply says that the court determines the liability as well as the amount of damages by considering the negligence of the claimant. As in other civil law countries, specific performance is the primary contractual remedy. Therefore, a claim for damages arises only when the contract is formally avoided. This has caused serious controversy about the time at which the amount of damages should be assessed. When a specific performance is pursued in court, it is common that a claim for damages is joined on the condition that the specific performance proves futile at the time of execution. In this event, the court normally uses the time of the last date of hearing in court as the time for the assessment of damages. Although there is no statutory basis for the obligation to mitigate damages, there have been some court decisions that seem to adopt the same idea. A pre-war Supreme Court decision granted damages assessed at the time of termination of the contract by the aggrieved buyer. In view of the fact that the claim for damages arises only at the time of termination, this solution is ideologically similar to the English rule. 10 A more recent case was also decided in a similar way to UCC provisions. Because of breach by the seller, the buyer bought the good from elsewhere at a "reasonable price at the time" and was granted the difference between the prices. 11 These decisions do not depend on the principle of contributory negligence, because there was no negligence found on the part of claimant, who acted according to the "unspoken" obligation to mitigate damages.
Overview of civil law systems in comparison with common law - Traditionally, it is admitted, a civil law system did not have the doctrine of obligation to mitigate damages as such. Nevertheless, it has been asserted by various authors that the civil law jurisprudence has achieved similar, if not identical, results by resorting to other principles. A comparative analysis presented by Profs. Lando and Beale is illuminating: they distinguish three situations, namely: (1) where the aggrieved party's conduct was a partial cause of the non-performance; (2) where the aggrieved party, though not in any way responsible for the non-performance itself, exacerbated its loss-producing effects by its behaviour; and (3) where the loss resulting from the non-performance could have been reduced or extinguished by appropriate[Page83:] steps in mitigation. According to Lando and Beale, English law treats situations (1) and (2) as falling within the concept of contributory negligence and situation (3) within the concept of failure to mitigate damages. On the other hand, most civil law systems do not distinguish between these two concepts, but obtain similar results by using concepts such as causation. 12 I agree. Under the umbrella of the broad principle of good faith, failure to mitigate in a reasonable manner can either be construed as contributory negligence by itself or as outside of the bona fide expectation of the non-performing party. However, as much interpretative freedom may be available in theory, the contract law doctrines in each system are history bound, and not all theoretical possibilities can be exploited in practice. Thus, some kind of non-national system is needed to free national systems from their traditional bonds.
2. Obligation to mitigate damages in non-national laws
Uniform Law on the International Sale of Goods of 1964 (ULIS)
The Hague Convention's Art. 88 concerns the obligation to mitigate damages
as follows:
"The party who relies on a breach of the contract shall adopt all reasonable
measures to mitigate the loss resulting from the breach. If he fails to adopt
such measures, the party in breach may claim a reduction in the damages."
Unfortunately, the Convention was acceded to by only nine countries, mainly European. Therefore, today it has only a historical importance in that it gave impetus to the adoption of the more popular Vienna Convention, adopted in 1980.
The UN Convention on Contract for the International Sale of Goods of 1980 (CISG)
This Convention (CISG), often referred to as the Vienna Convention, is now acceded to by almost 70 countries including all important trading countries, with the notable exception of two important trading nations, the UK and Japan. The rules set forth in the Convention have been widely accepted and applied. As a product of international cooperation from both common law and civil law sides, it represents an interesting integration of both systems. [Page84:]
Its Art. 77, which was derived from the earlier ULIS Art. 88, provides:
"A party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach. If he fails to take such measures, the party in breach may claim a reduction in the damages in the amount by which the loss should have been mitigated."
This provision is the last in the series of provisions dealing with damages (Arts. 74-77). It is also inter-related with other provisions dealing with remedies. The whole scheme is admittedly "not free from difficulty" and "presents some substantial problems". 13 As a compromise or hybrid product between common law and civil law, the system has elements of both systems. Unlike common law, CISG emphasizes specific performance (Arts. 46, 62), and the avoidance of contract plays an important role in the assessment of damages (Arts. 75, 76) rather than just the breach. Not being a contract law specialist, I am not in a position to explain some of the problems. Thanks to the widespread applicability of CISG, its provisions are interpreted by the courts of many jurisdictions and by arbitrators.
In fact, CISG is applicable according to its Art. 1 when both parties to a sale of goods contract have a place of business in different contracting states, or when the rules of private international law lead to the application of the law of a contracting state. Therefore, it is possible that a company from a non-contracting state such as Japan can have a place of business in a contracting state subject to CISG. Moreover, if an action is brought in a Japanese court and the Japanese rules of private international law direct the court to apply the law of a contracting state such as France, CISG, as a part of French law, may be applied by the Japanese court. This point, however, is not entirely clear, and I am not aware of any court decision concerning this issue. In any event, we cannot ignore the fact that provisions of CISG are being interpreted and applied by the courts of the contracting states. 14
UNIDROIT Principles of International Commercial Contracts 2004
The UNIDROIT Principles were first published in 1994 after a long preparation. The scope of their coverage is not limited to the sale of goods and was largely expanded in the 2004 version to include much new subject[Page85:] matter, but the provision for the obligation to mitigate damages is original. Its Art. 7.4.8, entitled "Mitigation of harm", provides:
"(1) The non-performing party is not liable for harm suffered by the aggrieved party to the extent that the harm could have been reduced by the latter party's taking reasonable steps.
(2) The aggrieved party is entitled to recover any expenses reasonably incurred in attempting to reduce the harm."
The gist of the provision seems the same as Art. 77 of CISG, but the wording of the provision better represents the nature of the rule. Despite the common term of "obligation" or "duty" to mitigate, there is admittedly no corresponding right. It only delimits the scope of damages to be granted. Apart from some differences in wording, such as "reduce" instead of "mitigate" and "harm" instead of "loss", an important difference is found in the second paragraph concerning recovery of expenses for reduction of harm, which is not found in CISG. It may be asked how this problem can be dealt with under CISG.
Generally speaking, however, there are basic similarities between the CISG's provisions and those of UNIDROIT regarding damages; both aim at the harmonization of common law and civil law principles of contract. Principles of European Contract Law prepared by the European Commission of European Contract Law (Art. 9:505) follow the UNIDROIT's formulation closely. 15 In any event, it is beyond my capacity to attempt a detailed comparison of these documents. It should be assumed that the UNIDROIT Principles, being the latest product, incorporate many improvements over the CISG. The preamble of the UNIDROIT Principles foresees various situations where the Principles are applied: First, "They shall be applied when the parties have agreed that their contract be governed by them." Then, they may be applied (1) when the parties have agreed that their contract will be governed bygeneral principles of law, lex mercatoria or the like; and (2) when the parties have not chosen any law to govern their contract. Moreover, they may be used (1) to interpret or supplement international uniform law instruments; and (2) to interpret or supplement domestic law. The meaning of this will be considered in connection with arbitrator's task to apply law. [Page86:]
3. Arbitrator's application of law - which law?
General principle
It is well established today that the arbitrator must apply law unless the parties specifically request him/her to decide the dispute as amiable compositeur according to aequo et bono. Application of law guarantees the parties predictability and due process. My reasoning is as follows: the law's provision, by definition, specifies the requisite conditions for existence of rights and obligations. Each party to an arbitration, being aware of these conditions, presents allegations and evidence which will guide the arbitrator to a conclusion favourable to such party. The guarantee of procedural due process enables a party to rebut effectively the allegations and evidence presented by the other party, only because the arbitrator is bound by the rules of law under which the parties are litigating. In case of an amiable compositeur, the parties cannot know what allegation and evidence will effectively lead the arbitrator to decide favourably. They can only guess by using common sense. This point is particularly important in international arbitration. In domestic arbitration, because of the cultural affinity shared by both parties and the arbitrator, common sense may be more "common" than in an international context. It is understandable, therefore, why the principle of arbitration according to law has been established. In this respect, the arbitration is no different from litigation in a national court where the national judge must apply law. This aspect of arbitration has led to the often criticized modern trend of the "judicialization" of arbitration. It is interesting, however, to note that there have been some repercussions to such a trend by allowing the arbitrator a certain latitude in this respect, as discussed later.
Determination of applicable national law
The traditional rule is that the arbitrator must act like a national judge, that is, he must determine the applicable law by applying the rules of the private international law of the forum, namely the place of arbitration. The rules of private international law normally allow the parties to agree on the applicable law for matters outside of the mandatory regulation of lex fori; typically this involves contractual relationships. Thus, the parties to a contract are free to agree on the applicable law to the contract. Such a governing law clause is commonly found in an international commercial contract. It is generally admitted that the choice of law by the parties is not without limit, but its exact scope is not clear. 16[Page87:]
This traditional formula creates many problems when the parties have not agreed to any law. Difficulties arise, among others, because the place (country) of arbitration is not always a good basis to start with. Its private international law may not be suitable for the particular case. The whole operation becomes very complex and unpredictable if the thus designated law of a state should include the private international law of that state. For these and other reasons, modern arbitral legislations have departed from the traditional formula and allow the arbitrator to pick a choice of law rule that he considers most appropriate for the case (UNCITRAL Model Law), or even to directly choose an appropriate substantive law (not including the choice of law rules) of a state.
The French law took a lead in adopting this "direct" approach as early as 1981. Its so-called New Code of Civil Procedure Art. 1496 provided that, in the absence of the parties' choice of law, the arbitrator decides the case according to the law that he thinks appropriate. It also provided that the arbitrator must take commercial usage into consideration. The purpose of this legislation is explained as freeing the arbitrator from an obligation to first select a conflict of law system. Some years later, the Swiss Private International law Act of 1989 (PILA or IPRG) took a slightly different approach. Its famous Art. 187(1) provided that, absent a choice of law made by the parties, the case shall be decided according to those rules of law with which the case has the closest connection. 17
New arbitration laws of Germany (1988) and Japan (2002), for example, follow the Swiss example by using the idea of "closest connection", but their provisions seem fundamentally different from the Swiss model. 18 German-Japanese provisions direct the arbitrator to apply "the law of the State" with which the case is most closely connected and not "the rules of law" with which the case has the closest connection. This difference is significant because, under the Swiss formulation, the arbitrator can apply certain rules of law without going through a particular state, whilst in the German and Japanese approach the arbitrator must first find a state that is closely connected to the case. If any "rules of law" can exist without being the rules of law of any state, this difference would lead to an important difference in application of non-national law. This is discussed in the next section. [Page88:]
Application of non-national law - lex mercatoria
It is no coincidence that when the international arbitration started losing its "nationality" by being freed from the bind of its national situs with respect to the applicable law, 19 the possible application of a non-national law became more real. Arguments in favour of lex mercatoria have a long history. But a positivistic trend in legal thinking as well as in legal practice has long prevented its application from becoming a real practical issue. First, the contents of lex mercatoria were considered to be too vague to be used by the arbitrator as a clear standard for decision. Second, the fate of an award applying lex mercatoria was not certain before the national court. There was a risk of non-recognition. As a result, it was considered that there was not a sufficient degree of predictability that could be guaranteed by application of lex mercatoria.
The situation surrounding lex mercatoria began changing with the rising volume of international trade, expanding use of model contract forms such as Incoterms and active international cooperation to produce written rules applicable to cross-border commercial contracts. In effect, lex mercatoria has become more visible and its contents more acceptable and the outcome of its application more predictable. On the other hand, modern national arbitration laws have placed more restrictions on the ability of national courts to interfere with the arbitrator's application of substantive law.
If the parties are allowed to agree upon an amiable compositeur who is not bound by any law, there is no reason to prohibit the parties from agreeing that the arbitrator can apply lex mercatoria. 20 UNIDROIT Principles are not rules of law in the ordinary sense, but the parties are free to agree to their application to their case. 21 For a party from a non-contracting state adhering to CISG or ULIS, the rules laid down in these international documents are not binding in any sense. But a party is free to subject himself/herself to these rules on his/her own volition. 22
A more difficult situation arises when the parties have not agreed to any national or non-national law. Does the arbitrator have the possibility to apply rules of lex mercatoria? In this connection, modern arbitral laws like the Swiss law can make a difference, because they allow the arbitrator to bypass any state law. On the other hand, the German and Japanese formulation[Page89:] directs the arbitrator to first find the state that has the closest connection to the case and then to apply its law. Therefore, there is ostensibly no opportunity for the arbitrator to apply lex mercatoria that is not the law of that state. However, there may be some interpretative avenues which make the application of rules of lex mercatoria possible. If the arbitrator is allowed or required to apply or to take into account the trade usage, as many arbitration laws today provide, he can take into account the rules of lex mercatoria. The good faith principle is recognized in most countries as the most important general principle in private law. The arbitrator may be able to find the expression of such a general principle in some lex mercatoria rules.
The most important question in the application of lex mercatoria, however, is how to satisfy the requirement of due process. As suggested earlier in this paper, due process is satisfied by adhering to the application of positive national law, because the parties know, or at least are able to know, its contents and to submit proper allegations and evidence accordingly. Even in the national courts, the opportunity to know the exact contents of the applicable law has become an important due process requirement. The ancient adage of jura novit curia is no longer entirely true. Surprise by a judgment is not allowed. The contents of applicable law must be known to the parties beforehand and submitted to the parties for discussion. Amended Art. 16(3) of the French Code of Civil Procedure now provides that the judge is not allowed to base his decision on a point of law raised by his own motion without having invited the parties to present their observations on it. In Germany also, the Rechtsgespräch between the parties and the judge has been emphasized in the same context. 23
If this is correct, the arbitrator cannot so easily and lightly resort to lex mercatoria. The arbitrator must first identify the rules of lex mercatoria he/ she thinks possibly apply to the case and present them for the parties' discussion. 24 This may cause confusion and delay when both parties refuse application of the particular rules that the arbitrator has proposed. But if the proposed rules are clear and reasonable, the parties will probably be willing to reformulate their arguments and to produce evidence accordingly. In order to obtain such a reaction from the parties, it is useful to propose well-reasoned rules of lex mercatoria, such as the UNIDROIT Principles or CISG where the latter is not legally applicable for some reason. [Page90:]
Possible conflict with public international law
In applying any law, national law or otherwise, that provides for the obligation to mitigate damages, is there any possibility of conflict with public international law as a result of which the arbitrator can be prevented from applying such a law? This question goes beyond my capacity. But a cursory reflection leads me to answer negatively. Public international law may prohibit traffic of certain products, such as narcotics, weapons, etc. If the obligation to mitigate damages compels one to violate such a prohibition, the obligation cannot be fulfilled. But this is not because of the rule of the public international law as such, but because of a national mandatory law that has incorporated the obligation of the state under the public international law. A final conclusion on this point, however, has to be reserved because, in view of the recent development of the public international law concept, there may be situations where a norm of the public international law directly affects a private legal relationship.
4. Arbitrator's application of the obligation to mitigate damages
Various applications
Depending on a variety of situations, the arbitrator's mode of applying the obligation to mitigate damages may vary. If the applicable national law designated by the parties or by application of choice of law rules precisely provides for such obligation, the arbitrator can simply apply it. In common law countries where the principle is well established, it will be an easy task, but if the applicable national law is silent or ambiguous, the task will become more difficult. As I have noted earlier, however, most national laws now embrace the idea by utilizing various theories, such as contributory negligence, causation (reasonableness, foreseeability, etc.), the good faith principle, etc. Another clear situation is where CISG's provision for mitigation of damages is applicable because the parties originate from the contracting states or because the applicable choice of law rules lead to the application of the law of a contracting state.
When applicable national law does not somehow allow the arbitrator to apply the obligation to mitigate damages, or when an appropriate international convention like CISG or even ULIS does not apply, and when the arbitrator[Page91:] still thinks the obligation to mitigate damages should be applied to the case in order to reach a satisfactory outcome, what can be done? It can be admitted that the obligation to mitigate damages, being incorporated in the CISG and UNIDROIT Principles, has become a part of lex mercatoria. Therefore, if the arbitrator can resort to these documents as source of law, a solution can be obtained from them. Because the rules of these documents are relatively clear, well commented and studied and, in case of CISG, interpreted and applied by national courts, the parties will be able to argue and produce evidence in accordance with their respective interests, thereby satisfying the due process requirement in respect of the application of law. Whether the arbitrator can do so or not depends on the arbitration law by which he/ she is bound. Under the Swiss type of law, it will be easier than under the German and Japanese kind.
The next question is how arbitrators have dealt with this problem in actual cases. A French publication in 1992 remarked, 25 citing Loquin, "la duty to mitigate damages ou mitigation est, sans aucun doute, 'l'un des usages les moins contestés du commerce international' … C'est dans ce cadre juridique que les arbitres du commerce international en ont fait un principe general de la lex mercatoria." Citing Yves Derains, the same author continued, "En effet, l'obligation du créancier de minimiser le dommage qu'il subit 'reçoit application dans la plupart des sentences statuant sur des problèmes de responsabilité contractuelle sans que les arbitres ne s'appuient pour cela sur une loi nationale, et indépendamment du fait qu'ils aient ou non les pouvoirs d'amiable compositeurs'." 26 This is a sweeping statement. If this was already the situation in 1992, the present situation cannot be said to be different. We must then ask, on what basis can international arbitrators act in this way?
Some examples of application
It is necessary to review how international arbitrators have acted in actual cases.
This is a case arising from termination of a sole distributorship of a Spanish dealer by a Danish manufacturer. Because both Spain and Denmark are[Page92:] contracting States of CISG, Art. 77 was applied to limit the damages claim of the Spanish dealer. Apparently, there was no governing law clause in the contract. The arbitrator issued a procedural order on the law applicable to tell the parties that CISG and its general principles, as presently elaborated in the UNIDORIT Principles, were perfectly suited to the settlement of the present dispute. It was commendable from the point of view of due process to inform the parties of the arbitrator's determination of applicable law at an early stage. I understand the reference to the UNIDROIT Principles to mean that the latter would be used as an interpretative help in applying CISG.
This was a "partial" award in a case arising from a contract between the defendant Danish company, manufacture of a fish-sorting machine, and the claimant Belgian fish merchant, the purchaser of the machine. Because of UNECE Conditions included in the contract, which make the contractor's law applicable, the parties agreed that the Danish law should apply. They also agreed that CISG would also apply. It is not clear why CISG came into the picture. It may be because Denmark was already a contracting State (acceded in 1990) or because the parties just agreed to it. The arbitrator stated, "Apparently, the principles of Danish law either incorporate the relevant provisions of the CISG with respect to this question or Danish law is essentially the same as these provisions, without having incorporated them explicitly or officially." Without referring to Art. 77 of CISG, however, the arbitrator said, "In general, there is an obligation for a creditor who is suffering damages … to limit or prevent same … there may be other rules and principles under Danish law leading to - basically - the same result." The arbitrator in this case appeared to be uncertain as to which law precisely was applicable to the dispute. Since this was an interlocutory award, this might have been enough to motivate the parties to plead and prove in this way.
The case involved a typical situation of a cover sale in the coffee trade. The arbitrator simply said, "the buyer breached its obligation under the Hamburg usages by failing to mitigate damages and to inform the seller of its intention to re-sell the coffee to a third party." The nationality of the parties is not[Page93:] known. But undoubtedly the Hamburg usage was established to include the obligation to mitigate damages, and such usage was directly applied by the arbitrator without any discussion of applicable law. In this kind of contractual relationship, an implied agreement of the parties to such a usage can easily be presumed.
The dispute arose from the termination of a distributorship agreement. The American claimant (manufacturer) requested a declaration that the contract had been terminated, and the Argentine defendant (distributor) counterclaimed damages. In the contract, the parties agreed to use California law. The arbitrator said, "This result is entirely consistent with, and meant to be understood in light of, the rule of California law on mitigation of damages. [citing California cases] That rule required defendant [counterclaimant] to mitigate the damages flowing from claimant's abrupt termination of the contract. At a minimum, it appears that claimant's offer of 29 March 1984 to renew the contract for two years presented defendant [counterclaimant] with an appropriate opportunity to mitigate its damages." This case does not present a problem in the application of the obligation to mitigate damages, because it was clear that California law was applicable, and it no doubt included the rule.
This case arose from a construction project in Libya. A contract was entered into between a consortium of two Italian companies and a local Libyan company. The contract was expressly made subject to Libyan law. The arbitral tribunal gave a partial award in 1984 in which it held that the applicable law was, in principle, Libyan law, but that the arbitrators might apply a lex mercatoria where Libyan law had not been proved, or if it had lacunae or was incomplete. In the final award, the tribunal said, "Libyan law, in the same way as other national laws such as German or Swiss law or even the lex mercatoria […] gives effect to the theory of the unforeseen (imprévision) which arises from the principle that the rule 'pacta sunt servanda' is superseded by the higher principle of good faith […]. The arbitral tribunal recalls also the provision of Libyan law which requires the creditor to take any measures within his power to reduce the extent of his loss (Art. 224, [Page94:] ch.2. Libyan Civil Code; in so far as reference is made to lex mercatoria: see awards I.C.C. 2103 and 2142 … which apply the same rule.)" In this case, the role of lex mercatoria is not clear. Although the contents of the Libyan Civil Code provision are not known to us, this case seems to show that an arbitrator can interpret the applicable law as he/she likes by importing into it a certain desirable meaning.
This dispute arose from a sale contract of 1977 of Hungarian wine between a UK buyer and an Hungarian foreign trade company. The contract designated Hungarian law as applicable. The tribunal found that the Hungarian Civil Code Sect. 340(1) provides, "injured person shall make such effort in order to prevent or to mitigate the damage as might reasonably be expected generally in the given situation. Such part of the damages as has been caused by the injured person having omitted to comply with the said duty does not entitle him to compensation." Thus, it held, "the prospects of increased sales of generic wines were so uncertain and the capital expenditure in launching them was so great that the claimants were quite justified in refusing to take the risk of losing their capital. There was therefore no breach of the duty to mitigate." This is another case in which the agreed applicable law itself provided for the obligation to mitigate damages. I am curious about the origin of such a progressive Hungarian provision.
This dispute arose from a contract of sale of boots between two Belgian companies when the seller could not obtain the products from its Romanian supplier on time. The defendant asserted that the claimant should have done certain things "in conformity with its obligation to take all appropriate steps to limit its damage and reduce its losses". The applicable law under which such obligation arose was not identified. Without refuting the asserted obligation itself, the tribunal rejected this assertion on a factual basis. The applicability of the obligation to mitigate damages was not an issue. Both parties being Belgian, the applicable law was likely to be Belgian law, which probably embraced the rule of mitigation. However, it is also possible that the tribunal resorted to lex mercatoria and that the parties acquiesced to it. [Page95:]
This dispute arose from a contract between a French buyer and a Romanian company over the sale of a certain petroleum product. When the Romanian seller failed to deliver the product, an arbitration took place in Paris. There is no indication of the applicable law. For the calculation of damages, the tribunal remarked, "we should not lose sight of the fact that, by virtue of the general principle of law which is reflected in Art. 42(2) and 44(1) of the Swiss Federal Code of Obligation, it belongs to the aggrieved party to take all necessary measures in order not to increase the damage." The tribunal then blamed the French buyer for not accepting an offer by the seller of certain gas-oil at a lower price to compensate the initial non-delivery. It is characteristic of this case that the arbitrator directly applied the general principle of law. It may have been practice in East-West trade arbitration until the 1970s to resort to such an abstract principle in order to avoid attachment to a particular national legal system.
Conclusion
The obligation to mitigate damages is a part of many developed national legal systems and has been incorporated in documents that represent many supra-national endeavours to make a uniform rule of law by harmonizing varying national laws, such as CISG and UNIDROIT Principles. It has also become easier to talk about lex mercatoria as incorporated in these documents. 27 On the other hand, the theories about the methodology by which the arbitrator must reach the applicable law has become more and more sophisticated. It is generally accepted that the parties can agree to the application of lex mercatoria, general principles of law or the like. In practice, however, a designation of non-national law rarely occurs. 28 On the other hand, the designation of applicable law, even a national law, for various possible reasons does not always occur. 29 Thus, in many cases, the responsibility of arbitrators is heavy in selecting a proper law for the case. In view of the fact that the issue of mitigation of damages often arises in contractual disputes, how an arbitrator uses the doctrine of obligation to mitigate damages can be regarded as a touchstone for testing the validity of the methodology for selecting an applicable law. Whatever methodology may be used by the arbitrator, the important point is to procedurally guarantee due process and transparency in determining the applicable law. [Page96:]
1 The reason for this has been attributed to the fact that the issue of damages being considered as factual, the appellate courts paid deference to the trial courts. D. Harris, D. Campbell & R. Halson, Remedies in Contract & Tort, Butterworths, 2002, p. 108.
2 Restatement of Contracts 2d, Vol. 3 § 350, 1981, p.126.
3 Ole Lando and Hugh Beale, Principles of European Contract Law Parts I and II, p.447, Kluwer Law International, 2000.
4 Ibid., p.448.
5 Hugh Beale, Arthur Hartkamp, Hein Koetz & Denis Tallon, eds., Cases, Materials and Text on Contract Law, Hart Publishing, 2002, p. 834. Art. 1147 seems relied upon as the statutory basis, which provides (in official translation), "A debtor shall be ordered to pay damages, if there is occasion, either by reason of the non-performance of the obligation, or by reason of delay in performance, whenever he does not prove that the nonperformance comes from an external cause which may not be ascribed to him, although there is no bad faith on his part." Cass. civ. 1re, 31 January 1973, D. 1973.149.
6 Saul Litvinoff, Damages, Mitigation, and Good Faith, 73 Tulane Law Review 1161, 1166, 1999.
7 G.H. Treitel, Remedies for Breach of Contract - A Comparative Account, p. 121, Clarendon Press, 1988.
8 Jean-Louis Baudouin, Les Obligations 4e éd., p. 438 (Les Editions Yvon Blais Inc., 1993). Its official English translation reads: "A person who is liable to reparation for an injury is not liable in respect of any aggravation of the injury that the victim could have avoided."
9 9 Exch. 341 (1854). This is said to have happened because one of the drafters had studied in England.
10 Great Court of Judicature, 5 February 1931, 4681 Horitsu Shimbun 15.
11 Tokyo High Court, 29 September 1958, 9 Tokyo High Court Special Civil Report 172.
12 Lando and Beale, supra No. 3, 444.
13 Jacob S. Ziegel, The Remedial Provisions in the Vienna Sales Convention: Some Common Law Perspectives, in Galston & Smit ed., International Sales: The United Nations Convention on Contracts for the International Sale of Goods, Matthew Bender, 1984, 9-1, 9-43.
14 Information is available, for example, at http:/www.cisg.law.pace.edu.
15 Lando and Beale, supra No. 3, p.445.
16 Generally speaking, the parties' autonomy cannot prevail over mandatory rules of law of the place of arbitration. But the exact extent of this rule is still uncertain. For example, the Japanese Supreme Court has decided that the enforcement of an American judgment granting punitive damages is not allowed as it was against public policy. Under this rule, can an arbitrator in Japan apply the American law agreed upon by the parties and grant punitive damages? The concept of international public policy may be relevant for solving this problem. W. Laurence Craig, William W. Park & Jan Paulsson, International Chamber of Commerce Arbitration, 3rd ed., p. 338, Oceana Publications, 2000.
17 For an analysis of the developments from traditional approaches to modern approaches, see Marc Blessing, Regulations in Arbitration Rules on Choice of Law, in Albert Jan Van den Berg, ed., Planning Efficient Arbitration Proceedings - The Law Applicable in International Arbitration (ICCA Congress Series) p. 391, 408 et seq., Kluwer Law International, 1996; see also for a thorough discussion of this Swiss provision, Joachim G. Frick, Arbitration and Complex International Contracts - With Special Emphasis on the Determination of the Applicable Substantive Law and on the Adaptation of Contracts to Changed Circumstances, p. 68 et seq., Kluwer Law International, 2001.
18 German Code of Civil Procedure Art. 1051 of 1988, Japanese Arbitration Law of 2002 Art. 36. Incidentally, the United Kingdom's new Arbitration Act of 1996 adopted the formulation of the UNCITRAL Model Law by providing that "the tribunal shall apply the law determined by the conflict of laws rules which it considers applicable".
19 "Absence of lex fori" in the modern theory of international arbitration is emphasized in Frick, supra No. 17, p. 48.
20 Wolfgang Kühn, Express and Implied Choice of the Substantive Law in the Practice of International Arbitration, in Albert Jan Van den Berg, ed., supra No. 17, pp. 380-382.
21 As mentioned earlier, the preamble of the UNIDROIT Principles make them applicable when the parties have so agreed. This provision raises no problem in arbitration. In litigation in a national court, the result can be the same, because the parties are deemed to have incorporated the contents of the Principles in their contract terms.
22 Note, General Principles of Law in International Commercial Arbitration, 101 Harvard Law Review 1816, at 1823 points out that the greatest weakness of the use of non-national law is in uncertainty and unpredictability, citing Redfern & Hunter, Law and Practice of International Commercial Arbitration, 1986. Thus, a choice of such a law by the parties is rare. See also infra No. 28 for recent statistics.
23 Cf. Hans-Willi Laumen, Das Rechtsgespräch im Zivilprozess (C. Heymann, 1984), Joachim Goebel, Rechtsgespräch und kreative Dissens zugleich ein Beitrage zur Bedeutung der Sprache in der interpretativen Praxis des Zivilprozess (Dunker & Humblot, 2001).
24 Matti S. Kurkela & Hannes Snellman, Due Process in International Commercial Arbitration, p. 171 et seq. (Kluwer Law International, 2005) discusses the relationship between the principle "Jura Novit Arbiter" and due process, although the author's approach seems a little different.
25 Filali Osman, Les principes généraux de la Lex Mercatoria, p. 184 (L.G.D.J. 1992).
26 One of the famous protagonists Prof. Goldman mentioned the duty to mitigate damages as an actual content of Lex Mercatoria. Berthold Goldman, La Lex Mercatoria dans les contrats et l'arbitrage internationaux: réalité et perspectives, Journal du Droit International, 1979, pp. 475, 495.
27 Katherine Lynch, The Forces of Economic Globalization: Challenges to the Regime of International Commercial Arbitration, p 309 et seq., Kluwer Law International, 2003, points out the rising importance of lex mercatoria as a third legal system, but also mentions differing attitudes to it among countries, such as most active France and reluctant Germany. Japan rather belongs to the German camp.
28 Christopher R. Drahozal and Richard W. Naimark, eds., Towards a Science of International Arbitration: Collected Empirical Research, Kluwer Law International 2005, reveals that, from 2000 to 2003, only 1% to 2% of ICC arbitration clauses specified rules of decision other than national laws, such as EU law, general principles of equity, international law, international commercial law, ICSG. Ibid., p.200.
29 According to the statistics for the 1994-2003 period in Ibid., p. 197, between 77.8% and 82.1% of all ICC arbitrations specified applicable law. Blessing, supra No. 17, p. 396 points out, however, that the absence of an agreement may indicate an implied negative choice of law, meaning that the parties' will was clearly to avoid either party's national law.