Any non-performance gives the aggrieved party a right to damages either exclusively or in conjunction with any other remedies except where the non-performance is excused under these Principles.
1. Right to damages in general
This Article establishes the principle of a general right to damages in the event of non-performance, except where the non-performance is excused under the Principles, as in the case of force majeure (see Article 7.1.7) or of an exemption clause (see Article 7.1.6). Hardship (see Article 6.2.1 et seq.) does not in principle give rise to a right to damages.
The Article recalls that the right to damages, like other remedies, arises from the sole fact of non-performance. It is enough for the aggrieved party simply to prove the non-performance, i.e. that it has not received what it was promised. In particular, it is not necessary in addition to prove that the non-performance was due to the fault of the non-performing party. The degree of difficulty in proving the non-performance will depend upon the content of the obligation and in particular on whether the obligation is one of best efforts or one to achieve a specific result (see Article 5.1.4).
The right to damages exists in the event of failure to perform any of the obligations which arise from the contract. Thus, it is not necessary to draw a distinction between principal and accessory obligations.
2. Damages may be combined with other remedies
This Article also states that the aggrieved party may request damages either as an exclusive remedy (for example, damages for delay in the case of late performance or for defective performance accepted by the aggrieved party; damages in the event of impossibility of performance for which the non-performing party is liable), or in conjunction with other remedies. Thus, in the case of termination of the contract, damages may be requested to compensate the loss arising from such termination, or again, in the case of specific performance, to compensate for the delay with which the aggrieved party receives performance and for any expenses which might have been incurred. Damages may also be accompanied by other remedies (cure, publication in newspapers of, for example, an admission of error, etc.).
3. Damages and pre-contractual liability
The right to damages may arise not only in the context of non-performance of the contract, but also during the pre-contractual period (see, for instance, Article 2.1.15 in case of negotiations in bad faith, Article 2.1.16 in the event of breach of the duty of confidentiality, or Article 3.2.16 in the case of mistake, fraud, threat or gross disparity). The rules governing damages for non-performance as laid down in this Section may be applied by analogy to those situations.
(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.).
(1) Compensation is due only for harm, including future harm, that is established with a reasonable degree of certainty.
(2) Compensation may be due for the loss of a chance in proportion to the probability of its occurrence.
(3) Where the amount of damages cannot be established with a sufficient degree of certainty, the assessment is at the discretion of the court.
1. Occurrence of harm must be reasonably certain
This Article reaffirms the well-known requirement of certainty of harm, since it is not possible to require the non-performing party to compensate harm which may not have occurred or which may never occur.
Paragraph (1) permits the compensation also of future harm, i.e. harm which has not yet occurred, provided that it is sufficiently certain. Paragraph (2) in addition covers loss of a chance, obviously only in proportion to the probability of its occurrence: thus, the owner of a horse which arrives too late to run in a race as a result of delay in transport cannot recover the whole of the prize money, even though the horse was the favourite.
2. Determination of extent of harm
Certainty relates not only to the existence of the harm but also to its extent. There may be harm the existence of which cannot be disputed but which it is difficult to quantify. This will often be the case in respect of loss of a chance (there are not always “odds” as there are for a horse, for example for an engineering company preparing for the making of a bid) or of compensation for non-material harm (detriment to someone’s reputation, pain and suffering, etc.).
A entrusts a file to B, an express delivery company, in response to an invitation to submit tenders for the construction of an airport. B undertakes to deliver the file before the closing date for tenders but delivers it after that date and A’s application is refused. The amount of compensation will depend upon the degree of probability of A’s tender having been accepted and calls for a comparison of it with the applications which were admitted for consideration. The compensation will therefore be calculated as a proportion of the profit which A might have made.
According to paragraph (3), where the amount of damages cannot be established with a sufficient degree of certainty then, rather than refuse any compensation or award nominal damages, the court is empowered to make an equitable quantification of the harm sustained.
3. Harm must be a direct consequence of non-performance as well as certain
There is a clear connection between the certainty and the direct nature of the harm. Although the latter requirement is not expressly dealt with by the Principles, it is implicit in Article 7.4.2(1) which refers to the harm sustained “as a result of the non-performance” and which therefore presupposes a sufficient causal link between the non-performance and the harm. Harm which is too indirect will usually also be uncertain as well as unforeseeable.
The non-performing party is liable only for harm which it foresaw or could reasonably have foreseen at the time of the conclusion of the contract as being likely to result from its non-performance.
The principle of limitation of recoverable harm to that which is foreseeable corresponds to the solution adopted in Article 74 CISG. This limitation is related to the very nature of the contract: not all the benefits of which the aggrieved party is deprived fall within the scope of the contract and the non-performing party must not be saddled with compensation for harm which it could never have foreseen at the time of the conclusion of the contract and against the risk of which it could not have taken out insurance.
The requirement of foreseeability must be seen in conjunction with that of certainty of harm set out in Article 7.4.3.
The concept of foreseeability must be clarified since the solution contained in the Principles does not correspond to certain national systems which allow compensation even for harm which is unforeseeable when the non-performance is due to wilful misconduct or gross negligence. Since the present rule does not provide for such an exception, a narrow interpretation of the concept of foreseeability is called for. Foreseeability relates to the nature or type of the harm but not to its extent unless the extent is such as to transform the harm into one of a different kind. In any event, foreseeability is a flexible concept which leaves a wide measure of discretion to the judge.
What was foreseeable is to be determined by reference to the time of the conclusion of the contract and to the non-performing party itself (including its servants or agents), and the test is what a normally diligent person could reasonably have foreseen as the consequences of non-performance in the ordinary course of things and the particular circumstances of the contract, such as the information supplied by the parties or their previous transactions.
1. A cleaning company orders a machine which is delivered five months late. The manufacturer is obliged to compensate the company for lost profit caused by the delay in delivery as it could have foreseen that the machine was intended for immediate use. On the other hand the harm does not include the loss of a valuable Govern¬ment contract that could have been concluded if the machine had been delivered on time since that kind of harm was not foreseeable.
2. A, a bank, usually employs the services of a security company for the conveyance of bags containing coins to its branches. Without informing the security company, A sends a consignment of bags containing new coins for collectors worth fifty times the value of previous consignments. The bags are stolen in a hold-up. A can only recover compensation corresponding to the value of the normal consignments as this was the only kind of harm that could have been foreseen and the value of the items lost was such as to transform the harm into one of another kind.
Unlike certain international conventions, particularly in the field of transport, the Principles follow CISG in not making provision for full compensation of harm, albeit unforeseeable, in the event of intentional non-performance.
Where the aggrieved party has terminated the contract and has made a replacement transaction within a reasonable time and in a reasonable manner it may recover the difference between the contract price and the price of the replacement transaction as well as damages for any further harm.
1. Amount of harm presumed in case of replacement transaction
It seems advisable to establish, alongside the general rules applicable to the proof of the existence and of the amount of the harm, presumptions which may facilitate the task of the aggrieved party.
The first of these presumptions is provided by this Article which corresponds in substance to Article 75 CISG. It concerns the situation where the aggrieved party has made a replacement transaction, for instance because so required by the duty to mitigate harm or in conformity with usages. In such cases, the harm is considered to be the difference between the contract price and the price of the replacement transaction.
The presumption comes into play only if there is a replacement transaction and not where the aggrieved party has itself performed the obligation which lay upon the non-performing party (for example when a shipowner itself carries out the repairs to its vessel following the failure to do so of the shipyard which had been entrusted with the work).
Nor is there replacement, and the general rules will apply, when a company, after the termination of a contract, uses its equipment for the performance of another contract which it could have performed at the same time as the first (“lost volume”).
The replacement transaction must be performed within a reasonable time and in a reasonable manner so as to avoid the non-performing party being prejudiced by hasty or malicious conduct.
2. Further damages recoverable for additional harm
The rule that the aggrieved party may recover the difference between the two contract prices establishes a minimum right of recovery. The aggrieved party may also obtain damages for additional harm which it may have sustained.
A, a shipyard, undertakes to accommodate a ship belonging to B, a shipowner, in dry dock for repairs costing USD 500,000 as from 1 July. B learns on 1 June that the dry dock will only be available as from 1 August. B terminates the contract and after lengthy and costly negotiations concludes with C, another shipyard, an identical contract at a price of USD 700,000. B is entitled to recover from A not only the difference in the price of USD 200,000 but also the expenses it has incurred and compensation for the longer period of unavailability of the ship.
(1) Where the aggrieved party has terminated the contract and has not made a replacement transaction but there is a current price for the performance contracted for, it may recover the difference between the contract price and the price current at the time the contract is terminated as well as damages for any further harm.
(2) Current price is the price generally charged for goods delivered or services rendered in comparable circumstances at the place where the contract should have been performed or, if there is no current price at that place, the current price at such other place that appears reasonable to take as a reference.
1. Amount of harm presumed when no replacement transaction
The purpose of this Article, which corresponds in substance to Article 76 CISG, is to facilitate proof of harm where no replacement transaction has been made, but there exists a current price for the performance contracted for. In such cases the harm is presumed to be equal to the difference between the contract price and the price current at the time the contract was terminated.
2. Determination of “current price”
According to paragraph (2) “current price” is the price generally charged for the goods or services in question. The price will be determined in comparison with that which is charged for the same or similar goods or services. This will often, but not necessarily, be the price on an organised market. Evidence of the current price may be obtained from professional organisations, chambers of commerce etc.
For the purpose of this Article the place relevant for determining the current price is that where the contract should have been performed or, if there is no current price at that place, the place that appears reasonable to take as a reference.
3. Further damages recoverable for additional harm
The rule that the aggrieved party may recover the difference between the contract price and the current price at the time of termination establishes only a minimum right of recovery. The aggrieved party may also obtain damages for additional harm which it may have sustained as a consequence of termination.
Where the harm is due in part to an act or omission of the aggrieved party or to another event for which that party bears the risk, the amount of damages shall be reduced to the extent that these factors have contributed to the harm, having regard to the conduct of each of the parties.
1. Contribution of the aggrieved party to the harm
In application of the general principle established by Article 7.1.2 which restricts the exercise of remedies where non-performance is in part due to the conduct of the aggrieved party, this Article limits the right to damages to the extent that the aggrieved party has in part contributed to the harm. It would indeed be unjust for such a party to obtain full compensation for harm for which it has itself been partly responsible.
2. Ways of contributing to the harm
The contribution of the aggrieved party to the harm may consist either in its own conduct or in an event for which it bears the risk. The conduct may take the form of an act (e.g. it gave a carrier a mistaken address) or an omission (e.g. it failed to give all the necessary instructtions to the constructor of the defective machinery). Most frequently such acts or omissions will result in the aggrieved party failing to perform one or another of its own contractual obligations; they may however equally consist in tortious conduct or non-performance of another contract. The external events for which the aggrieved party bears the risk may, among others, be acts or omissions of persons for whom it is responsible such as its servants or agents.
1. A, a franchisee bound by an “exclusivity” clause contained in the contract with B, acquires stock from C because B has required immediate payment despite the fact that the franchise agreement provides for payment at 90 days. B claims payment of the penalty stipulated for breach of the exclusivity clause. B will obtain only part of the sum due thereunder as it was B who provoked A’s non-performance.
2. A, a passenger on a liner effecting a luxury cruise, is injured when a lift fails to stop at the floor requested. B, the shipowner, is held liable for the consequences of A’s injury and seeks recourse against C, the company which had checked the lifts before the liner’s departure. It is proved that the accident would have been avoided if the floor had been better lit. Since this was B’s responsibility, B will not obtain full recovery from C.
3. Apportionment of contribution to the harm
The conduct of the aggrieved party or the external events as to which it bears the risk may have made it absolutely impossible for the non-performing party to perform. If the requirements of Article 7.1.7 (Force majeure) are satisfied, the non-performing party is totally exonerated from liability.
Otherwise, the exoneration will be partial, depending on the extent to which the aggrieved party contributed to the harm. The determination of each party’s contribution to the harm may well prove to be difficult and will to a large degree depend upon the exercise of judicial discretion. In order to give some guidance to the court this Article provides that the court shall have regard to the respective behaviour of the parties. The more serious a party’s failing, the greater will be its contribution to the harm.
3. The facts are the same as in Illustration 1. Since it was B who was the first not to observe the terms of the contract, B is deemed to have caused A’s failure to respect the exclusivity clause. B may only recover 25% of the amount stipulated in the penalty clause.
4. The facts are the same as in Illustration 2. Since the failings of B and C seem to be equivalent, B can only recover from C 50% of the compensation it had to pay A.
4. Contribution to harm and mitigation of harm
This Article must be read in conjunction with the following Article on mitigation of harm (see Article 7.4.8). While this Article is concerned with the conduct of the aggrieved party in regard to the cause of the initial harm, Article 7.4.8 relates to that party’s conduct subsequent thereto.
(1) The non-performing party is not liable for harm suffered by the aggrieved party to the extent that the harm could have been reduced by the latter party’s taking reasonable steps.
(2) The aggrieved party is entitled to recover any expenses reasonably incurred in attempting to reduce the harm.
1. Duty of aggrieved party to mitigate harm
The purpose of this Article is to avoid the aggrieved party passively sitting back and waiting to be compensated for harm which it could have avoided or reduced. Any harm which the aggrieved party could have avoided by taking reasonable steps will not be compensated.
Evidently, a party who has already suffered the consequences of non-performance of the contract cannot be required in addition to take time-consuming and costly measures. On the other hand, it would be unreasonable from the economic standpoint to permit an increase in harm which could have been reduced by the taking of reasonable steps.
The steps to be taken by the aggrieved party may be directed either to limiting the extent of the harm, above all when there is a risk of it lasting for a long time if such steps are not taken (often they will consist in a replacement transaction: see Article 7.4.5), or to avoiding any increase in the initial harm.
1. On 2 May, A requests B, a travel agency, to reserve a hotel room in city X for 1 June, at a cost of EUR 200. On 15 May, A learns that B has not made the reservation. A waits however until 25 May before making a new reservation and can only find a room costing EUR 300, whereas accommodation could have been secured for EUR 250 if A had taken action already on 15 May. A can recover only EUR 50 from B.
2. A, a company which has been entrusted by B with the building of a factory, suddenly stops work when the project is nearing completion. B looks for another company to finish the building of the factory but takes no steps to protect the buildings on the site the condition of which deteriorates as a result of bad weather. B cannot recover compensation for such deterioration as it is attributable to its failure to take interim protective measures.
2. Reimbursement of expenses
The reduction in damages to the extent that the aggrieved party has failed to take the necessary steps to mitigate the harm must not however cause loss to that party. The aggrieved party may therefore recover from the non-performing party the expenses incurred by it in mitigating the harm, provided that those expenses were reasonable in the circumstances (paragraph (2)).
3. The facts are the same as in Illustration 2, except that B has the necessary work carried out to ensure the interim protection of the buildings. The cost of such work will be added to the damages due by A for non-performance of the contract on condition that those costs were reasonable. If they were not, they will be reduced.
4. The facts are the same as in Illustration 1, except that A takes a room costing EUR 500 in a luxury hotel. A may only recover the 50 euro difference in respect of the room which A could have obtained for EUR 250.
(1) 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 to the time of payment whether or not the non-payment is excused.
(2) The rate of interest shall be the average bank short-term lending rate to prime borrowers prevailing for the currency of payment at the place for payment, or where no such rate exists at that place, then the same rate in the State of the currency of payment. In the absence of such a rate at either place the rate of interest shall be the appropriate rate fixed by the law of the State of the currency of payment.
(3) The aggrieved party is entitled to additional damages if the non-payment caused it a greater harm.
1. Lump sum compensation for failure to pay a sum of money
This Article reaffirms the widely accepted rule according to which the harm resulting from delay in the payment of a sum of money is subject to a special regime and is calculated by a lump sum corresponding to the interest accruing between the time when payment of the money was due and the time of actual payment.
Interest is payable whenever the delay in payment is attributable to the non-performing party, and this as from the time when payment was due, without any need for the aggrieved party to give notice of the default.
If the delay is the consequence of force majeure (e.g. the non-performing party is prevented from obtaining the sum due by reason of the introduction of new exchange control regulations), interest will still be due not as damages but as compensation for the enrichment of the debtor as a result of the non-payment as the debtor continues to receive interest on the sum which it is prevented from paying.
The harm is calculated as a lump sum. In other words, subject to paragraph (3) of this Article, the aggrieved party may not prove that it could have invested the sum due at a higher rate of interest or the non-performing party that the aggrieved party would have obtained interest at a rate lower than the average lending rate referred to in paragraph (2).
The parties may of course agree in advance on a different rate of interest (which would in effect subject it to Article 7.4.13).
2. Rate of interest
Paragraph (2) of this Article fixes in the first instance as the rate of interest the average bank short-term lending rate to prime borrowers. This solution seems to be that best suited to the needs of international trade and most appropriate to ensure an adequate compensation of the harm sustained. The rate in question is the rate at which the aggrieved party will normally borrow the money which it has not received from the non-performing party. That normal rate is the average bank short-term lending rate to prime borrowers prevailing at the place for payment for the currency of payment.
No such rate may however exist for the currency of payment at the place for payment. In such cases, reference is made in the first instance to the average prime rate in the State of the currency of payment. For instance, if a loan is made in pounds sterling payable in country X and there is no rate for loans in pounds on country X financial market, reference will be made to the rate in the United Kingdom.
In the absence of such a rate at either place, the rate of interest will be the “appropriate” rate fixed by the law of the State of the currency of payment. In most cases this will be the legal rate of interest and, as there may be more than one, that most appropriate for international transactions. If there is no legal rate of interest, the rate will be the most appropriate bank rate.
3. Additional damages recoverable
Interest is intended to compensate the harm normally sustained as a consequence of delay in payment of a sum of money. Such delay may however cause additional harm to the aggrieved party for which it may recover damages, always provided that it can prove the existence of such harm and that it meets the requirements of certainty and foreseeability (paragraph (3)).
A concludes a contract with B, a specialised finance company, for a loan which will permit the renovation of its factory in country X. The loan specifically mentions the use of the funds. The money lent is transferred three months later than agreed. During that period the cost of the renovation has increased by ten percent. A is entitled to recover this additional sum from B.
Unless otherwise agreed, interest on damages for non-performance of non-monetary obligations accrues as from the time of non-performance.
This Article determines the time from which interest on damages accrues in cases of non-performance of obligations other than monetary obligations. In such cases, at the time of non-performance the amount of damages will usually not yet have been assessed in monetary terms. The assessment will only be made after the occurrence of the harm, either by agreement between the parties or by the court.
This Article fixes as the starting point for the accrual of interest the date of the occurrence of the harm. This solution is that best suited to international trade where it is not the practice for businesspersons to leave their money idle. In effect, the aggrieved party’s assets are diminished as from the occurrence of the harm whereas the non-performing party, for as long as the damages are not paid, continues to enjoy the benefit of the interest on the sum which it will have to pay. It is only natural that this gain passes to the aggrieved party.
However, when making the final assessment of the harm, regard is to be had to the fact that damages are awarded as from the date of the harm, so as to avoid double compensation, for instance when a currency depreciates in value.
This Article takes no stand on the question of compound interest, which in some national laws is subject to rules of public policy limiting compound interest with a view to protecting the non-performing party.
(1) Damages are to be paid in a lump sum. However, they may be payable in instalments where the nature of the harm makes this appropriate.
(2) Damages to be paid in instalments may be indexed.
1. Lump sum or instalments
Although this Article does not impose a fixed rule as to the manner in which damages are to be paid, the payment of damages as a lump sum is in general considered to be the mode of payment best suited to international trade. There are however situations in which payment by instalments will be more appropriate, having regard to the nature of the harm, for instance when the harm is on-going.
1. A, a consultant, is retained by B for the purpose of checking the safety of its factories. A is killed when travelling by helicopter to one of B’s factories, for which accident B is held responsible. A leaves two children aged twelve and eight. So as to compensate for the loss of the maintenance of the family, a monthly allowance will be payable to the children until they reach the age of majority.
2. A, a consultant in safety matters, is recruited by B for a three year period. The remuneration is fixed at 0.5% of the production. A is wrongfully dismissed after six months. It may be appropriate that B be ordered to pay A monthly a sum corresponding to the agreed salary until A has found new employment or, at the most, for thirty months.
Paragraph (2) of this Article contemplates the possibility of indexation of damages to be paid in instalments so as to avoid the complex mechanism of a review of the original judgment in order to take account of inflation. Indexation may however be prohibited by the law of the forum.
3. The facts are the same as in Illustration 1. The monthly allowance may be adjusted in accordance with the cost of living index applicable where the children live.
Damages are to be assessed either in the currency in which the monetary obligation was expressed or in the currency in which the harm was suffered, whichever is more appropriate.
The harm resulting from the non-performance of an international contract may occur in different places and the question therefore arises of the currency in which it is to be assessed. This question is dealt with by this Article and should be kept distinct from that of the currency of payment of the damages addressed in Article 6.1.9.
The Article offers a choice between the currency in which the monetary obligation was expressed and that in which the harm was suffered, whichever is more appropriate in the circumstances.
While the first alternative calls for no particular comment, the second takes account of the fact that the aggrieved party may have incurred expenses in a particular currency to repair damage which it has sustained. In such a case it should be entitled to claim damages in that currency even if it is not the currency of the contract. Another currency which may be considered the most appropriate is that in which the profit would have been made.
The choice is left to the aggrieved party, provided that the principle of full compensation is respected.
Finally, it may be noted that in the absence of any indication to the contrary, a party is entitled to interest and to liquidated damages and penalties in the same currency as that in which the main obligation is expressed.
(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.
1. Agreed payment for non-performance defined
This Article gives an intentionally broad definition of agreements to pay a specified sum in case of non-performance, whether such agreements be intended to facilitate the recovery of damages (liquidated damages according to the common law) or to operate as a deterrent against non-performance (penalty clauses proper), or both.
2. Agreed payment for non-performance in principle valid
National laws vary considerably with respect to the validity of the type of clauses in question, ranging from their acceptance in the civil law countries, with or without the possibility of judicial review of particularly onerous clauses, to the outright rejection in common law systems of clauses intended specifically to operate as a deterrent against non-performance, i.e. penalty clauses.
In view of their frequency in international contract practice, paragraph (1) of this Article in principle acknowledges the validity of any clauses providing that a party who does not perform is to pay a specified sum to the aggrieved party for such non-performance, with the consequence that the latter is entitled to the agreed sum irrespective of the harm actually suffered by it. The non-performing party may not allege that the aggrieved party sustained less harm or none at all.
1. A, a former international football player from country X, is recruited for three years to train the players of B, a football team from country Y, at a monthly salary of AUD 10,000. Provision is made for a severance allowance of AUD 200,000 in the event of unjustified dismissal. A is dismissed without any justification after six months. A is entitled to the agreed sum, even though A was immediately recruited by another team at double the salary received from B.
Normally, the non-performance must be one for which the non-performing party is liable, since it is difficult to conceive a clause providing for the payment of an agreed sum in case of non-performance operating in a force majeure situation. Exceptionally, however, such a clause may be intended by the parties also to cover non-performance for which the non-performing party is not liable.
In the case of partial non-performance, the amount may, unless otherwise agreed by the parties, be reduced in proportion.
3. Agreed sum may be reduced
In order to prevent the possibility of abuse to which such clauses may give rise, paragraph (2) of this Article permits the reduction of the agreed sum if it is grossly excessive “in relation to the harm resulting from the non-performance and to the other circumstances”. The same paragraph makes it clear that the parties may under no circumstances exclude such a possibility of reduction.
The agreed sum may only be reduced, but not entirely disregarded as would be the case were the judge, notwithstanding the agreement of the parties, to award damages corresponding to the exact amount of the harm. It may not be increased, at least under this Article, where the agreed sum is lower than the harm actually sustained (see however Comment 4 on Article 7.1.6). It is moreover necessary that the amount agreed be “grossly excessive”, i.e. that it would clearly appear to be so to any reasonable person. Regard should in particular be had to the relationship between the sum agreed and the harm actually sustained.
2. A enters into a contract with B for the purchase of machinery which provides for payment in five instalments of EUR 50,000 each. The contract contains a clause allowing immediate termination in the event of non-payment by A of one instalment, and authorises B to keep the sums already paid and to recover future instalments as damages. A fails to pay the third instalment. B keeps the EUR 100,000 already paid and claims, in addition to the return of the machinery, the EUR 150,000 representing the three outstanding instalments. The court will reduce the amount since A’s non-performance would result in a grossly excessive benefit for B.
4. Agreed payment for non-performance to be distinguished from forfeiture and other similar clauses
The type of clauses dealt with in this Article must be distinguished from forfeiture and other similar clauses which permit a party to withdraw from a contract either by paying a certain sum or by losing a deposit already made. On the other hand a clause according to which the aggrieved party may retain sums already paid as part of the price falls within the scope of this Article.
3. A undertakes to sell real estate to B for EUR 450,000. B must exercise the option to purchase within three months and must pay a deposit of EUR 25,000, which A is entitled to retain if B does not exercise the option. Since this is not an agreed payment for non-performance it does not fall under this Article and the sum cannot be reduced thereunder even if grossly excessive in the circumstances.
4. A enters into a contract with B for the lease of a machine. The contract provides that in the event of A’s failure to pay one single rental the contract will be terminated and that the sums already paid will be retained by B as damages. The clause falls under this Article and the agreed amount may be subject to reduction.