Much has been written, both in terms of their scope and desirability, concerning the application of transnational rules to international contracts and possible ensuing disputes. This paper will examine the impact or role of the general principles of international law in relation to the notions of certainty and of foreseeability with respect to compensatory damages. Others will focus on specific areas of the recovery of damages, such as the principles of mitigation of damages, compensatory interest, quantification of the loss of profit, exclusion of consequential damages, punitive damages, etc. In the light of their contributions, it will be interesting to see if an answer will emerge to the following question: "Can a set of transnational general principles of damages recovery be identified?"

1. Certainty and foreseeability: two pillars of recovery

The breach of a contractual obligation normally calls for making good the consequences. The repair can take the form of specific performance, cancellation or a condemnation in damages. In the area of international commercial trade, thus of international contracts, the most frequently sought remedy is a condemnation consisting of an award of damages.

International arbitrators are bound to apply the national law provided for in the contract from which the dispute derives. In the absence of an express or clear provision, arbitrators are nonetheless obliged to apply the rules of law they will have determined in order to arrive at a proper compensation or remedy for the breach. In either case, are or should the arbitrators be influenced by, or apply transnational legal principles and rules? [Page11:]

Overall, it can be said at the outset that many aspects of the recovery of damages in international arbitration have given rise to principles that are widely accepted today, as will be illustrated by the other commentators. We will examine here two basic characteristics of recoverable damages, namely certainty and foreseeability, and explore some of the limits of these concepts. As a general rule, it can be said that whether the arbitrators are called upon to decide under a specific national law or not, they will, in almost all cases, pay attention to the principles of certainty and foreseeability.

2. Certainty

There are not many examples of express reference to this element in arbitral case law, but arbitrators will, in most cases, carefully examine the evidence in order to quantify, with an acceptable degree of certainty, the damages for which entitlement has been found. However, since they enjoy practically unrestricted freedom in appreciating the evidence, arbitrators will assess the damages, whenever possible, in such a way as to arrive at a fair figure.

Leaving aside liquidated damages and those claims which do not leave any room for interpretation, 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. That being said, when it comes to assessment, the notion of what constitutes certainty raises its head. Ignoring "nominal" damages and, at the other end of the spectrum, "exemplary" or "punitive" damages, the award will seek to compensate actual or real loss.

The measure of damages is "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". This statement by Lord Blackburn dates back to 18801 but has been reaffirmed consistently by the English courts and still holds true. 2 It also prevails under other common law systems. 3 The principle of restitutio in integrum is also applied by arbitrators deciding pursuant to provisions of civil law. 4

The measurement of damages is predicated upon the possibility of identifying, with precision and accuracy, the prejudice sustained. [Page12:]

In practice, one can hardly find a single instance where all the heads of claims correspond to an exact and precise loss. While some items can be easily quantified (e.g. replacement or residual costs of physical assets), a number of monetary condemnations do not result from straightforward mathematical operations involving uncontested numbers.

In the ancient tradition of English law, which is still in fashion, the claimant must do his best to ascertain his damages precisely. There is a clear principle that as much certainty and particularity as is reasonably possible must be insisted upon, having regard to the circumstances and nature of the acts themselves causing the damage. 5 In their appreciation of the efforts deployed by the successful party in establishing with as much certainty as possible the reality of the damages claimed, arbitral tribunals will, in all likelihood, dismiss a claim lacking sufficient concrete economic support or detailed cost-related elements.

Many arbitrations may not have materialized or could have been settled if the litigants had a clear and realistic awareness of the difficulties to establish quantum with a degree of certainty. The parties' insensibility to this aspect is often compounded by the frequent lack of understanding of their legal advisers. French lawyers, for instance, tend to be relaxed about the legal requirement of assessing damages with certainty; arbitrators with a continental background could be tempted to follow the lead of judges in their jurisdiction, who, when confronted with problems of quantification, will simply make une souveraine appréciation to fix the damages by awarding a lump sum, even though they should have expended some effort at quantification.

Fortunately, most international arbitrators will devote the necessary time to assess the evidence in order to establish, with a satisfactory degree of certainty, the amount of damages claimed. For several years, training has been available to enable contract negotiators and advisers, as well as parties in litigation and arbitrations, to deal more effectively with damages-related issues. In arbitrations involving more or less substantial amounts, costs and damages analysis has been developed and presented by accounting and financial professionals. Major accounting and consultancy firms have departments specifically versed in the quantification of damages to ensure they are as certain as they can be. [Page13:]

The ICSID award in the Ancoven/Venezuela case6 recognized that indemnification for lost profits, to the extent that the amount claimed is in line with the damages actually suffered, as provided for under Venezuelan law, was consistent with the practice of international tribunals. This is a well-entrenched principle in the jurisprudence of ICSID tribunals and of the Iran-US Claims Tribunals. The panel stressed that claims for lost profit would have been dismissed if "the claimant had not proven with a sufficient degree of certainty that the project would not have resulted in a profit".

The inescapable relevance of the standard of reasonable certainty can sometimes become a mere formality when it is decided at the outset that liquidated damages - the damages to be paid by the defaulting party are agreed upon in advance - will be owed in case of a proven contractual violation. Liquidated damages clauses are meant to prevent unnecessary litigation. When such stipulations are carefully crafted to obtain a genuine pre-estimate of the anticipated damages that can result from the breach of one or more terms of the contract, an exact measure of compensation will be readily available to the arbitrator and the requirement of certainty will be satisfied. 7

3. Foreseeability

In principle, parties are free to prove their case and discharge their burden of proof by any means. One of the hurdles in doing so with respect to the foreseeability test is first to establish causation (entitlement) by showing that the breach and the damages are linked, the latter being the necessary consequence of the former or a direct and immediate result. In practice, causation often becomes blurred with the notion of foreseeability.

When deciding under common law rules, arbitrators will not hesitate to quote the famous 1854 Hadley v. Baxendale decision. 8 The test as to whether the damages can be deemed to be arising naturally became known as "direct" loss or damages. The second test is whether the party found responsible for the breach reasonably contemplated or ought to have reasonably contemplated the damages; this latter became known as "indirect or consequential" loss or damages. In any event, it is generally accepted that a loss to be claimant must have been susceptible of being envisaged at the time the parties contracted. [Page14:]

Over the years, the principles laid down in Hadley v. Baxendale became somewhat clouded, and loss of profit, even when intended to be excluded pursuant to an "indirect, special or consequential loss" clause, would no longer necessarily exclude all liability for the loss of profit that was the normal loss of profit. 9

Section 2-715 of the UCC, a rare piece of legislation dealing expressly with the notion, provides that the consequential damages resulting from the seller's breach include any loss resulting from the general or particular requirements and needs of which the seller at the time of contracting had reason to know, and which could not reasonably be prevented by cover or otherwise. Consequential damages can be equated with losses that result indirectly from an injurious act or from a breach of contract, i.e. they do not flow directly and immediately from the act or the breach. The word "indirect", however, results in different consequences under various national legislations.

The trouble with the notion of "foreseeability" is that it is not readily reconcilable with the definition encountered in individual national legislations.

Article 1151 of the French Civil Code provides that only those damages which are une suite immédiate et directe de l'inexécution de la convention are compensable. Wording to the same effect is found in the laws of most countries that belong to a continental or civil system of law. Put differently, the breaching party can only be held responsible for those damages which were foreseen or which ought to have been foreseen at the time the contract was made, absent gross fault (Art. 1150 French Civil Code). While the criteria set in the two articles of the French Civil Code are, in theory, different, they are not, in practice, very well distinguished. The words "direct" and "foreseeable" appear to be interchangeable in many awards.

In theory, the term "direct" in Article 1151 of the French Civil Code is associated with causation whereas foreseeability connotes a test which must be appreciated in abstracto, that is, in the case of someone who is normally prudent and reasonable. Of course, specific circumstances that can be deduced from the type of contract or the professional expertise of the parties must be taken into account. [Page15:]

Foreseeability is understood as of the time that the contract is entered into. Indeed, at the time they make their contractual arrangements, it is natural for the parties to envisage, consciously or not, that certain damages, i.e. those foreseeable, could arise in the event of a breach. In that sense, those foreseeable damages enter the ambit of the contract, because they are generally agreed upon. It should be noted that what must be foreseen is the scope of the damages and not the cause of the damages.

It is not our purpose to examine here the concepts of "certainty" and "foreseeability" in any further detail, nor to consider the law of specific countries (this is dealt with by many authors and case law), but rather to consider how these concepts have been applied in an international legal environment, in particular in the context of arbitral awards, transnational rules (UNIDROIT, CSIG, treaties and model law). It is also to determine whether transnational general principles applicable to the recovery of damages in arbitration have emerged.

4. Possible limitations to the principles of certainty and foreseeability

Contractual limitation

The most classical approach to limit the amount of the damages resulting from a breach is to negotiate contract clauses to cap the damages that would otherwise be allowed, or to exclude certain types of liability or damages.

As an example, the General Conditions of Contract for Construction, FIDIC 1998, provides, in Clause 17.6, a limitation of liability: "Neither Party shall be liable to the other Party for loss of use of any Works, loss of profit, loss of any contract or for any indirect or consequential loss or damage which may be suffered by the other Party in connection with the Contract, other than under Sub-Clause 17.1 [Indemnities] or in the event of termination under Clause 16 [Default of Employer]."

The second paragraph of the clause also provides that the total liability of the contractor to the employer, under reserve of certain exceptions, shall not exceed the sum stated in the particular conditions or (if a sum is not so stated) the accepted contract amount. It is further stated that this sub-clause shall not limit liability in any case of fraud, wilful misconduct or gross negligence by the defaulting party. [Page16:]

Such limiting provisions, even if drafted with care, will nonetheless, in many instances, require interpretation by arbitral tribunals as to their exact scope. This is particularly true in an international context where a definition of a given term (consequential damages, for example) will not be understood in the same manner by the other party who originates from another jurisdiction, let alone from another system of law.

In this context, the following clause is particularly instructive:

"18.1. Where either Party is liable in damages to the other under this Contract,

those shall not exceed the damages which the Party in default could

reasonably have foreseen at the time of conclusion of this contract.

18.2. However, neither party shall be liable for indirect or consequential damages under this Contract except in case of gross negligence or fraud … ."

In one case, the tribunal did enter into a discussion as to the meaning of the expression "consequential damages" borrowed from the common law tradition but embodied in a contract governed by the Egyptian Civil Code. 10 The respondent argued that this expression prohibited any claim for loss of profit and that it had no defined meaning under Egyptian law; accordingly, the respondent said that its interpretation should be consistent with the practice prevailing in international commercial contracts, which favours an interpretation excluding, as in the instant case, any liability for loss of profit. For its part, the claimant argued that Egyptian law provided, in any event, compensation for loss of profit, because this was a repairable direct and normal loss deriving from a breach of contract. The tribunal did not embark on any exercise to define the expression "consequential damages"; it merely stated that loss of profit was a direct and foreseeable consequence of the delay in completing the plant and of breaching the performance and deliveries guarantees. Compensation for loss of profit was awarded.

Liquidated damages

Instead of leaving it up to the arbitrators to decide what damages can be awarded, the parties themselves can provide, in order to be certain, what the amount of the damages will be in the event of a violation of the contractual provisions. In other words, the parties can by agreement "liquidate" the[Page17:] damages likely to be attributed to a breach. Whereas in the French tradition, this will be referred to as a clause pénale, the common law steers away from the word "penalties" in this context, preferring the expressions "lump sum damage" or "liquidated damages".

Such a contractual provision has the advantage for the parties, as well as for the arbitrators, of fixing the amount of damages that will be awarded in the event of a given breach ahead of the dispute. However, difficulties could surface at the time of negotiating the amount of possible future damages. Even in the case of a daily, weekly or monthly penalty for the late delivery of merchandise or a project, it is often hazardous to predict what the real damages will be at the time the prejudice arises.

Of course, to avoid becoming voidable under many legislations, a liquidated damages provision must not be tantamount to a penalty. In France, Art. 1226 of the Civil Code recognizes that the parties can agree ahead of time to fix the amount of damages by providing for a compensatory lump sum payment. Although called a clause pénale, such a provision aims at making certain the quantum independent of the actual loss suffered, which can prove to be less or more than what the parties had fixed as liquidated damages. However, the judge may, even ex officio, reduce or increase the agreed-upon "penalty" (peine), should it be patently excessive or ridiculously low. Any stipulation to the contrary would be considered to be non-existent (Art. 1152 Civil Code).

There is nothing unusual in arbitration awarding "liquidated damages", especially in relation to international construction contracts, as long as the damages are not characterized as penalties. This distinction is found in the common law as well as in the civil law tradition. In ICC Case No. 3267, 1979, the tribunal clearly expressed that since the parties had agreed on an arrangement that resulted in liquidated damages, it became irrelevant to examine evidence as to how the arrangement was arrived at, nor as to what were the "real damages". No specific national law applied, and the tribunal decided in accordance with the general principles of law largely admitted to be the governing rules in international trade. 11

The principle of pacta sunt servanda may not always prevent the application of other rules. For instance, Art. 7.4.13 of the UNIDROIT Principles says[Page18:] that where a party who does not perform is to pay a specified sum, the aggrieved party is entitled to that sum irrespective of its actual harm, but further that such sum can be reduced to a reasonable amount where it is grossly excessive in relation to the harm resulting from the non-performance and other circumstances. Of course, the arbitrators will have to give the word "excessive" a concrete meaning. This is likely to be done by placing in civil law systems, at least in France, the bar higher than in the United States. If the amount of the liquidated damages is tantamount to a penalty, then it might be set aside altogether as being in the nature of a penal clause; the amount fixed by the parties to facilitate the recovery of damages could, therefore, thwart their intent.

Equity in the assessment of damages

Equity is relatively often referred to by arbitrators when assessing damages. A review of awards in this connection is provided by Bernard Hanotiau. 12 The principle of equity can be used to interpret a contractual clause and allow the parties to round off figures on the basis of the objective elements produced in evidence. This can occur, for instance, if an important devaluation takes place between the time of the contract and the time of the delivery of the merchandise, especially if there is a long delay in paying the invoices. At other times - and this is largely recognized - the arbitrators can evaluate the damages by an appreciation souveraine or by invoking equity in order to make an overall judgment of various damages when they are not precisely identified, but when it is proven that damages have been suffered. The arbitrators can also order the payment of a lump sum.

Deciding in equity can be more delicate if there is an applicable national law, although various techniques exist (interpretation) to arrive at the equitable solution desired by the arbitrator, even if he does not so state.

In deciding what was a fair interpretation, the arbitrator, sitting in the Liamco

v. Libya case cited by Mr Hanotiau, referred to the general principles of law as they have been applied by international tribunals, the general principles of which form a compendium of legal precepts and maxims universally accepted in theory and in practice. 13

Using amiable composition can achieve similar results. [Page19:]

Mitigation of damages

Even in the presence of damages that were foreseeable and of which the amount can be ascertained, the award may not allow for their full recovery to the extent that the damages could have been mitigated or were contributed in part through the fault of the other party.

Other limits

Damages will not be awarded, even when their amount can be ascertained and even if they had been foreseeable, when it is clear that the defendant has committed no fault, when a force majeure has intervened to relieve the debtor of the obligation, when the cause of the damages lies entirely with a third party or when the breach can be attributed to the creditor of the obligation himself.

The doctrine of abuse of right, albeit still controversial, can be applied by arbitral tribunals to keep claims, otherwise legitimate, within tolerable norms "on the grounds that it would be intolerable in the present case to uphold claims for lost profits from investment not yet incurred", as this doctrine was applied in the Himpurna v. PLN award and fully discussed in Jan Paulson's presentation. 14

A further limitation on the amount of damages claimed, which may or may not be applied by arbitral tribunals, concerns punitive and exemplary damages. These all depend on the applicable law and perhaps, to a certain extent, on the sensitivity of arbitrators to this issue. Jacques Werner's presentation is very enlightening in this connection. 15

There can also be limits on recoverable damages imposed by some applicable national or international regulations, such as in the case of international transport.

Conversely, arbitral tribunals can be called upon to set aside or curtail the application of clauses limiting or excluding liability for certain kinds of damages. National laws differ in this area. For instance, Art. 1150 of the French Civil Code obliges the debtor to repair unforeseen damages when they result from his gross fault or negligence (faute lourde) in performing the contract, even if this was not intentional. A similar provision is not found, for instance, in Art. 74 CISG. [Page20:]

5. Resort to transnational law generally

In his review of the book published by Professor Peter Klaus Berger, the late Philippe Fouchard recalls that the enquiry conducted by a Research Team of the Center for Transnational Law (CENTRAL), directed by Professor Berger, provides the following statistics (based on 808 responses from 78 different countries): 42 percent of the practitioners have come across the use of transnational rules in the context of international arbitrations, such rules being understood as general principles of law (between 21 and 28 percent), the lex mercatoria (between 12 and 18 percent) and the UNIDROIT Principles (between eight and 13 percent). The survey results also indicate that transnational rules were most often applied to supplement or interpret the applicable municipal law rather than to replace it. 16

In the Aucoven v. Venezuela ICSID case, the tribunal, applying Venezuelan law, examined whether Aucoven's claim for lost profit met the test of certainty. In line with a jurisprudence of the Venezuelan Supreme Court, the tribunal reiterated that it could not award loss of profit on the basis of speculative assessments and added that this was consistent with the practice of international tribunals. The tribunal noted that "Decisions issued by ICSID tribunals and by the Iran-US Claims Tribunal have often dismissed claims for lost profits in cases of breach of contract on the ground that they were speculative and that the claimant had not proven with a sufficient degree of certainty that the project would have resulted in a profit." In this connection, the tribunal referred to certain authorities. 17

In the same matter, the tribunal reviewed four cases put forth by Venezuela corroborating the proposition that lost profits cannot be awarded where they are not justified by economic evidence. 18 The tribunal went on to observe that the four decisions cited by Venezuela showed that ICSID tribunals are reluctant to award lost profits to a beginning industry and unperformed work, and noted that the same reluctance of ICSID tribunals is confirmed by the practice of the Iran-US Claims Tribunal. This enabled the panel to consider that Aucoven's claim for future profits did not rest on sufficiently certain economic projections and thus appeared to be speculative: Aucoven had no record of profit, since it never built the viaduct required by the Concession Agreement. [Page21:]

This relatively recent international award in the Aucoven v. Venezuela case can be seen as a natural penchant of international arbitrators to work toward the building up of an autonomous corpus of rules susceptible of being applied in international trade. This can be best illustrated by the tribunal's following obiter dictum: "Hence, it [the Venezuela claim] does not meet the standards for an award of lost profits under Venezuelan law, nor would it meet these standards under international law, if the latter were applicable."

6. Resort to unidroit principles

According to Alexander Komarov, President of the Court of International Arbitration of the Chamber of Commerce & Industry of the Russian Federation, the UNIDROIT Principles found their way into six arbitral proceedings pursuant to the rules of this institution. 19

In one case, the arbitral tribunal applied the Principles on its own as reflecting international trade usages required to be applied pursuant to the rules. In another case, the Principles were used to support the application of a rule of domestic law to show the appropriateness of the latter to international contracts. Among the examples given by Mr Komarov, it is interesting to note that for many years, tribunals and courts often reduced the sum stipulated by the parties as liquidated damages, basically to safeguard a state interest. Since the UNIDROIT Principles enunciate that the rule of good faith must be taken into account in matters of compensation, arbitrators therefore refer to the Principles in order to show that the rules of domestic origin are also applicable to international situations, and the amount of liquidated damages is less likely to be reduced.

Award 229/1996 of 5 June 1997 of the Russian Chamber dealt with the validity of a contractual clause providing for an amount to be paid by the buyer as a penalty in the event of late payment. In response to the buyer's argument that the stipulated amount was excessive and in the absence of any relevant provision in the CISG, the arbitral tribunal applied Art. 7.4.13 (2) of the UNIDROIT Principles and reduced the penalty to a reasonable amount. The arbitral tribunal further pointed out that the Principles were applicable pursuant to Art. 9 (2) CISG since "they reflect usages of which the parties knew or ought to have known and which are widely known in international trade". 20[Page22:]

During the May 1994 to December 1998 period, 23 ICC awards made reference to the UNIDROIT Principles. 21 For the period 1999-2000, 14 ICC awards mentioning the UNIDROIT Principles have been reviewed by Professor Fabrizio Marrella. 22 According to this survey, four awards only applied the Principles as the proper law of the contract, while nine show the use of the Principles as a means of interpreting/supplementing the applicable national law and one the former Uniform Law on the International Sale of Corporate Property. Emmanuel Jolivet, General Counsel, ICC International Court of Arbitration, reviewed 10 awards made in 2001 and 2002 referring to the UNIDROIT Principles. 23

We will examine here some of those awards which deal with the issue of damages and in particular with the elements of "certainty" and "foreseeability".

In line with the classical notion of foreseeability, the 1985 Chinese law on foreign economic contracts provides that damages must not exceed the loss that was foreseeable by the breaching party at the time the contact was made. A claimant had sought compensatory as well as punitive damages. Although both parties agreed that Chinese law governed the merits of the dispute, they requested the arbitral tribunal to apply the UNIDROIT Principles as an expression of international practices. 24 The tribunal was therefore able to shore up its decision to reject the claimed punitive damages - after having found that they exceeded normal foreseeable compensatory damages as provided under Chinese law - by concluding it was obvious that there was no international trade practice favouring punitive damages.

In a 1996 award under the Rules of the Camera Arbitrale Nazionale ed Internazionale di Milano, the parties agreed, in the absence of a choice of law clause, to have their dispute settled in conformity with the UNIDROIT Principles tempered by recourse to equity. By reference to Articles 7.4.1 and 7.4.2 of the Principles, the tribunal affirmed the right to full compensation for the harm suffered by the aggrieved party due to the other party's nonperformance, but excluded compensation for emotional suffering and distress on the ground that the aggrieved party was a corporate entity. Likewise, the tribunal excluded compensation for the purchase of a house in the place where the contract was to be performed. 25[Page23:]

In ICC Case No. 8264, the arbitral tribunal was authorized, in addition to the applicable Algerian law, to consider "the general principles of law and the usages of trade". 26 The tribunal found that the UNIDROIT Principles reflected the practice of international contracts and, referring to Article 7.4.3 (2) of the Principles, that it was authorized to compensate the "loss of a chance", since the licensor (claimant) had not kept the licensee (respondent) regularly informed that it had not made any improvements to the equipment, and therefore that it had no technical advancements to communicate. Since the licensee could not integrate this information into its plant expansion programme, it therefore necessarily lost business opportunities by having been prevented thereby from timely reorganization of the industrial plant that it had built to manufacture the equipment pursuant to the license agreement. While the tribunal recognized that the loss of a chance could be compensated when sufficiently proven, it nonetheless tempered its decision by taking into account that the non-communication by the claimant of the information that no improvement had been made to its technology was only a contributory factor to the loss of a large part of the respondent's investment:

"En d'autres termes, en raison de l'attitude de la partie demanderesse, la partie défenderesse a perdu une chance de rentabiliser convenablement des installations industrielles fort onéreuses. Certes, l'échec actuel de la partie défenderesse, qui se traduit par l'arrêt presque complet de la fabrication des compresseurs et compacteurs visés par le contrat de licence, est dû à des causes diverses, mais le comportement de la partie demanderesse a sûrement contribué, dans une certaine mesure, à ce fiasco industriel."

An ICC award rendered in December 2000 in Case No. 10346 clearly sets out the general principles applying to damage recovery, in particular under Colombian law, applicable to the contract. 27 The tribunal refers to civil law commentators as well as to Anglo-Saxon sources. Having recalled the two categories into which recoverable damages can be classified, damnum emergens and lucrum cessans, the tribunal proceeded to define the parameters that must be applied in evaluating the prejudice once, of course, the figures have been proven. The tribunal lists the following conditions :

"i. Fullness of the compensation, referable to the need to place the aggrieved party in the position it would have been in absent [sic] the loss; [Page24:]

ii. Certainty of the loss, material in the case of consequential loss(crystallized situation) and legal in the case of loss of profit (contingent situation);

iii. Direct character, that is to say resulting exclusively from the cause-effect relationship; and

iv. Foreseeability, referring to the harmful consequences of their actions being within the reasonable contemplation of the Parties".

In this December 2000 award, the arbitral tribunal was obviously largely influenced by the UNIDROIT Principles, although it had to apply Colombian law. In relation to the "certainty" of the loss, the tribunal made it clear that it would not order compensation of a loss that would merely be "contingent". To illustrate this point, the tribunal referred to Article 7.4.3 of the UNIDROIT Principles and recalled the illustration given in the commentary on this article, where the owner of a horse that arrives too late to run in a race as a result of a delay in transport cannot recover the whole of the prize money, even though the horse was the favourite.

The tribunal stressed that the exercise of classifying damages as certain or as contingent constitutes a necessary filter for the determination of the reasonableness of losses. If the losses are 100 percent certain, then they can be awarded in total, provided, of course, that the other criteria for damage recovery are met. The tribunal then turned to an examination of the inevitability of the damage and underlined that this had to be found in order to award damages. It differentiated this notion from the intermediate or immediate character of a loss.

The tribunal went on to examine the condition of foreseeability and, in line with the 1854 English case of Hadley v. Baxendale, concluded that the foreseeability rule requires the tribunal to determine whether the type of losses had been ordinarily and reasonably within the contemplation of the breaching party as being associated with its breach, in order to decide whether or not compensation should be ordered and, if so, the amount of such compensation. This requirement is clearly met, as specified under Article

7.4.4 of the UNIDROIT Principles, when the loss of profit could have beenreasonably expected by the party that breached the contract at the time of[Page25:] entering into it, as the probable consequence of its breach. In the instant case, the tribunal had no hesitation in concluding that it must have been obvious to the breaching party that the essential objective of the aggrieved party in taking part in the public tender and, naturally, in entering into the contract, was to obtain a return on its investment. The tribunal therefore allocated damages on this basis.

The reasoning of the arbitral tribunal in this ICC case is illustrative of the influence that the international principles of law, and in particular the UNIDROIT Principles, will have on the application of a given national provision of law when applied by an arbitrator sitting in a case involving parties from different jurisdictions. The reference to, and sometimes reliance on, transnational rules provide the desired flexibility in applying domestic rules to an international relationship.

When legislators adopt laws in their respective countries, and in particular rules applying to contracts, they primarily, if not exclusively, have in mind a national application, i.e. the use of these laws by citizens of their country. This is why the publication, albeit in sanitized form, of international awards becomes essential if national laws are to continue to be applied in world trade. These constitute precedents concerning how national norms can be successfully transposed into the transnational arena. International awards and principles of law restated (UNIDROIT Principles, CSIG, UCC, model laws) largely contribute to resolve many difficulties that the application of a national rule may entail when tested in an international context.

ICC Case No. 8817, decided in 1997, offers an interesting solution for identifying international rules to be applied in the absence of a governing law. 28 The tribunal noted that both Spain and Denmark had adopted the CISG sometime before the litigious contract had been entered into, thereby allowing time for the CISG to have been studied and commented on in these jurisdictions. Accordingly, the CISG represented a tronc commun of the principles that would apply in each country. The arbitral tribunal then proceeded to resolve the main issues by applying the relevant principles found in the CISG. The tribunal further noted that the provisions of the CISG and its general principles were also contained in the UNIDROIT Principles, so that the CISG rules were perfectly suited for resolving the dispute. [Page26:]

The arbitral tribunal then proceeded to analyze the facts of the case in the light of Article 77 of

CISG and Art. 7.4.8 of the UNIDROIT Principles in so far as mitigation of damages was concerned. Although this case did not deal directly with the notion of certainty and foreseeability, the interest resides in the reasoning of the tribunal in arriving at the rules of law to be applied in an international dispute where no domestic law has been provided. The tribunal considered that the CISG and the UNIDROIT Principles provided an adequate tronc commun of principles to resolve the dispute. 29

It is worth noting that when the contract is silent as to the applicable law, tribunals will often determine the case by reference, first, to the provisions of the contract itself and then to the lex mercatoria or the international principles of law which, in many instances, mean reference to the UNIDROIT Principles to the extent that they are largely viewed and accepted as a codification or restatement of those transnational rules.

In ICC Case No. 5835 (1996) opposing Kuwaiti and Italian parties, the arbitrator was not convinced that the parties had expressly decided upon a national applicable law. 30 The tribunal did not accept the respondent's argument that the parties had made a "negative choice" in that the national law of neither party was intended to be applied. The respondent derived from this negative choice that the law to be applied should be the tronc commun principles containing that part of the Kuwaiti and Italian legislations which were common to them at the time the agreement was entered into. The tribunal finally decided that Kuwaiti law, which presented the closest link with the contract, should be applied. However, the tribunal went on to state that "in accordance with the well-established practice in International Commercial Arbitration, the arbitrators shall take account also of the principles generally applicable in international commerce…". This statement was "particularly justified in view of the fact that the Parties refrained from choosing explicitly Kuwaiti law as the law on the merits … ".

Having reached this conclusion, the tribunal was able to interpret Art. 300 Sect. 1 of the Kuwaiti Civil Law No. 67 of 1980, which provides that compensation shall be "estimated" by the court. The tribunal equated the meaning of the Kuwaiti legal provision to mean what Art. 7.4.3, para. 3 of the UNIDROIT Principles states: "Where the amount of damages cannot be established with a sufficient degree of certainty the assessment is at the discretion of the court." [Page27:]

This is a remarkable illustration of how a municipal law meant to regulate contractual relations between residents of the same country can be interpreted by an international tribunal to suit the decision-making process in disputes involving international elements.

Comfort was sought from international norms by another arbitral tribunal in 1999, when it could have resolved the dispute on the basis of the English law chosen by the parties. 31 After having reviewed the leading English cases, the tribunal found it appropriate to add that "a similar standard has been established internationally, primarily in the UNIDROIT Principles of International Commercial Contracts (1994) which enunciates in sub-section (1) of Article 7.4.8", that in essence the aggrieved party has an obligation to mitigate its damages. In connection with the "foreseeability" test, the tribunal cited the Hadley v. Baxendale 1884 case and the Sale of Goods Act, 1979, but did not find it necessary nor useful to refer to Article 7.4.4 of the UNIDROIT Principles embodying the principle of limitation of the recoverable harm to that which is foreseeable, this rule also corresponding to the language found in Article 74 CISG.

Although the unpublished ad hoc arbitration award rendered in 1997 between Argentinean and Chilean parties does not deal with an issue of damages, 32 this case offers an example where reference is made to the Model Law. The arbitral tribunal took the argument in Section 4 of Art. 28 of the Model Law to state that the UNIDROIT Principles constituted "usages of international trade reflecting the solutions of different legal systems and of international contract practice" and as such, the tribunal determined that these Principles should prevail over any domestic law. 33 Despite the fact that the arbitrators acted as amiables compositeurs, they nonetheless sought comfort in the Model Law and the UNIDROIT Principles.

Another ad hoc arbitration cited in Bonell shows that even if the tribunal were able to reach its decision purely on the applicable domestic law (reduction of an excessively high penalty or liquidated damages), it nonetheless found it worthwhile to corroborate its finding by referring to Article 7.4.13 (2) of the UNIDROIT Principles, which provides for a penalty to be reduced to a reasonable amount where it appears grossly excessive under the given circumstances. 34[Page28:]

The final award rendered in Case No. 9950 in June 2001, 35 where the arbitral tribunal faced with the complexities of quantification and given the judicial discretion that it enjoyed in the allocation of damages as foreseen under the Egyptian Civil Code, looked to Article 42 of the applicable substantive law, the Swiss Code of Obligations (Geneva being the site of the arbitration). 36 The tribunal sought further support in the exercise of its discretion to assess damages in the UNIDROIT Principles, in particular from Article 7.4.3. The tribunal was careful to state that such discretion must not be tantamount to deciding in amiable composition and insisted that it continued to operate within the legal framework relevant in this matter.

Another recent award rendered in July 2001 in ICC Case No. 11051 gives an example of an arbitral tribunal referring to the UNIDROIT Principles (Art. 7.4.9), this time in relation to the question of interest, even though Italian law had been chosen by the parties. 37 This solution, as stated by the tribunal, is consistent with the relevant customs of international trade, of which the UNIDROIT Principles are an expression.

The final award rendered in ICC Case No. 10422 in 2001 held, failing a stipulation by the parties as to a clear choice of applicable law, that the parties had intended their contractual relationships to be governed by a neutral solution. 38 Accordingly, relying on Article 17(1) of the ICC Rules of Arbitration, the arbitral tribunal considered that the most appropriate solution to meet the parties' intent for a neutral set of rules was to resort to the UNIDROIT Principles as representing a restatement of the rules governing business relationships in international trade, those rules conforming to the interest and expectations of the parties. 39 The tribunal referred to previous awards where this reasoning was recognized. In any event, this decision acknowledges that the Principles can be directly applied as a material rule in relation to the quantification of damages. 40

The sole arbitrator in this ICC Case No. 10422 noted that the UNIDROIT Principles were a component part of the lex mercatoria. This award confirms that the UNIDROIT Principles are now part of the international rules used by negotiators and drafters of international commercial contracts. It also supports the proposition that the Principles constitute a substantive set of rules that can be directly applied by arbitral tribunals, at least when the[Page29:] parties have not provided expressly for an applicable law. Emmanuel Jolivet, the General Counsel to the ICC Court of Arbitration, concluded that this award provides a very instructive example of the application of the UNIDROIT Principles. 41 Mr Jolivet recalled that constant arbitral jurisprudence has now established for a number of years that in applying the notion of lucrum cessans, the loss of profit is not calculated on the basis of the gross margin on the sale price, but on the net profit after deduction of all expenses. In applying the UNIDROIT Principles, the arbitral tribunal had the necessary discretion to determine what the reasonable net margin was.

Another ICC award in Case No. 10578, also rendered in 2001, furnishes an example where the claimant, the parties not having relied in their contract on general principles of international trade law, invited the tribunal to refer to the UNIDROIT Principles and equity even though the contract was governed by Swedish law. 42 The tribunal had to examine several claims in damages, including loss of profit, costs incurred, lost goodwill and compensation for damaged trading image and interest.

The final award in ICC Case No. 6829, rendered in 1992, although more ancient, is noteworthy, since it illustrates how a tribunal limited a condemnation in damages to compensate lost profit. After having determined the total loss of profit sustained by the claimant over a period of 9.33 years, the tribunal subjected that sum to a discount rate to take account of the fact that the sum awarded would be paid to the claimant years in advance of the dates on which claimant would have otherwise received its profits had the respondent performed the contract for the whole of the term. The tribunal applied a discount rate of 6.5 percent, which it considered to be appropriate according to the practice prevailing in Luxembourg, the place of arbitration. 43

Conclusion

For some time now, a considerable body of scholarly work has been devoted to the issue of whether there exists a body of transnational rules susceptible of being applied, particularly by international business operators and arbitrators, as the substantive law or lex contractus. Today, this is a generally accepted proposition as reflected in Art. 17 (1) of the ICC Rules of Arbitration in force as from 1 January 1998, which provides that "The party shall be free to agree upon the rules of law to be applied by the Arbitral Tribunal to[Page30:] the merits of the dispute." National courts have also validated the position that the lex mercatoria, as restated in the UNIDROIT Principles and other international instruments such as the CISG, can serve as a genuine law equivalent in their application to a specific municipal law.

However, is this proposition acceptable in relation to the recovery of damages? At the end of the day, once specific issues (mitigation of damages, interest, etc.) have been examined, the answer will likely be "yes" for certain rules and "no" for others.

In general, international arbitrators enjoy greater flexibility in assessing damages between parties coming from different jurisdictions than local judges who are bound by their own domestic legal rules. Arbitrators are often called upon to accommodate the perception of parties to an international dispute, as they do not always share the same understanding of the national rule of law retained in their contract. International arbitrators will naturally turn to arbitral precedents and to sets of transnational rules to arrive at the most appropriate solution in the precise circumstances of a given case. In order to support their determination, they can refer, for instance, to Art. 7.4.2 of the UNIDROIT Principles providing that the aggrieved party is entitled to full compensation, which will include lost profit (sometimes called "consequential damages"); Art. 7.4.3 which provides that the harm, including future harm, must be established with a reasonable degree of certainty, albeit leaving to the arbitrators - when such a sufficient degree of certainty cannot be proven - a discretion to assess the damages; and to Art. 7.4.4, which limits the recoverable harm to what was foreseeable at the time the contract was made.

Overall, the application of these principles does not cause any problems, quite the contrary. The relevance and particular interest of arbitral case law in this context is that awards offer concrete examples of the application of such principles, thereby creating a base of precedents more adapted to international disputes. On the other hand, there are still some contradictions in the application of transnational rules, including the UNIDROIT Principles, except in relation to specific topics such as the mitigation of damages. Some arbitrators exclude certain of the UNIDROIT Principles, such as hardship, as not reflecting international trade usages, but others will accept them. [Page31:]

There is a need to establish a compendium of arbitral awards, rendered pursuant to the rules of the various institutions, as well as pursuant to ad hoc procedures, to determine whether universally, if not generally, recognized transnational rules are emerging in the field of damage recovery as a whole (e.g. is there a common approach in applying Art. 7.4.9 (2) of the UNIDROIT Principles in determining "the average bank short-term lending rate to prime borrowers" when the arbitrator wants to award full compensation?).

Most international practitioners undoubtedly favour the development of uniform rules of law, even though resort to such rules is not always warranted. Hopefully, international practitioners in the field of damage recovery will make greater use of transnational rules of damage recovery. There are cases where arbitrators would have liked to use international rules to support their decision, but were reluctant to do so in the presence of an applicable national law. Other awards will borrow from transnational rules to interpret and fill gaps in the applicable domestic law whenever it is not adapted to an international context. [Page32:]

Some awards purely and simply retain transnational rules, in particular those embodied in the UNIDROIT Principles and the CISG, as the lex contractus. The adoption of a set of general principles of law as the substantive law applicable to the contract sometimes comes from an agreement of the parties either before or at the time the dispute comes to be arbitrated, or from a determination by the arbitral tribunal in the absence of an applicable national law. [Page33:]

As the globalization of trade develops, individuals and companies will increasingly encounter rules of a transnational nature, to use a generic expression, and will become more familiar with them over time. This will lead more and more to the adoption, at the time of negotiation, of such principles. Arbitral tribunals will more frequently invite the parties to refer to international principles of law at the time the arbitration is initiated, in particular when discussing the terms of reference as well as in the course of the proceedings. This will be the case even when a specific domestic law governs, in order to support a tribunal's decision to apply a national rule in an international context.

Should such steps - supported by activities sponsored by international organizations, institutions, universities and groups - ultimately bring about sets of readily applicable international rules, other issues could arise, namely, will there be more advocacy in favour of inserting transnational rules instead of national laws in international contracts and will amiable composition become obsolete in view of the accrued flexibility flowing from international rules that are more adapted to international situations? Will we witness a growing trend to add, in the governing law clause, some general principles of law in addition to a given national law?



1
Livingstone v. Rawyards Coal Co (1880) 5 App. Cas. 25 at 39, cited in Mc Gregor on Damages, London, Sweet and Maxwell Limited, 16th ed., 1997, p. 9.


2
See the cases cited in Mc Gregor on Damages, ibid, p. 9.


3
Cam Quyen Corinne Truong, Les différends liés à la rupture des contrats internationaux de distribution dans les sentences arbitrales CCI, Litec, 2002, 290-291, referring to ICC Case No. 5631 decided pursuant to British Columbia law.


4
See Cam Quyen Corinne Truong, ibid, 291, referring to ICC Case No. 7905 decided pursuant to French law.


5
Ratcliffe v. Evans(1892) 2 Q.B. 524 CA cited in McGregor on Damages, op. cit.,p. 358.


6
Ancovenv. Venezuelan ICSID Case No. ARB/00/05, 23 September 2003.


7
See Robert Ribeiro, Damages and other remedies for breach of commercial contracts, London, 2002, published by Thorogood, p. 48.


8
Hadleyv. Baxendale (1854) 9 Exch. 341, 354; see, for instance, ICC Case No. 2404 in 1975, Sigvard Jarvin, Yves Derains, Jean-Jacques Arnaldez, Collection of ICC Arbitral Awards 1974-1985, ICC Publishing S.A., Paris/Kluwer Law and Taxation Publishers, Deventer, The Netherlands, 1990, pp. 280-282.


9
Robert Ribeiro, Damages and other remedies for beach of commercial contracts, London, 2002 published by Thorogood, pp. 19-21.


10
ICC Case No. 9950, Final Award rendered in 2001 in Geneva, The UNIDROIT Principles: New Developments and Applications, 2005 Special Supplement - ICC International Court of Arbitration Bulletin, pp. 77-79.


11
Published in Journal de droit international,Clunet, 1980, No. 4, 961-970; see also the ICC Guide pour les clauses pénales et les clauses de dommages-intérêts libératoires, ICC Publishing 1990; see for a general discussion of liquidated damages and penalty clauses in common law countries: the chapter on Delay under Australian law contributed by T. M. Burke, in Selected Problems of Construction Law: International Approach, Peter Gauch and Justin Sweet (ed.), University Press, Fribourg, Switzerland, Sweet and Maxwell, London, 1983.


12
Bernard Hanotiau, La détermination et l'évalutation du dommage réparable : principes généraux et principes en émergence, in Gaillard (ed.), Transational Rules in International Commercial Arbitration (ICC Publication No. 480, 4), ICC Publishing SA, Paris 1993, p. 209 et seq.


13
Bernard Hanotiau, see supra note 12.


14
See infra, Jan Paulsson, The expectation model.


15
See infra, Jacques Werner, Punitive and exemplary damages in international arbitration.


16
P. K. Berger (ed). The Practice of Transnational Law, Kluwer Law International, The Hague, 2001 reviewed by Philippe Fouchard in Revue de l'Arbitrage, 2002, No. 4, pp. 1077-1080.


17
Metalclad Corp.v. The United Mexican States, ICSID Case No. ARB(AF)/97/1, 30 August 2000; Asian Agricultural Productsv.Sri Lanka, Award of 27 June 1990, in 4 ICSID Reports, pp. 245, 292-293; American Manufacturing & Trading v. Republic of Zaire, ICSID Case No. ARB 793/1, 7.14. G.H. Aldrich, The Jurisprudence of the Iran-United States Tribunal, Clarendon Press, Oxford 1996, p. 294. See in particular Levittv. Islamic Republic of Iran, 14 Iran-US C.T.R. 191, 209; Dadras International v. Islamic Republic of Iran, Award No. 567-213/215-3 (Nov. 7, 1995), in G. Aldrich, op. cit., p. 296.


18
See S.P.P. (Middle East) Limited, Southern Pacific Properties, Ltd v. The Arab Republic of Egypt, ICC Arbitration No. YD/AS No. 3493, Award (Mar. 11, 1983), 22 I.L.M. 752 (1983), Resp. Auth. 21; Asian Agricultural Products Limited v. Republic of Sri Lanka, ICSID Case No. ARB/87/3, Award of 27 June 1990, 4 ICSID Rep. 245, Resp. Auth 17. Metalclad Corp. v. United Mexican States, ICSID Case No. ARB(AF)/97/1, Award (30 August 2000), 16 ICSID Rev. - FILJ 168, Cl. Auth. 5, pp. 197-199, § 119-122; Wena Hotels Ltd v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Award (8 December 2000), Resp. Auth. 23, pp. 64-70, § 118-130.


19
The UNIDROIT Principles of International Commercial Contracts, 2002 Special Supplement, ICC International Court of Arbitration Bulletin, pp. 144-145.


20
Cited by M. J. Bonell, The UNIDROIT Principles of International Commercial Contracts, 2002 Special Supplement, ICC International Court of Arbitration Bulletin, p. 36.


21
Fabrizio Marrella & Fabien Gélinas, TheUNIDROIT Principles of International Commercial Contracts in ICC Arbitration, ICC International Court of Arbitration Bulletin, Vol. 10 No. 2, Fall 1999, pp. 26-32.


22
Fabrizio Marrella, ICC International Court of Arbitration Bulletin, Vol. 12 No. 2, Fall 2001, pp. 49-55.


23
UNIDROIT Principles: New Developments and Applications,2005 Special Supplement, ICC International Court of Arbitration Bulletin, pp. 65-72.


24
ICC Case No. 10114, cited in Bonell, The UNIDROIT Principles in Practice,Transnational Publishers, Inc., Ardsley, New York, 2002, pp. 637-638.


25
Cited in Bonell, above n. 1, pp. 409-410. This case provides an illustration of the limits of foreseeability and, as an "international" precedent, is likely to find its way in decisions of international tribunals more easily than domestic standards, even where a national law applies.


26
See excerpts of the original text in French in ICC International Court of Arbitration Bulletin, Vol. 10 No. 2, Fall 1999, pp. 62-65.


27
ICC International Court of Arbitration Bulletin, Vol. 12 No. 2, Fall 2001, pp. 106-115 also cited in Bonell, The UNIDROIT Principles in Practice, Transnational Publishers, Inc., Ardsley, New York, 2002, 677-688.


28
ICC International Court of Arbitration Bulletin, Vol. 10 No. 2, Fall 1999, pp. 75-78.


29
See in connection with the tronc commun doctrine and other applicable transnational rules to the substance including those chosen by the arbitrators and the lex mercatoria, the developments in Rubino-Sammartano, International Arbitration Law and Practice, 2nd ed., Kluwer Law International, The Hague, 2001, pp. 417-456.


30
ICC International Court of Arbitration Bulletin, Vol. 10 No. 2, Fall 2001, pp. 73-76, also cited in Bonell, The UNIDROIT Principles in Practice, Transnational Publishers, Inc., Ardsley, New York, 2002, pp. 437-440.


31
Final Award in Case 9594, place of arbitration: London, UK, ICC International Court of Arbitration Bulletin, Vol. 12 No. 2, Fall 2001, pp. 73-76, p. 75.


32
Bonell, The UNIDROIT Principles in Practice, Transnational Publishers, Inc., Ardsley, New York, 2002, pp. 463-464, at least at the abstract cited.


33
Art. 28(4) of the Model Law reads as follows: "4. In all cases, the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction."


34
Bonell, The UNIDROIT Principles in Practice, Transnational Publishers, Inc., Ardsley, New York, 2002, p. 515.


35
UNIDROIT Principles: New Developments and Applications,2005 Special Supplement, ICC International Court of Arbitration Bulletin, pp. 77-79.


36
Article 42 of the Swiss Code of Obligations is to the effect that the judge must determine with fairness the amount of damages when it cannot be established with certainty, by taking in consideration the ordinary course of things and the efforts made by the aggrieved party to reduce the damages.


37
UNIDROIT Principles: New Developments and Applications,2005 Special Supplement, ICC International Court of Arbitration Bulletin, pp. 86-87; Art. 7.4.9 of the UNIDROIT Principles provides that: " ... if a party does not pay a sum of money when it falls due the aggrieved party is entitled to interest upon that sum from the time when payment is due".


38
Note Emmanuel Jolivet, Journal de Droit International, Clunet, Vol. 4, 2003, at 1142-1156.


39
Art. 17(1) reads: "The parties shall be free to agree upon the rules of law to be applied by the Arbitral Tribunal to the merits of the dispute. In the absence of any such agreement, the Arbitral Tribunal shall apply the rules of law which it determines to be appropriate."


40
See in this connection, Pierre Lalive, The UNIDROIT Principles as Lex Contractio, With or Without an Explicit or Tacit Choice of Law: An Arbitrator's Perspective, The UNIDROIT Principles of International Commercial Contracts, 2002 Special Supplement, ICC International Court of Arbitration Bulletin, pp. 77-83.


41
Note Emmanuel Jolivet, Journal de Droit International, Clunet, Vol. 4, 2003, at 1156.


42
Final award in Case 10578, UNIDROIT Principles: New Developments and Applications, 2005 Special Supplement, ICC International Court of Arbitration Bulletin, pp. 65-72.


43
ICC Case No. 6829, 1991, Jean-Jacques Arnaldez, Yves Derains, Dominique Hascher, Collection of ICC Arbitral Awards, Kluwer Law International, The Hague, ICC Publishing SA, Paris, 1997, pp. 282-298; see also in this connection the Award in Aucovenv. Venezuela, ICSID Case No ARB/00/05 where the tribunal laid down the rules that lost profits, when a project never comes into operation, would be too speculative to be awarded [supra] and the Himpurna v. PLN case discussed by Jan Paulsson [infra].