(1) The aggrieved party is entitled to full compensation for harm sustained as a result of the non-performance. Such harm includes both any loss which it suffered and any gain of which it was deprived, taking into account any gain to the aggrieved party resulting from its avoidance of cost or harm.
(2) Such harm may be non-pecuniary and includes, for instance, physical suffering or emotional distress.
1. Aggrieved party entitled to full compensation
Paragraph (1) of this Article establishes the principle of the aggrieved party’s entitlement to full compensation for the harm it has sustained as a result of the non-performance of the contract. It further affirms the need for a causal link between the non-performance and the harm (see also Comment 3 on Article 7.4.3). Non-performance must be a source neither of gain nor of loss for the aggrieved party.
The solution to be found in some legal systems which allows the court to reduce the amount of damages having regard to the circumstances has not been followed, since in international situations it could risk creating a considerable degree of uncertainty and its application might moreover vary from one court to another.
2. Damages cover loss suffered, including loss of profit
In specifying the harm for which damages are recoverable, paragraph (1) of this Article, following the rule laid down in Article 74 CISG, states that the aggrieved party is entitled to compensation in respect not only of loss which it has suffered, but also of any gain of which it has been deprived as a consequence of the non-performance.
The notion of loss suffered must be understood in a wide sense. It may cover a reduction in the aggrieved party’s assets or an increase in its liabilities which occurs when an obligee, not having been paid by its obligor, must borrow money to meet its commitments. The loss of profit or, as it is sometimes called, consequential loss, is the benefit which would normally have accrued to the aggrieved party if the contract had been properly performed. The benefit will often be uncertain so that it will frequently take the form of the loss of a chance (see Article 7.4.3(2)).
1. A national library sends a rare manuscript by special courier abroad for an exhibition. The manuscript is irreparably damaged during transport. Its loss in value is estimated at EUR 100,000 and it is this sum which is due by the courier.
2. A, who has not been paid by B under the terms of their contract, must borrow money from its bank at a high rate of interest. B must compensate A for the interest due by the latter to its bank.
3. A, a construction company, hires a crane from company B. The boom of the crane, which has been poorly maintained, breaks and in falling crushes the architect’s car and results in an interruption of work on the site for eight days, for which A must pay a penalty for delay of EUR 50,000 to the owner. B must reimburse A for the expenses incurred as a consequence of the interruption of the work, the amount of the penalty and the cost of repairing the architect’s car which A has had to pay.
4. A, a singer, cancels an engagement with B, an impresario. A must pay damages to B in respect not only of the expenses incurred by B in preparing the concert, but also of the loss of profit resulting from the cancellation of the concert.
3. Damages must not enrich the aggrieved party
However, the aggrieved party must not be enriched by damages for non-performance. It is for this reason that paragraph (1) also provides that account must be taken of any gain resulting to the aggrieved party from the non-performance, whether that be in the form of expenses which it has not incurred (e.g. it does not have to pay the cost of a hotel room for an artist who fails to appear), or of a loss which it has avoided (e.g. in the event of non-performance of what would have been a losing bargain for it).
5. A rents out excavating machinery to B for two years at a monthly rental of EUR 10,000. The contract is terminated after six months for non-payment of the rentals. Six months later, A succeeds in renting out the same machinery at a monthly charge of EUR 11,000. The gain of EUR 12,000 realised by A as a result of the re-letting of the machinery for the remainder of the initial contract, that is to say one year, should be deducted from the damages due by B to A.
4. Damages in case of changes in the harm
In application of the principle of full compensation regard is to be had to any changes in the harm, including its expression in monetary terms, which may occur between the time of the non-performance and that of the judgment. The rule however is not without exceptions: for example, if the aggrieved party has itself already made good the harm at its own expense, the damages awarded will correspond to the amount of the sums disbursed.
5. Compensation of non-material harm
Paragraph (2) of this Article expressly provides for compensation also of non-pecuniary harm. This may be pain and suffering, loss of certain amenities of life, aesthetic prejudice, etc. as well as harm resulting from attacks on honour or reputation.
The rule might find application, in international commerce, in regard to contracts concluded by artists, outstanding sportsmen or women and consultants engaged by a company or by an organisation.
In these cases also, the requirement of the certainty of harm must be satisfied (see Article 7.4.3), together with the other conditions for entitlement to damages.
6. A, a young architect who is beginning to build up a certain reputation, signs a contract for the modernisation of a municipal fine arts museum. The appointment receives wide press coverage. The municipal authorities subsequently decide to engage the services of a more experienced architect and terminate the contract with A. A may obtain compensation not only for the material loss suffered but also for the harm to A’s reputation and the loss of the chance of becoming better known which the commission would have provided.
The compensation of non-material harm may assume different forms and it is for the court to decide which of them, whether taken alone or together, best assures full compensation. The court may not only award damages but also order other forms of redress such as the publication of a notice in newspapers designated by it (e.g. in case of breach of a clause prohibiting competition or the reopening of a business, defamation etc.).