I. Common features

The clauses pénales and liquidated damages clauses are contractual remedies - meant for the purposes of the present study only as monetary remedies, i.e. as accessory obligations to pay a sum of money - for non-performance or breach of an obligation. Without disregarding terminology, in particular the hybrid character of clauses pénales, and specific questions that may arise at the stage of their enforcement depending on the different applicable rules of law, one can assert that in normal practice:

First, they both regulate in advance, in an agreed and certain manner, the assessment of damages in the event of breach of an obligation.

Second, they reinforce the contractual obligations to which they refer and constitute a deterrent to breach - this word per se does not imply a penal sanction - due to the foreseeability and the apparent certainty of the amount of damages to be paid in case of

breach.

Third, if a dispute is not avoided, the non-defaulting party does not need to prove its actual damages, if any.

Fourth, regarding international arbitration, which aims to be the specific angle of the present study, if arbitration is not avoided, as there will be no need to prove actual damages, the arbitration proceedings will be more efficient in terms of both time and cost. [Page13:]

II. The contractual clauses

Both clauses pénales and liquidated damages clauses are very frequent in practice; they are in fact used interchangeably or indiscriminately in different kinds of international contracts (sales contracts, construction contracts, loan agreements, licensing agreements, etc.) and refer to different types of breached obligations (late performance, failure to supply, inadequate performance, etc.).

The study of the contractual clauses reveals a great diversity in their drafting, 1 often ambiguity as to their real nature as compensatory or punitive and sometimes a marked similarity to clauses with a different legal function. 2 The contracting parties are invited to pay specific attention to different aspects when drafting such clauses, as to the granting of grace periods, the fixing of a maximum amount, the possible reduction of penalties, but also - more importantly - the limitative, cumulative or optional character of the clause. 3 They must especially make clear in the clause, when it is anticipated that its enforcement may be sought under the common law system, that their intention is to assess future damages for breach.

III. Overview in comparative law

The legal function of clauses pénales and liquidated damages clauses is one of the most discussed issues in comparative law; one may easily find a series of scholarly writings on the solutions adopted under the different national laws as well as many comparative studies. Be this as it may, the main, recurring topic in comparative law is the theoretical divergence between common law and civil law countries regarding the enforcement of these clauses. [Page14:]

In civil law countries, 4 the clauses pénales are an assessment in advance of the amount of damages to be paid in the event of breach of an obligation; this amount may sometimes include an extra-compensatory element, which constitutes the penalty, but the courts never evaluate the intent behind the clause since the clause is always enforceable.Yet, the courts have the power to reduce the amount of the clause if it is considered grossly excessive on the basis of different criteria; the relevant provision is mandatory in most national laws. 5 The courts also have the power to increase the amount of the clause or award additional damages, but the conditions for the exercise of this power differ under the national legislations of the civil law countries. 6

In common law, a liquidated damages clause will be enforced if it is a reasonable pre-estimate of actual damages to be recovered by the non-defaulting party in case of breach by the other party. 7 It will not matter that the contract uses the word "penalty" if this sum is in reality a pre-estimate of damages or is intended as a limitation of damages and not in terrorem, 8 or, in a more modern sense, not excessive. The decision as to whether a sum represents liquidated damages or a penalty depends on the terms of the contract and the intention of the parties at the time of concluding the contract. If the sum is held to be a penalty, the clause becomes unenforceable. On the other hand, if it is held to be liquidated damages, the aggrieved party will be entitled to the stipulated sum whether its actual damages are greater, less or non-existent. 9

However, some different approaches in the construction of the clauses in order to qualify them as excessive, and thus as a penalty, or as a genuine pre-estimate of damages do exist in common law countries. For instance, while English courts always have regard to the range of losses that could reasonably be anticipated at the time the contract was entered into, 10 US courts consider not only what could be anticipated as loss flowing from the breach at the time the parties concluded their contract but also the actual loss caused by the breach at the time that the breach took place. 11[Page15:]

IV. The international efforts to harmonize national laws

It has to be stressed that, in all international harmonized rules regarding clauses pénales and liquidated damages clauses, the civil law approach has prevailed. Reference is made to (i) the Uniform Rules on Contract Clauses for an Agreed Sum Due upon Failure of Performance, 12 adopted by UNCITRAL in December 1983, with the recommendation that states implement them in the form of either a Model Law or a Convention; 13

(ii) Article 7.4.13 of the UNIDROIT Principles; and (iii) Article 9:509 of the Principles of European Contract Law.

Indeed, all the above harmonized rules apply to agreements on liquidated damages, penalties or hybrid clauses. The only difference is that whereas Article 7.4.13 of the UNIDROIT Principles14 and Article 9:509 of the European Principles15 - which, in essence, are identical in their wording - use a broad definition of the agreements to which they apply ("to pay a specified sum to the aggrieved party for such nonperformance"), Article 1 of the UNCITRAL Uniform Rules16 specifies that the non-defaulting party is entitled to the agreed sum "whether as a penalty or as compensation".

All three international harmonized rules provide further that the agreed sum may be reduced by a court, if it is "grossly excessive" (UNIDROIT and European Principles) or "substantially disproportionate" (Article 8 of the UNCITRAL Uniform Rules17) in relation to "the loss that has been suffered" and (UNIDROIT and European Principles) "to the other circumstances"; this power of the court exists, according to all three rules, despite any agreement of the parties to the contrary.

But it is only the UNCITRAL Uniform Rules that provide18 the possibility of a claim for additional damages by the aggrieved party "if the loss substantially exceeds the agreed sum".

Notwithstanding these important international efforts to harmonize national laws, national legislators did not react. As a result, the disparities in the treatment of these clauses are still apparent in comparative law. The question is whether these disparities and especially the divergence in the approach of the clauses between civil and common law systems are limited to legal theory, while in concreto the different courts ultimately come to similar solutions, at least with regard to upholding or reducing these clauses depending on the circumstances. [Page16:]

It is undoubted that all courts accord pre-eminence to the freedom of contract and wish to validate the certainty of commercial transactions, on the grounds that "what the parties have agreed should normally be upheld". 19 The drafting of these clauses is obviously of the utmost importance. If the question now arises whether the agreed sum is excessive or not when considering the contractual clause, courts will balance justice, certainty and freedom of contract by referring to different criteria under the two law systems.

Under the civil law system, courts will resort to the concepts of good faith and morality in relation to the time of the breach, while, under the common law system, courts will consider primarily the bargaining powers of the parties at the time of the conclusion of the contract. But is the common law courts' approach not actually a disguised application of the same civil law concepts, albeit with reference to a different critical time? The court decision to uphold the clause would therefore arguably be the same under both systems, notwithstanding the difference in the reference period, as the threshold imposed by Dunlop20 for the characterization of the sum as a penalty is extremely high - it must be "extravagant and unconscionable" in relation to the "greatest possible loss" that could be anticipated. And the civil law decision to reduce the agreed sum because it is grossly excessive would not differ substantially in terms of the finally payable amount from the common law decision characterizing the clause as a penalty and assessing in lieu21 the actual damages, except if we consider that an important extra-compensatory/ penal element would be retained in the reduced amount by the civil law court. 22

In contrast, similar solutions of the courts under the two law systems in cases where the actual loss is more than the clause pénale or the liquidated damages clause seem improbable. Because common law courts will traditionally consider that the clause acts as a limitation on recoverable damages, while civil law courts, though respecting the agreement of the parties in principle, may exercise their power to award additional damages under the conditions provided in the applicable national law. Moreover, these conditions differ fundamentally in the civil law countries. This is all the more so, as civil law courts may often not accept a limitation on recoverable damages if the clause is considered to be a limited liability clause and there is evidence of fraud, wilful misconduct or gross negligence by the defaulting party. [Page17:]

V. The attitude of the arbitral tribunals

The attitude of the international arbitral tribunals towards such clauses aims to be the real focus of the present study. The question is to what extent international arbitral tribunals tend to apply the harmonized rules or at least avoid to analyze the purposes of the clause in a reasoning "penalty versus genuine pre-estimate of damages".

There are a limited number of published arbitral awards dealing with clauses pénales or liquidated damages clauses; the 30 awards summarized in the Annex to the present study are the result of specific research in this respect. Most of them are not really indicative of a tendency of the arbitrators to search for and apply international rules; they are rather confined to the interpretation of the relevant contractual clauses and to considerations related to specific provisions of the applicable national law.

The arbitral awards in the Annex are assembled in three groups:

(A) awards applying national laws; (B) awards applying usages, generalprinciples and the UNIDROIT Principles; and (C) awards applying the UN Convention on Contracts for the International Sale of Goods of 1980 (CISG). Only one of them, applying New York law, 23 involves a discussion of the purposes of the clause (penalty v. liquidated damages), concluding with its validation as a reasonable estimate of the expected loss. In all the others, the arbitral tribunals are not preoccupied with such an analysis of the clause. Interestingly enough, in one award, 24 the clause (providing for "a compensation fee") is interpreted as a real penalty and granted in addition to damages pursuant to Articles 74 and 75 CISG, without any reference to a national law.

The awards that do not refer to a national law are scarce. In one of them, an ICC award of 1979, 25 the arbitral tribunal decided to apply "the widely accepted general principles governing commercial international law". However, the arbitral tribunal then proceeded to analyze the contractually agreed payments, found that they were in the nature of damages rather than a penalty and adopted the view that, contrary to the amounts of a penalty, which may be reviewed, the amounts of liquidated damages are not subject to such a review. The arbitral tribunal in fact followed the common law approach. [Page18:]

Some more recent awards, however, do refer to Article 7.4.13 of the UNIDROIT Principles. These provisions are applied directly in some awards because the Principles are explicitly agreed by the parties or because they are considered applicable in the absence of an explicit choice of law by the parties. 26 In some other awards, they are applied indirectly because the applicable rules of law refer to international trade usages. 27

In yet some other awards, finally, these provisions are simply applied with a view to corroborating the contents of the applicable national provisions. 28

The CISG does not address the issue of clauses pénales and liquidated damages clauses. By stipulating such a clause in their contract and depending on its drafting, parties may be held as having tacitly derogated from the application of Articles 74-76 of the Convention, pursuant to Article 6 CISG. When interpreting and applying such contractually agreed clauses, arbitral tribunals have two possibilities pursuant to Article 7(2) CISG: either to resort to the general principles on which the Convention is based (first limb) or to apply a national law by virtue of a conflict of laws system (second limb).

A recourse to the general principles of the Convention may arguably lead to a rule like Article 7.4.13 of the UNIDROIT Principles, after due consideration and balancing of the principle of the freedom of the parties (Articles 6 and 45(2) CISG) and the principle of full compensation of damages (Article 74 CISG). Conversely, the application of the UNIDROIT Principles by reference to Article 9(2) CISG, which considers them to be usages, 29 is deemed a theoretically wrong process notwithstanding its welcome purpose.

However, most of the awards applying the CISG and summarized in the Annex have had recourse to a national law when addressing the issue of clauses pénales/liquidated damages clauses. As to the solutions on the merits, the general impression that one may obtain from these awards is that contractual penalties for delay, in addition to payment of the price due for delivered goods or reimbursement of payment for undelivered goods, are granted to the extent that they are not excessive. [Page19:]

It would be presumptuous to posit on the basis of the awards referring to the UNIDROIT Principles, which, moreover, are only known through abstracts, that there is currently a trend of international arbitral tribunals to apply - or create - transnational rules with regard to clauses on agreed sums for non-performance or breach of an obligation.Quite the opposite, arbitral tribunals apparently seek the security of the provisions of a national law. However, in actual fact, their attitude is in line with the provisions of Article 7.4.13 of the UNIDROIT Principles and thus leaves leeway for some general propositions.

First, international arbitral tribunals should be inclined to uphold the agreed clause pénale or liquidated damages clause, irrespective of the actual loss - if any - and of its extra-compensatory/penal element, not only on the basis of the principles of the parties' will and pacta sunt servanda but also in view of the efficiency of the arbitration proceedings, which is normally wished by the parties through the inclusion of such a clause in their contract. Indeed, by enforcing such clauses, a long and costly evidentiary procedure on the existence of damages, the identification of the compensable ones and their quantification is avoided, and issues such as the remoteness in the causal link between the breach and the damages or the obligation to mitigate damages will not arise. Moreover, international arbitral tribunals apparently need not be preoccupied by international public policy enquiries, as provisions of national laws prohibiting agreements for lump-sum damages in some cases, 30 or penalty clauses proper, 31 do not seem to be matters of international public policy or to preclude enforcement of the award, at least when they are not excessive.

Second, irrespective of the stipulations of the clause and the provisions of the applicable law, international arbitral tribunals, should acknowledge their discretion to reduce32 rather than invalidate - for the same reason of efficiency of the proceedings33 - such clauses but should proceed with such a reduction only exceptionally, in cases where the agreed amount is grossly excessive in relation to the loss actually suffered by the non-defaulting party. 34 Considerations of other relevant circumstances, like the gravity of the fault, the bargaining power of the parties, 35 their financial situation36 or the benefit that is likely to result from the breach for the aggrieved party, may also enter into play. As to the obligation of the aggrieved party to mitigate its damages, it is doubtful whether such a consideration can effectively influence the decision on the reduction. [Page20:]

Third, the arbitrators should not use their discretionary power to reduce the agreed amount of damages in the same way as when they apply the principle of full compensation of damages in the absence of a clause pénale or liquidated damages clause. When a clause pénale or liquidated damages clause is present, the arbitrators cannot ignore that they intervene against the parties' will and that it is only the excessive character of the agreed amount that is to be redressed. Arguably, their pouvoir souverain d'appréciation regarding the reduction operates irrespective of the degree of certainty of the established actual loss (Article 7.4.3 of the UNIDROIT Principles) and the reduced sum may well exceed the foreseeable (Article 7.4.4 of the UNIDROIT Principles) or actual loss. 37

As regards the possibility to award additional damages over and above the agreed amount, there is no room for an argument on the existence of a principle in this respect - as in the case of reduction - due to the great variety of the relevant national provisions and the silence of the UNIDROIT Principles. It has proved impossible to find any award on additional damages among those published, which would be based only on the finding that the actual loss substantially exceeded the agreed amount, without any reference to the contract or a national law. However, notwithstanding the stipulations of the clause and the relevant provisions of the applicable national law precluding ex hypothesi additional damages, one may assume that, in exceptional circumstances, when the agreed amount is indeed derisory in relation to the actual loss, other legal concepts or general principles are likely to enter into play and invalidate the clause or ground the payment of additional damages, such as abuse of rights and good faith, morality and unconscionability or rebus sic stantibus and frustration of the contract, as well as - possibly

- considerations of international public policy.

To conclude, in an effort to make things if not simpler then at least theoretically more precise, the trend in international arbitration should be towards the creation of self-sufficient rules, in the spirit of the provisions of Article 1152 of the French Civil Code. 38 The needs of international arbitration would be effectively met by the general principle of upholding the clause but also by the discretion left to the arbitral tribunals to intervene in both directions, i.e. to reduce or increase the agreed sum, in exceptional cases. In this way, predictability and parties' legitimate expectations would be satisfied, while flexibility in international arbitration and morality in international trade would at the same time be protected. [Page21:]

The pragmatic conclusion of this study, however, is limited to the finding that the published awards do not reveal any new transnational approach in the legal treatment of clauses pénales and liquidated damages clauses. The scope and function of such clauses actually depend on their drafting and the applicable rules of law. However, they do further the efficiency of the proceedings, irrespective of the applicable rules of law - be they national provisions of civil or common law systems or international rules - since they are upheld in principle and damages need not be proven. [Page22:]

Annex: Published awards on clauses pénales and liquidated damages clauses

A. Arbitral awards applying national laws

1. Award of October 4, 1979 of the Arbitration Court of the Chamber of Commerce and Industry of Czechoslovakia (Yearbook of Commercial Arbitration (1986) p. 101)

The sale contract between the Yugoslav seller and the Czechoslovak buyer provided that in case of delay in the delivery of the goods exceeding 15 days, the seller should pay liquidated damages at the rate of 10% of the value of the goods delayed or not delivered.

Application of Czechoslovak substantive law (International Trade Code).

The cause of non-delivery of the goods by the seller was due to an event of force majeure, i.e. floods and restrictions in water supplies, which caused the temporary interruption of the seller's plant.

The Arbitral Tribunal held that the right to claim liquidated damages arises upon the occurrence of the event, i.e. the failure to perform under the obligation secured by the liquidated damages, irrespective of the cause of the failure. It exercised its power to reduce the liquidated damages, as it found that the liquidated damages were in obvious excess of the actual loss, by applying Article 194 of the International Trade Code, also taking into consideration the event that had caused the delay. The Arbitral Tribunal reduced the sum to be paid so as to cover the actual loss (the difference between the price to be paid to the seller and the higher price paid to a third supplier).

2. ICC Case No. 4237/1984 (Yearbook of Commercial Arbitration (1985) p. 52)

Sale contract between a Syrian state trading organization (buyerclaimant) and a Ghanaian state enterprise (seller-defendant). Application of Ghanaian and English law.

After the establishment of a breach of contract by the defendant, the arbitrator proceeded to the determination of the damages without taking into account the contractual delay penalties, stating the following in this regard:

"Although Claimants had repeatedly threatened to claim the delay penalty, Claimants have not claimed them in this arbitration. The Arbitrator therefore lacks competence to decide on them."

3. ICC Case No. 4462/1987 (Yearbook of Commercial Arbitration (1991) p. 54 and Collection of ICC Arbitral Awards, Vol. III, p. 3)

Exploration and production sharing agreement governed by Libyan law.

Article 8.2 of the contract provided:

"In the event that any part of the Exploration Program for any Area is not properly completed by the end of the Exploration Period applicable to such Area, [Sun Oil] shall immediately pay to [NOC] the costs of such uncompleted part at the end of such Exploration Period."

The Arbitral Tribunal admitted the application of this article for the five-year areas but considered that the amount of money that would be payable by Sun Oil as liquidated damages under this article would be "grossly exaggerated" and should therefore be reduced in accordance with the mandatory provision of Article 227.2 of the Libyan Civil Code. Making use of its "broad discretion" under this article, the Arbitral Tribunal reduced the liquidated damages and awarded to NOC an amount of USD 20 million, concluding as follows:

"in fixing such an amount, which it considers fair and equitable, the Arbitral Tribunal is exercising its authority to make findings of fact based upon evidence and submission presented by the Parties, noting that despite repeated requests, NOC chooses not to produce any evidence as to its actual proven losses."

4. ICC Case No. 4629/1989 (Yearbook of Commercial Arbitration (1993) p. 11 and Collection of ICC Arbitral Awards, Vol. III, p. 152)

Work contract between two contractors (claimants) and the owner (defendant). Application of Swiss law.

The contract stated that the liquidated damages must be computed as follows: "10% of the sums paid or due in accordance with this contract if the defaulting party is the owner". The Arbitral Tribunal considered that the phrase "sums paid or due" cannot refer to anything else but to the total price of the contract regardless of the state of completion of the contract at the time of the termination.

The Tribunal further considered whether, under Article 163(3) Swiss CO, the judge had the power to reduce ex officio liquidated damages that he deemed to be excessively high or whether one party must especially request the reduction. Without taking a position on this controversial issue in Swiss law, the Tribunal decided not to modify the contractually agreed liquidated damages by stating (with reference to Engel, Traité de droit des obligations):

"The parties are in a better position than the judge to estimate the amount of the liquidated damages applicable to their relations. The reduction is an exceptional remedy which must be applied only when the liquidated damages are so high that they exceed any common measure and are therefore incompatible with the idea of justice and equity".

Having considered the various circumstances relevant in the case law, such as the disproportion between real damages and liquidated damages, the gravity of the defendant's fault and the financial situation of the parties, the Tribunal decided not to reduce the liquidated damages.

5. Arbitral Award in Case No. 16/1998 of the Arbitration Institute of the Stockholm Chamber of Commerce (2 Stockholm Arbitration Report (1999) p. 42)

Object of the contract: trading in Russian securities.

The Arbitral Tribunal decided to determine the dispute on the basis of general principles of law as contained in Swedish law and to apply Swedish law to the issue of interest.

Article 5.2 of the contract provided that "a Party exceeding the time-limit of the financial obligations specified by this agreement must pay the other party a fine in the amount of 0.01% of the delayed sum as a forfeit for every calendar day of the delay but no more than 10%". Article 5.4 of the contract provided that "the payment of fines does not release the at-fault party from the execution of the obligations and caused loss compensation"[sic].

The penalty that had accrued until the date of the award was USD 10 880.

The Arbitral Tribunal concluded that

"in view of the modest level of the penalty and of the contents of Article 5.4 of the Agreement, the Tribunal further finds that the penalty must have been intended to be payable in addition to default interest rather than in lieu thereof. Claimant is thus also entitled to interest, at a rate that exceeds by 8 percentage units the official discount rate, as fixed from time to time by the Bank of Sweden, from 12 January 1998 until payment on USD 317,000 [principal amount] and on the penalty amount from the date of this Award until payment."

6. Arbitral Award in Case No. 75/97 of July 20, 1998 of the Italian Arbitration Association (Yearbook of Commercial Arbitration (1999) p. 189)

Supply contract between an Italian supplier and a foreign buyer. Application of Italian law.

An article in the general purchasing conditions (GPC) provided that in the case of late delivery the buyer could either accept the delivery, in which case the seller would pay a penalty, or terminate the contract, both without prejudice to the buyer's right to claim damages. A clause in the purchase order provided for liquidated damages in the case of late delivery.

The Arbitral Tribunal analyzed the clause in the purchase order in the light of Italian law and found that the clause's aim was evidently to predetermine the damages to be paid in the case of delay when delivery was nonetheless accepted.

Hence, the clause fell under the provisions of Article 1382 of the Italian Civil Code (on the clausola penale). Considering that there was a conflict between the clause in the purchase order and the article in the GPC, the Tribunal solved it in favour of the prevalence of the clause in the purchase order as lex specialis. Since there was no agreement between the parties in the purchase order that further damages could be reimbursed and such an agreement could not be found in the generic formulation of the article in GPC, the Tribunal granted the seller's claim for payment of the delivery minus the liquidated damages and dismissed the buyer's counterclaim for higher damages.

7. ICC Case No. 9839/1999 (Yearbook of Commercial Arbitration (2004) p. 66)

Representation agreement. Application of New York law.

The agreement provided that, in the event of a breach of the non-solicitation contractual clause, the affiliates of Q (Q Inc., an international mergers and acquisitions firm) shall be liable to pay to Q "by way of liquidated damages and not as a penalty the sum of …".

The Arbitral Tribunal referred to a series of precedents on liquidated damages in New York law and applied the principles deriving therefrom. To be precise:

"Liquidated damages are compensatory damages that parties have agreed to pay to satisfy a breach of contract…

In determining whether a liquidated provision clause is enforceable, it is necessary to determine whether it is a reasonable attempt to estimate the measure of compensation, in which case it is enforceable, or whether it is a penalty, in which case it is unenforceable…

f the sum stipulated to bears no reasonable proportion to the actual loss sustained by a breach, it will be deemed a penalty…I

As a general rule when the actual damages are uncertain and difficult to prove and the contract does not give any data for their ascertainment, a stipulation to an amount, which is not unreasonable will be held to be liquidated damages… If a court finds that the liquidated damages constitute an invalid penalty, however, the amount awarded will be limited to actual damages…".

The Arbitral Tribunal found that the sum stipulated in the contract for breach of the non-solicitation clause was a reasonable estimate of the expected loss from the violation of the clause. Its finding was based mostly on the consideration of circumstances existing when the contract was entered into and not on the actual damages sustained by Q:

"At the time the Agreement was negotiated, Q-affiliate's counsel thoroughly went over the contract and, in so doing, never questioned the sum specified in the liquidated damages clause. In addition, the stipulated sum bears a reasonable relationship to the probable loss suffered by Q-affiliate's violation of the clause. There was testimony that [the amount] has a rational relation to the amount invested in establishing the network divided by the number of Q offices."

The Arbitral Tribunal refused to award interest on the liquidated damages by stating that "interest should not be awarded on this sum since both the parties agreed to the fixed sum as the full measure of liquidated damages".

B. Arbitral awards applying usages, general principles and/ or the unidroit principles

8. ICC Case No. 2139/1974 (Journal du Droit International (1975) p. 929)

The defendant was held responsible for the non-performance of its contractual obligations. The contract did not include any stipulation on the quantification of damages in case of nonperformance. The claimant had not succeeded in proving the actual damages it suffered but referred to arbitrary elements for their quantification.

The Arbitral Tribunal proceeded to calculate the claimant's damages by reference, as a basis for such calculation, to the usual penalty (pénalisation) encountered in practice in numerous sale contracts of raw materials of this kind (oil).

9. ICC Case No. 3267/1979 (Yearbook of Commercial Arbitration (1982) p. 96 and Collection of ICC Arbitral Awards, Vol. I, p. 76; in French: Journal du Droit International (1980) p. 962 and Collection of ICC Arbitral Awards, Vol. I, p. 376)

The parties had not agreed on the application of a national law and had granted the Tribunal the powers of amiables compositeurs. The Arbitral Tribunal decided to apply "the widely accepted general principles governing commercial international law with no specific reference to a particular system of law".

According to the contract, the claimant (the subcontractor) had a choice between two remedies for the compensation of its damages following the termination of the contract due to the payment default of the defendant (contractor). The first remedy led to the calculation of actual damages, whereas the second, a "speedy remedy", consisting of the exercise of the claimant's rights under the REG (Risk Exposure Bank Guarantee), effected a liquidation of damages on the basis of a predetermined agreed figure.

The Arbitral Tribunal proceeded to analyze the payments under the REG by referring to Hudson and Black's Dictionary and found that they were in the nature of damages and not of a penalty. It concluded that:

"whereas, in many legal systems, the amount of a penalty may be reviewed by the Courts or by the arbitrators, the amounts of liquidated damages are not subject to such review. The Arbitral Tribunal adopts this view. It will not therefore review the amount agreed between the parties as liquidated damages."

10. Arbitral Award in Case No. 229/1996 of June 5, 1997 of the International Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation (abstract available at: http://www.unilex.info)

Sales contract between a Bulgarian party and a Russian party.

The contract provided for the payment of a penalty by the buyer in the case of a delay in the payment of the price corresponding to 0.5% of the price per day. When the buyer actually failed to make the payment in time, the seller asked for the payment of the penalty as agreed upon in the contract. The buyer objected on the grounds that the agreed sum was excessive.

The contract was governed by the UN Convention on Contracts for the International Sales of Goods (CISG). After having found that CISG was silent on the issue, the Arbitral Tribunal decided to resort to the UNIDROIT Principles in order to fill the gap. In doing so, the Tribunal invoked the Preamble of the UNIDROIT Principles, which states that they "may be used to interpret and supplement international uniform law instruments". It regarded the UNIDROIT Principles as applicable according to Article 9(2) CISG, because they reflect usages of which the parties knew or ought to have known and that are widely recognized in international trade.

The Tribunal applied Article 7.4.13(2) of the UNIDROIT Principles and found that a penalty amounting to 0.5% of the total contract price for each day of delay in the payment was indeed excessive and reduced the penalty to a reasonable amount. To be precise, the tribunal imposed a penalty in the amount of 50% of the sum requested by the seller.

11. ICC Case No. 8261/1996 (abstract available at: http://www.unilex.info)

An Italian company and a government agency of a Middle East country entered into a contract that did not contain any choice of law clause. The Arbitral Tribunal declared that it would base its decision on the terms of the contract, supplemented by general principles of trade as embodied in the lex mercatoria. It then referred without further explanation to different provisions of the UNIDROIT Principles, among which Article 7.4.13, in support of its reasoning.

No more precisions on the application of said provisions are given in the abstract.

12. Arbitral Award in Case No. A-1795/51 of December 1, 1996 of the Camera Arbitrale Nazionale ed Internazionale di Milano (abstract available at: http://www.unilex.info)

An Italian company and a US company entered into a contract of commercial agency. The principal terminated the contract due to the non-performance by the agent. The contract did not contain any choice of law clause, but at the outset of the arbitral proceedings the parties agreed that the dispute would be settled in conformity with the UNIDROIT Principles tempered by recourse to equity.

The Arbitral Tribunal applied a number of individual articles of the UNIDROIT Principles, including Article 7.4.9 to grant interest at the statutory rate fixed by the law of the state of the currency of payment and, interestingly enough, Article 7.4.13 in order to uphold a contract term providing for a higher rate of interest for the delay in the payment of certain specific debts.

13. Arbitral Award of January 28, 1998, Ad hoc Arbitration, Helsinki (abstract available at: http://www.unilex.info)

The shareholders of company X and company Y entered into an agreement whereby the former granted the latter the right to purchase at a fixed price within a specified period of time 51% of company X's shares. The contract, which was governed by the law of a Nordic country, provided for the payment of an amount corresponding to the purchase price in case of breach of the contract by the grantors of the option. A dispute arose between the parties regarding an alleged breach by the grantors of the option of some of their obligations arising out of the contract. Company Y asked for payment of the penalty.

The Arbitral Tribunal, though it held that the grantors of the option were liable for the alleged breaches, found that the amount of the penalty was excessively high for breaches different from that of the main obligation to sell the shares and awarded company Y only part of it. In justifying the reduction of the agreed amount of the penalty, the Arbitral Tribunal based its decision on Article 36 of the Nordic Contract Law, according to which any contract term that is unreasonable or the application of which leads to unreasonableness may be mitigated or set aside. In order to further corroborate its finding, it also referred to Article 7.4.13(2) of the UNIDROIT Principles.

14. ICC Case No. 9797/2000 (15(8) Mealey's International Arbitration Report (2000) pp. A1-A45)

The arbitration clause in the agreements (MFIFAs) between the two Andersen business units stipulated that "the arbitrator shall not be bound to apply the substantive law of any jurisdiction but shall be guided by the policies and considerations set forth in the Preamble of this Agreement and the Articles and Bylaws of [AWSC], taking into account general principles of equity…".

The Arbitral Tribunal declared that, pursuant to Article 17.1 of the ICC Rules, it would further apply "general principles of law and the general principles of equity commonly accepted by the legal systems of most countries". It also held that

"the UNIDROIT Principles of International Commercial Contracts are a reliable source of international commercial law in international arbitration for they contain in essence a restatement of those 'principes directeurs' that have enjoyed universal acceptance and, moreover, are at the heart of those most fundamental notions which have consistently been applied in arbitral practice."

No specific reference was made to Article 7.4.13, as the Tribunal rejected the defendants' counterclaim for payment by the claimants of the penalty provided for in the MFIFAs. According to the MFIFAs, such a penalty was due only where the member firm(s) terminating the MFIFAs was (were) the party at fault; and the Tribunal found that the MFIFAs were terminated as a consequence of the second defendant's fundamental breach, while the claimants were not at fault.

15. Arbitral Award in Case No. 88/2000 of January 25, 2001 of the International Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation (abstract available at: http://www.unilex.info)

A sales contract between a Russian party and an English party provided that, in case of delayed payment of the price, the buyer should pay a penalty in addition to interest at the LIBOR rate. When the buyer actually delayed the payment of the price, the seller asked for the payment of both the interest on the sum not paid in time and the agreed penalty.

The Arbitral Tribunal awarded the interest at the agreed LIBOR rate and rejected the claim for the payment of the penalty. In doing so, it referred to Article 7.4.13(2) of the UNIDROIT Principles.

16. Arbitral Award in Case No. 134/2002 of April 4, 2003 of the International Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation (abstract available at: http://www.unilex.info)

The dispute between Russian and German private entrepreneurs related to the untimely execution of an earlier award of an arbitral tribunal. Under the earlier award, the buyer was ordered to pay to the seller, in addition to the costs of the non-paid goods and other expenses of the seller, the contractual penalty for the delay (0.5% of the cost of the goods for each day of delay) in the payment of the goods for the period of June 29 till September 21, 1999. The buyer transferred the awarded amount to the seller only on March 1, 2002. The seller's claim was thus for the payment of the penalty for a period starting from September 21, 1999 till March 1, 2002.

The Arbitral Tribunal noted that, on the grounds of the first tribunal's award, the buyer had paid the penalty in the amount of 42% of the cost of the goods with regard to the payment delay for which the penalty was accrued. The penalty claimed in the second arbitration, taking into consideration the penalty paid earlier, would constitute 487% of the cost of the goods with regard to the payment for which the delay occurred.

The Arbitral Tribunal referred to the criteria of proportionality and conformability with the negative consequences of the breach of the obligations to the sum of the penalty claimed by the seller as these criteria are set forth in the CISG and the Civil Code of the Russian Federation. It further referred specifically to Article 7.4.13 of the UNIDROIT Principles. It found that the amount of the penalty claimed by the seller was clearly not in proportion to the consequences of the breach of the obligation with regard to the payment and that it should be reduced. As to the amount of the reduction of the penalty, the Tribunal took into consideration the cost of the property in relation to payment for which the delay occurred, losses incurred by the seller in this respect and other property and non-property rights that the seller was entitled to expect.

However, the Tribunal took into account that the seller had lodged the claim for the recovery of the penalty in complete accordance with the contract concluded by the parties and that its reduction by the Tribunal was carried out in view of reasons for which the seller was not responsible. Under such circumstances, on application of para. 10 of the Regulation on Arbitration Fees and Expenses (Specific Apportionment of Arbitration Costs and Fees), the Tribunal imposed on the buyer payment of such fees and expenses in a sum calculated on the basis of the amount of the claimed penalty.

17. Arbitral Award of November 30, 2006 of the Centro de Arbitraje de México (abstract in English and full text in Spanish available at: http:// www.unilex.info)

The defendant, a Mexican grower, and the claimant, a US distributor, entered into a one-year exclusive agreement according to which the defendant undertook to produce quantities of specific products and to provide them to the claimant on an exclusive basis, while the claimant had to distribute the goods on the Californian market against a commission.

The parties had expressly agreed in the contract on the application of the UNIDROIT Principles.

In the arbitration, the claimant asked for termination of the contract as well as damages for the harm suffered as a result of the defendant's failure to provide the goods; it also asked for payment of the penalty stipulated in the contract in case of violation of the exclusivity clause.

By reference to Article 7.1.1 of the UNIDROIT Principles, the Arbitral Tribunal held that, although the claimant could demonstrate only one concrete case of the defendant's contracting with a third person, this was sufficient proof of breach by the defendant of the exclusivity clause. It thus awarded payment of the contractually stipulated penalty for violation of the exclusivity clause. However, since the precise amount to be paid could not be established with a sufficient degree of certainty, the Arbitral Tribunal determined it on a discretionary basis according to Article 7.4.3(3) of the UNIDROIT Principles. (The relevant clause provided that the penalty would be equivalent to 25% of the value of the sale made in violation of the exclusivity clause.)

C. Arbitral awards applying the 1980 un convention on contracts for the international sale of goods (cisg)

18. Arbitral Award of June 13, 1989 of CIETAC (abstract available at: http://cisgw3.law.pace.edu/cases/890613c1.html)

The claimant, a Chinese company, and the defendant, a Jordan investment company, entered into a barter contract. The contract provided that the claimant would sell 2174 tons of sesame to the defendant in exchange for 10 000 tons of urea from the latter with the equal value of sesame. According to Article 4 of an agreement concluded between the parties in relation to the contract provided that the seller of urea (the defendant) should compensate the other party in the amount of 10% of the contract price in case of non-delivery of the goods.

The dispute arose when the claimant delivered the agreed quantity of sesame while the defendant did not deliver the urea. In its submissions, the claimant requested the price difference between the contract price and the market price of the quantity of urea at the time of breach of contract on the basis of Article 76 CISG and liquidated damages amounting to 10% of the contact price.

The Arbitral Tribunal, applying the provisions of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interests with reference to the CISG, dismissed the claimant's claim for the loss of price difference, considering it as an extra claim in addition to the amount of the liquidated damages stipulated in the agreement, which was able to include different possible damages. Nevertheless, taking into account that such liquidated damages were far from sufficient to compensate the actual loss suffered by the claimant, the Arbitral Tribunal adjusted the compensation to a proper amount.

19. ICC Case No. 7197/1992 (abstract available at: http://www.unilex.info)

An Austrian seller and a Bulgarian buyer concluded a contract for the sale of goods produced by the former. The parties agreed that the price had to be paid by documentary credit to be opened before a certain date and that the goods had to be delivered 'DAF' at the Austrian-Hungarian border four weeks after the opening of the documentary credit. The contract contained a penalty clause whereby damages were limited to x% of the purchase price in case of nonperformance by either party.

The seller commenced arbitration proceedings against the buyer, alleging that the latter did not perform its obligations to open the documentary credit either within the time period fixed in the contract or within the additional period of time granted by the seller. The seller, who had to deposit the goods in order to preserve them, claimed performance of the contract as well as damages.

The Arbitral Tribunal held that the provisions of the CISG were applicable to the merits of the dispute. Accordingly, it awarded the seller damages pursuant to Article 74 et seq. CISG. In the Arbitral Tribunal's opinion, since the CISG did not contain any provisions relating to penalty clauses, Austrian law had to be applied pursuant to Article 7(2) CISG. Applying Austrian law, the Tribunal held that the seller had the right to recover all damages suffered notwithstanding the limit fixed by the penalty clause.

20. ICC Case No. 7585/1992 (abstract available at: http://cisgw3.law.pace.edu/ cases/927585i1.html; excerpts available at: http://www.unilex.info)

An Italian seller and a Finnish buyer entered into a contract for the sale of a production line of foamed boards. The contract contained a clause providing that "if the agreement is terminated by fault or request of the purchaser - including force majeure - the seller is entitled to a compensation fee of 30% of the price".

The seller filed a request for arbitration against the buyer claiming damages and interest, as the latter had failed to make the third down payment to the seller and to notify the relevant letters of credit on the required date.

On the basis of the relevant CISG provisions, the Arbitral Tribunal held that

"the wording 'compensation fee' has to be interpreted as an amount of money payable in consideration of the termination of the contract independently of any damages suffered by Seller. It has to be paid independently of any contractual liability on behalf of Buyer. It is expressly stated in Article

19.3 of the contract that the compensation fee is due even ina 'force majeure' situation. According to Article 79 of the CISG, a party has not to pay damages 'if he proves that the failure was to due to an impediment beyond his control'.

The mere fact that the compensation fee has to be paid in such a situation evidences that it has a nature different from damages in compensation of a loss. The conclusion is that Defendant has to pay the provided 'compensation fee' (30% of the price) added to the damages."

The Arbitral Tribunal granted the seller damages on application of Articles 74 and 75 CISG, as well as the "compensation fee" as the agreed penalty, without having recourse to a national law but on application of Article 7(2) CISG (i.e. in conformity with the general principles on which the CISG is based).

21. Arbitral Award in Case No. 251/93 of November 23, 1994 of the International Arbitration Court of Commerce and Industry of the Russian Federation (abstract available at: http://www.unilex.info)

The seller was to deliver certain goods for a sum that had been paid by the buyer in advance. The buyer, after receiving a smaller quantity of goods than what had been agreed, filed a request for arbitration against the seller in which it requested the Arbitral Tribunal:

to order the seller to pay back the price of the undelivered goods; and

to award the buyer an amount covering the damages suffered by it and resulting from the seller's breach of contract, in accordance with Article 74 CISG.

The Arbitral Tribunal held that the buyer was entitled to be reimbursed the amount it had paid for the undelivered goods. As regards the claim for damages, the Arbitral Tribunal came to the conclusion that the clause in the contract that stipulated the payment of a penalty in case of a delay in delivery was of an exclusive nature and did not provide for payment of damages in excess of the sum due in accordance with the clause. Accordingly, the Arbitral Tribunal decided to award damages for the delay only up to the limited amount indicated in the penalty clause and dismissed the buyer's claims as to damages relating to the poor quality of the goods, since the latter had not been able to prove the amount of the relevant loss.

22. Arbitral Award in Case No. 40/1995 of January 22, 1996 of the International Arbitration Court of Commerce and Industry of the Russian Federation (abstract available at: http://cisgw3.law.pace.edu/cases/960122r1.html)

The seller, a Russian company, entered into a sales contract with the buyer, an English company. The dispute arose when the seller handed over the goods at the agreed place, while the buyer did not comply with its obligation to pay the purchase price.

According to clause 7 of the contract,

"if the terms of the contract as to payment agreed upon in advance are not performed, then the buyer will pay the seller damages which were estimated and agreed, in the amount of 0.1% of the whole price of the contract for each day of delay of the payment, but not exceeding 10% of the whole price of the contract."

The seller's claims before the Arbitral Tribunal included recovery of:

the price for the goods delivered to the buyer under the contract; and

the liquidated damages due to the buyer's failure to perform its obligation to pay for the goods in the amount agreed upon and estimated in advance in the contract.

The Arbitral Tribunal applied the CISG provisions (since they are part of Russian substantive law) and granted the seller payment of the price for the delivered goods; it further granted payment of the total amount of liquidated damages (i.e. 10% of the price for delivered but unpaid goods).

23. ICC Case No. 8247/1996 (abstract available at: http://www.unilex.info)

The claimant (seller) and the defendant (buyer) entered into a contract for the sale of chemical goods that were to be paid for within ten days of transmission of the shipping documents, failing which a penalty payment would be added to the amount due. Following delivery, the defendant refused to pay, alleging that the delivered goods were of poor quality. The claimant was opposed to such refusal and insisted on the agreed payment. The defendant finally made a partial payment and offered a further sum that was unacceptable to the claimant.

In its request for arbitration, the claimant requested the Arbitral Tribunal to hold that the defendant had breached the contract by failing to pay the price within the time limit contractually set. Moreover, the claimant requested the Arbitral Tribunal to hold that the defendant caused important damages to it, and claimed not only the balance of the price due but also part of the penalty that was established by item 7 of the contract (0.5% of the contract value for each day of delay).

On the basis of the CISG provisions, the Arbitral Tribunal held that

"[c]onsistently with the conclusion [that the failure by the defendant to make the payment provided by the contract is not justified] and in view also of the provisions laid down by the Convention in its Art. 53 (confirming the obligation by the purchaser to pay the price for the goods)… under the conditions provided by the contract and in other relevant Articles concerning the default by the purchaser, the Arbitrator deems that the subject request [of the claimant, that its damages related to the balance of the price due as well as related to the penalty clause] should be granted."

24. ICC Case No. 9978/1999 (abstract available at: http://www.cisg-online.ch/ cisg/urteile/708.html)

A dispute arose as a result of non-delivery of the goods provided for by a sales contract between the claimant (buyer) and the defendant (seller). The contract contained a special clause providing that, in the event of non-delivery by the seller, the buyer would be entitled to recover from the seller a penalty of 2% of the contract value in full and final settlement. The goods were to be paid for by letter of credit (L/C) upon presentation of certain documents, including a forwarder's certificate of receipt. Though the documents were presented and payment was made, the goods were not delivered to the buyer. Accordingly, negotiations were undertaken for the sum paid to be refunded. An initial amount was repaid and an agreement made for the transfer to the claimant of sums purported to be owed to the defendant by a third party.

The buyer subsequently initiated arbitration proceedings claiming, on the basis of Articles 45(1)(b) and 74 CISG, the refund of the amounts paid under the L/C plus interest, bank interest paid in connection with the L/C, detention charges, dead freight and the penalty for non-delivery provided for in the contract. Alternatively, it claimed repayment asserting that it had voided the contract in accordance with the relevant CISG provisions and arguing that it was entitled to damages on that basis as well. In addition, it considered its claim for damages not to be barred by the penalty clause contained in the contract, since such damages were claimed not on the grounds of non-delivery but on the grounds of the breach by the defendant of an obligation arising under the CISG. The defendant rebutted the claimant's arguments invoking, inter alia, exemption from any liability whatsoever in excess of the 2% contractual penalty.

As far as the law applicable to the contract is concerned, the Arbitral Tribunal held that the CISG provisions would apply as being part of the applicable German law, while German contract law provisions would apply to the penalty clause. According to the Arbitral Tribunal, pursuant to Article 6 CISG, the parties to an international sales contract may derogate from the provisions on damages of Article 45(1)(b) CISG through inclusion of a penalty/liquidated damages clause. In the Arbitral Tribunal's view, the agreed penalty clause was valid under the applicable German law and precluded any further damage claims for non-performance that the claimant might bring against the defendant.

Thus, the Arbitral Tribunal found that the claimant's claim for damages under Articles 45(1) and 74 CISG triggered by the defendant's fundamental breach of contract was precluded by the special condition for non-delivery contained in the contract (i.e. the penalty clause). Consequently, the Arbitral Tribunal held that the claimant was entitled to recover:

a penalty of 2% of the contract value under the terms of the contract; plus

5% interest upon the penalty according to German contract law provisions.

25. Arbitral Award in Case No. 302/1996 of July 27, 1999 of the International Arbitration Court of Commerce and Industry of the Russian Federation (abstract available at: http://cisgw3.law.pace.edu/cases/990727r1.html)

The buyer, a Russian company, and the seller, a Swiss company, entered into a contract for the international sale of goods in July 1993, providing for delivery to be made no later than the end of October 1993 in a few instalments on FOB terms. The buyer brought its claims against the seller when the seller delivered only one lot of the goods (20% of the total quantity required by the contract).

The Arbitral Tribune applied the CISG, on the basis of the parties' agreement reached during the hearings of the case, and for issues not covered by the CISG the Russian substantive law. It also referred to the lex mercatoria, the UNIDROIT Principles, international trade usages and principles of foreign law (Anglo-American and German law) used in international arbitration practice.

The Arbitral Tribunal found that following non-performance by the seller of its obligations to ship the goods, the buyer was entitled to recover from the seller its lost profit, which was considered reasonable and foreseeable. The amount of the loss of profit was not contested by the seller. With regard to the claim of the sum of the penalties that the buyer should pay for late delivery to the final purchaser, the Arbitral Tribunal found unproven the possibility to grant to the buyer the performance bond penalties for total nondelivery of the goods (10%) and, at the same time, the penalties for late delivery (5%). According to the Arbitral Tribunal, this possibility neither resulted from the contractual terms nor did it find any reasonable basis in other legal sources. An ad verbum interpretation of the language of the contract led the Arbitral Tribunal to the conclusion that the penalties for late delivery could not be applied in the case of non-delivery. In any event, in the Arbitral Tribunal's view, this consequence of the breach of contract neither could nor should have been foreseen by the seller at the time of the conclusion of the contract.

26. Arbitral Award in Case No. 65/1997 of 10.1.1998 of the International Arbitration Court of Commerce and Industry of the Russian Federation (abstract available at: http://cisgw3.law.pace.edu/cases/980110r1.html)

The buyer, an Austrian company, paid only part of the price for goods delivered to it by the seller, a Russian company, under a contract concluded between the parties in October 1995. The seller claimed before the Arbitral Tribunal recovery of the debt as well as recovery of a penalty for delay in payment calculated in accordance with the contractual provisions.

In the absence of a clause determining the applicable law, the Arbitral Tribunal found that the CISG provisions were applicable to the merits of the dispute, save where there were issues not dealt with by the CISG. In that case, the Arbitral Tribunal should apply the rules of the Russian Federation's Civil Code.

On the merits, the Arbitral Tribunal found that, pursuant to Articles 53 and 62 CISG, the buyer should pay the seller the unpaid sum for the delivered goods. As to the seller's claim to recover from the buyer the penalty for delay in payment of the purchase price of the goods, this claim complied, according to the Arbitral Tribunal, with the provisions of the contract, which did not limit the total amount of the penalty. However, considering that the amount of penalty exceeded the sum of the buyer's debt for delivered goods by a factor of three, the Arbitral Tribunal concluded that such a penalty was disproportionate in comparison to the actual loss suffered by the seller. Therefore, on the basis of Articles 333(1) and 10(2)(1) of the Russian Federation's Civil Code, the Tribunal decreased the amount of the penalty granted in favour of the seller.

27. Arbitral Award in Case No. 165/2001 of February 18, 2002 of the International Arbitration Court of Commerce and Industry of the Russian Federation (abstract available at: http://cisgw3.law.pace.edu/cases/020218r1.html)

A Russian company (seller) entered into an international sales contract with a US company (buyer) on January 19, 2001. According to clause 12 of the contract, in the case of non-payment of the purchase price within the time limit set forth in the contract, the buyer should pay a penalty to the seller amounting to 0.1% of the sum of the debt for each day of delay. In any case, such penalty should not exceed an amount of 8% of the price of the unpaid goods.

The seller filed a request for arbitration against the buyer following the partial payment by the latter for goods delivered by the former under the contract. In its request, the seller claimed recovery of the principal debt, recovery of contractual penalties for delay in payment as well as compensation for losses suffered by it due to the use of a loan issued by a bank.

In the absence of an agreement between the parties on the law applicable to the dispute, the Arbitral Tribunal decided that it would apply the CISG and the rules of the Russian Federation's Civil Code.

The Arbitral Tribunal granted in full to the seller the principal debt as well as the contractual penalty but dismissed the latter's claim to recover from the buyer the loss resulting from the payment to the bank of interest on a loan used by the seller during the delay in payment by the buyer. In so doing, the Arbitral Tribunal took into account:

that the relations of the parties in connection with this issue were governed by Article 394 of the Russian Federation's Civil code, which provided that the losses should be recovered only in the part not covered by penalties, save where otherwise provided by the law or the contract; and

that the seller recovered contractual penalties from the buyer for this delay in an amount higher than the sum of the seller's losses; the seller's losses were thus already compensated by the sum of the recovered penalties.

28. Arbitral Award in Case No. 99/2002 of April 16, 2003 of the International Arbitration Court of Commerce and Industry of the Russian Federation (abstract available at: http://cisgw3.law.pace.edu/cases/030416r1.html)

The buyer, a Russian company, brought claims against the seller, a Ukrainian company, following the failure of the latter to perform its obligation to deliver the goods purchased under the international sales contract entered into by the parties. Clause 5.1 of the contract set forth that the rate of penalties in case of late delivery should be 0.2% of the price of the non-delivered goods.

Both parties agreed that the dispute should be settled on the basis of the CISG as well as the rules of the Russian Federation's Civil Code.

On application of Article 45(2) CISG and Article 330 of the Russian Federation's Civil Code, the Arbitral Tribunal accepted the buyer's claims and, in addition to the refund of the amount of the advanced payment and the interest thereon, awarded to the buyer the contractual penalties for the delay in delivery until the date of termination of the contract.

29. Arbitral Award in Case No. 65/2003 of February 19, 2004 of the International Arbitration Court of Commerce and Industry of the Russian Federation (abstract available at: http://cisgw3.law.pace.edu/cases/040219r1.html)

The seller, a US company, lodged a claim against the buyer, a company located in the British Virgin Islands, in connection with the partial non-payment by the latter for goods delivered according to the contract entered into by the parties. According to the contractual stipulations, if the payment by the buyer of the goods delivered was delayed, the latter should pay a fine amounting to 0.3% of the sum of the uncollected payments for each overdue day during the first 20 days of delay and a fine amounting to 0.5% for each subsequent overdue day.

In its submissions, the seller claimed the main sum in arrears owed by the buyer for the goods delivered and the penalty provided in the contract. However, on its own initiative, the seller reduced its claim on the basis of the penalty clause to the amount of the main sum in arrears. (The amount of the fine exceeded the sum of the main debt by a factor of 6.5.)

Following the parties' choice of Russian substantive law as the law applicable to the merits, the Arbitral Tribunal decided that the CISG provisions applied. In the case of issues not determined by the CISG provisions, Russian civil law provisions were to be applied.

The Arbitral Tribunal awarded the seller the sum in arrears for the delivered goods in full. In addition, it held that the seller's request to reduce the amount of the penalty due by the buyer to the amount of the main sum in arrears complied with Article 333 of the Russian Civil Code, which provides for the reduction of the amount of the contractual penalty if such amount is in obvious disproportion to the losses resulting from the breach of contract.

30. Arbitral Award in Case No. 115/2003 of April 20, 2004 of the International Arbitration Court of Commerce and Industry of the Russian Federation (abstract available at: http://cisgw3.law.pace.edu/cases/040420r1.html)

The seller, a Russian company, lodged its claim against the buyer, a Cypriot company, on the grounds of non-payment by the latter for the goods delivered under the international sale and purchase contract entered into by the parties. According to paras. 10.1 and 10.2 of the contract, in case of a delay in payment, the buyer shouldpay to the seller a fine in the amount of LIBOR plus 2.5% of the sum in arrears for each overdue day as of the date on which the payment was to be made under the contract.

The following relief was sought by the seller:

?

payment of the sum in arrears for the goods delivered; and

?

payment of the penalty stipulated by the contract.

As far as the law applicable to the merits is concerned, the Arbitral Tribunal, after taking into consideration Article 13 of the contract, which provided that Russian law was applicable, held that the CISG provisions applied, except for the issues not specified therein, which should be settled under Russian substantive law.

The Arbitral Tribunal awarded the seller not only the sum in arrears but also the contractual penalty. More specifically, the Arbitral Tribunal found that the contractual determination by the parties of the penalty in terms of interest (i.e. LIBOR plus indicated interest) did not affect the qualification of the seller's claim as a penalty, under the relevant provisions of the Russian Civil Code. In that respect, the Arbitral Tribunal's findings were the following:

"addressing the issue about legal qualification of the present claim, the Tribunal states that the Vienna Convention does not regulate questions on recovery of penalties; however, it does not deprive the parties to an international sale and purchase contract of the possibility to reach an agreement on payment of a contract penalty. This sort of agreement on payment of contract penalties is to be regulated by the subsidiary applicable Russian civil legislation. According to Art. 330(1) of the Russian Civil Code, a 'penalty (fine) is a monetary sum fixed by the law or contract which is to be paid by the debtor to the creditor in case of non-fulfilment or improper fulfilment of the obligations, in particular delay in fulfilment.

In respect to the claim for payment of the penalty creditor is not obliged to prove caused losses.' The text of the contract does not indicate directly that the sum which is to be paid by the buyer to the seller in case of payment delay is a penalty. The intent of the parties to include in the contract specifically condition [sic] about payment of the penalty is confirmed by the representatives of the seller in the course of the hearings on the case. With due account to the above, in the Tribunal's opinion, the indication of payment of the interest should be regarded as the parties' determination of the calculation procedure of the amount of the contract penalty for payment delay… Following Article 330 of Russian Civil Code, the Tribunal finds the [seller's] claim on recovery of the penalty from the [buyer] in the amount determined by the [seller] well founded and subject to satisfaction."



1
See the two reports of UNCITRAL on liquidated damages and penalty clauses: A/CN.9/161 dated 25 April 1979 and A/CN.9/WG.2/WP.33 dated 12 February 1981. See further Marcel Fontaine and Filip De Ly, Drafting International Contracts (Transnational Publishers, 2006) Chapter 6: 'Penalty Clauses', based on the study of numerous varying clauses.


2
Such as withdrawal payments (clauses de dédit), price adjustment clauses and, especially, clauses limiting liability.


3
See ICC Guide on Penalty and Liquidated Damages Clauses, Publication No. 478 (1990); and Fontaine and De Ly, supra note 1.


4
With the striking exception of Belgian law (Arts. 1226 and 1231 of the Belgian Civil Code, as modified by the Law of November 23, 1998), which prohibits penalty clauses. Regarding liquidated damages, however, it does empower the courts to reduce amounts that are excessive in relation to the foreseeable damages.


5
See, for instance, Art. 1152.2 of the French Civil Code, Art. 1384 of the Italian Civil Code and Art. 409 of the Greek Civil Code.


6
See, for instance, Art. 1152.2 of the French Civil Code (même d'office), Art. 161.2 of the Swiss Code of Obligations (upon request of the creditor who must prove a fault of the debtor), Art. 1382 of the Italian Civil Code (only if the possibility to claim further damages has been agreed upon by the parties) and Art. 407 of the Greek Civil Code (upon request of a party, only if the clause pénale is agreed for defective performance or delay).


7
Black's Law Dictionary, 8th edn.


8
See, Dunlop Pneumatic Tyre Co. Ltd. v. New Garage & Motor Co. Ltd. [1915] A.C. 79 at p. 86: "The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage".


9
Hudson's Building and Engineering Contracts, Vol. 2 (Sweet & Maxwell, 1995) p. 1131 et seq.


10
>The traditional position of the English courts from Dunlop Pneumatic Tyre Co. Ltd. v. New Garage & Motor Co. Ltd. onwards. See, inter alia, Alfred McAlpine Capital Projects Ltd. v. Tilebox Ltd. [2005] EWHC 281 (TCC). Four tests were suggested by Lord Dunedin in Dunlop for the construction of the clause with a view to distinguishing between liquidated damages and a penalty: "(a) It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach. (b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid. This, though one of the most ancient instances, is truly a corollary to the last test. (c) There is a presumption (but no more) that it is a penalty when 'a single sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damages'. (d) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable the pre-estimated damage was the true bargain between the parties."


11
See Restatement (Second) of Contracts, § 356(1): "Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty." See also Uniform Commercial Code § 2-718(1): "Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or non-feasibility of otherwise obtaining an adequate remedy…".


12
See Official Records of the General Assembly, 38th Session, Supplement No. 17 (A/38/17, Annex I).


13
See Resolution No. 38/135 of the 101st plenary meeting of December 19, 1983 (A/RES/38/ 135), available at: <http://www.uncitral.org/uncitral/en/GA/resolutions.html>.


14
Art. 7.4.13 of the UNIDROIT Principles: "(1)Where the contract provides that a party who does not perform is to pay a specified sum to the aggrieved party for such non-performance, the aggrieved party is entitled to that sum irrespective of its actual harm. (2)However, notwithstanding any agreement to the contrary the specified sum may be reduced to a reasonable amount where it is grossly excessive in relation to the harm resulting from the non-performance and to the other circumstances."


15
Art. 9:509 of the European Principles: "(1)Where the contract provides that a party who fails to perform is to pay a specified sum to the aggrieved party for such non-performance, the aggrieved party shall be awarded that sum irrespective of its actual harm. (2)However, despite any agreement to the contrary the specified sum may be reduced to a reasonable amount where it is grossly excessive in relation to the loss resulting from the non-performance and the other circumstances."


16
Art. 1 of the UNCITRAL Uniform Rules: "These Rules apply to international contracts in which the parties have agreed that, upon a failure of performance by one party (the obligor), the other party (the obligee) is entitled to an agreed sum from the obligor, whether as a penalty or as compensation."


17
Art. 8 of the UNCITRAL Uniform Rules: "The agreed sum shall not be reduced by a court or arbitral tribunal unless the agreed sum is substantially disproportionate in relation to the loss that has been suffered by the obligee."


18
Art. 7 of the UNCITRAL Uniform Rules: "If the obligee is entitled to the agreed sum, he may not claim damages to the extent of the loss covered by the agreed sum. Nevertheless, he may claim damages to the extent of the loss not covered by the agreed sum if the loss substantially exceeds the agreed sum."


19
See Philips Hon Kong v. A-G of Hong Kong [1993] 61 Build LR 41, at 59.


20
See supra note 10.


21
See, however, Jobson v. Johnson [1989] 1 WLR 1023, where the clause was held to be a penalty. Interestingly enough, however, instead of being "wholly disregarded" it has been scaled down, which in essence means a reduction of the clause.


22
On such an attempt to downplay the differences in the approach of the clauses, see two recent articles: Lucinda Miller, 'Penalty Clauses in England and France: A Comparative Study', 53(1) International and Comparative Law Quarterly (2004) pp. 79-106; and Charles R. Calleros, 'Punitive Damages, Liquidated Damages, and Clauses Pénale in Contract Actions: A Comparative Analysis of the American Common Law and the French Code Civil', bepress Legal Series, Working Paper 1180 (2006), available at: <http://law.bepress.com/expresso/eps/1180>. The proposition that a certain, not necessarily important extra-compensatory element may be retained by civil law courts is strengthened by the latter article and the interview of French magistrates by its author (p. 57).


23
ICC Case No. 9839/1999, summarized in the Annex under No. 7.


24
ICC Case No. 7585/1992, summarized in the Annex under No. 20.


25
ICC Case No. 3267/1979, summarized in the Annex under No. 9.


26
See awards summarized in the Annex under Nos. 11, 12, 14 and 17.


27
See award summarized in the Annex under No. 10.


28
See awards summarized in the Annex under Nos. 13 and 16.


29
For such an application of Art. 7.4.13, see Arbitral Award 229/1996 of June 5, 1997 of the International Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation, summarized in the Annex under No. 10.


30
See Oberlandsgericht [Court of Appeal] Dresden, January 13, 1999, YB Com. Arb. (2004) p. 679, which upheld an ICC award although agreements for lump-sum damages in general conditions of sale are prohibited under German law.


31
See Supreme Court of the United States, Mastrobuono v. Shearson Lehman Hutton Inc., YB Com. Arb. (1996) p. 181, followed by numerous other court decisions. If enforcement of punitive damages awarded in arbitration is not contrary to US public policy, the same must hold true, all the more so, for penalty clauses. The position of English courts apparently does not differ, see Fontaine and De Ly, supra note 1, at p. 343 and Godard v. Grey [1870] L.R. 6


32
This proposition goes counter to the decision in ICC Case No. 3267/1979, which is, however, an old one. It is mentioned above and summarized in the Annex under No. 9.


33
Full proof of the actual damages is not indispensable for the exercise by the arbitrators of their power to reduce the agreed amount; in this respect, see ICC Case No. 4462/1987, summarized in the Annex under No. 3.


34
In one case, summarized in the Annex under No. 15, the arbitral tribunal awarded the interest at the agreed LIBOR rate for the delay in the payment of the price and, applying Art. 7.4.13(2), even decided to reject the claim for the agreed penalty. With regard to this possibly problematic relationship between penalty and interest, it is noted that in another case, summarized in the Annex under No. 12, by virtue of Art. 7.4.13(1), the arbitral tribunal upheld the rate of interest agreed for the delay in the payment of specific debts, which exceeded the applicable statutory rate, considering it as a penalty.


35
This criterion is specifically mentioned in the Swedish law, S. Com. S. 36(2).


36
See ICC Case No. 4629/1989, summarized in the Annex under No. 4.


37
>Interestingly enough, in a recent arbitral award, summarized in the Annex under No. 17, reference to Art. 7.4.3(3) of the UNIDROIT Principles was made because the amount of the penalty per se could not be established with a sufficient degree of certainty.


38
Art. 1152 of the French Civil Code reads: "Lorsque la convention porte que celui qui manquera de l'exécuter payera une certaine somme à titre de dommages-intérêts, il ne peut être alloué à l'autre partie une somme plus forte, ni moindre. Néanmoins, le juge peut, même d'office, modérer ou augmenter la peine qui avait été convenue, si elle est manifestement excessive ou dérisoire. Toute stipulation contraire seraréputée non écrite."