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Part XI Remedies for Breach of Contract, 44 Damages

From: Global Sales and Contract Law

Ingeborg Schwenzer, Pascal Hachem, Christopher Kee

Content type:
Book content
Product:
International Commercial Law [ICML]
Published in print:
26 January 2012
ISBN:
9780199572984

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 06 June 2023

Subject(s):
Calculation of damages — Mitigation of damages — Contract clauses and damages — Exclusion or limit of liability — Burden of proof and damages

(p. 576) 44  Damages

  1. A.  General 44.01

    1. I.  Purposes of Damages 44.04

      1. 1.  Compensation 44.06

      2. 2.  Prevention 44.08

        1. (a)  Deterrence v Punishment 44.11

        2. (b)  Punitive Damages 44.13

        3. (c)  Disgorgement of Profits 44.15

    2. II.  General Principles 44.18

      1. 1.  Full Compensation v Over-Compensation 44.19

      2. 2.  Economic Benefits v Performance Principle 44.22

        1. (a)  Difference Hypothesis of German Descent 44.24

        2. (b)  Economic Analysis of Law 44.25

        3. (c)  Performance Principle 44.27

      3. 3.  Pecuniary v Non-Pecuniary Loss 44.33

        1. (a)  Line Drawing 44.34

        2. (b)  Moral Damages in Contract 44.37

  2. B.  Causation 44.42

    1. I.  General 44.42

    2. II.  Causation Doctrine 44.43

      1. 1.  Natural Causality 44.46

      2. 2.  Restrictions on Natural Causality 44.47

        1. (a)  Adequacy/Common Sense Approach 44.48

        2. (b)  Scope of Protection of the Breached Duty 44.50

    3. III.  Intervening Events 44.51

      1. 1.  Third Party Intervention 44.52

      2. 2.  Act or Omission by the Aggrieved Party 44.54

  3. C.  Fault and Foreseeability 44.59

    1. I.  General 44.59

    2. II.  Fault 44.63

      1. 1.  General 44.63

      2. 2.  Notion of Fault 44.65

        1. (a)  General 44.67

        2. (b)  Attribution of Fault 44.72

      3. 3.  Non-Conformity 44.77

    3. III.  Foreseeability 44.85

      1. 1.  General 44.91

      2. 2.  Relationship to Fault 44.98

      3. 3.  Specificities 44.101

        1. (a)  Relevant Persons 44.102

        2. (b)  Relevant Point in Time 44.104

        3. (c)  What Must Be Foreseen 44.106

  4. D.  Form of Compensation 44.109

    1. I.  General 44.109

    2. II.  Restitution in Kind 44.110

    3. III.  Discretion of Parties and Adjudicators 44.112

    4. IV.  Money 44.113

  5. E.  Categorization of Losses 44.118

    1. I.  General 44.118

    2. II.  Damnum Emergens and Lucrum Cessans 44.119

      1. 1.  Terminology 44.119

      2. 2.  Treatment of Lost Profit 44.120

    3. III.  Expectation and Reliance Loss 44.124

      1. 1.  Terminology 44.124

      2. 2.  Availability 44.128

        1. (a)  Expectation Loss 44.129

        2. (b)  Reliance Loss 44.131

        3. (c)  Election Between Losses 44.134

    4. IV.  Direct v Indirect Loss 44.138

      1. 1.  General 44.138

      2. 2.  Causality Approaches 44.141

        1. (a)  Mere Causality 44.141

        2. (b)  Adequate Causality and Protective Scope of the Norm 44.143

        3. (c)  Length of Causality Chain 44.144

      3. 3.  Foreseeability 44.147

      4. 4.  Degree of Fault 44.148

      5. 5.  Statutory Definitions 44.149

    5. V.  Incidental and Consequential Loss 44.150

      1. 1.  Incidental Losses 44.151

      2. 2.  Consequential Losses 44.153

  6. F.  Extent of Damages 44.156

    1. I.  General 44.156

    2. II.  General Non-Performance Loss 44.158

    3. III.  Incidental Loss 44.161

      1. 1.  General 44.161

      2. 2.  Legal Costs 44.164

        1. (a)  General 44.164

        2. (b)  Recovery as Damages for Breach of Contract 44.166

    4. IV.  Consequential Loss 44.170

      1. 1.  General 44.170

      2. 2.  Property Damage and Personal Injury to the Buyer 44.175

        1. (a)  Damage to Property 44.175

          • (i)  Damage to Other Property 44.175

          • (ii)  Damage to the Chattel Itself 44.182

          2. (p. 577)

        2. (b)  Personal Injury 44.183

      3. 3.  Loss of Goodwill and Reputation 44.187

        1. (a)  General 44.187

        2. (b)  Approaches 44.190

        3. (c)  Measurement 44.195

      4. 4.  Recourse for Liability to Third Parties 44.197

        1. (a)  Constellations 44.198

        2. (b)  Extent of Recovery 44.200

    5. V.  Lost Profit 44.203

      1. 1.  General 44.203

      2. 2.  Lost Volume Cases 44.207

      3. 3.  Loss of a Chance 44.211

  7. G.  Methods of Calculation 44.216

    1. I.  General 44.217

    2. II.  Concrete and Abstract Calculation 44.221

      1. 1.  General 44.221

        1. (a)  Terminology 44.221

        2. (b)  Relationship of Calculation Methods 44.225

      2. 2.  Concrete Calculation 44.228

        1. (a)  General 44.228

        2. (b)  Substitute Transactions 44.229

          • (i)  General 44.229

          • (ii)  Reasonableness of Substitute Transaction 44.231

          • (iii)  Avoidance of the Contract 44.236

        3. (c)  Repair 44.239

      3. 3.  Abstract Calculation 44.240

        1. (a)  General 44.240

        2. (b)  Available Market 44.245

        3. (c)  Market Price 44.247

        4. (d)  Avoidance of the Contract 44.249

    3. III.  Profit from Breach of Contract 44.250

  8. H.  Mitigation 44.252

    1. I.  General 44.252

    2. II.  Extent of Duty to Mitigate 42.256

      1. 1.  General 44.257

      2. 2.  Specific Examples of Mitigration Measures 44.259

        1. (a)  Substitute Transaction 44.260

        2. (b)  Dealing with Contract Breacher 44.263

    3. III.  Consequences 44.265

  9. I.  Contract Stipulations 44.266

    1. I.  Agreed Sums Payable upon Breach of an Obligation 44.266

      1. 1.  General 44.266

      2. 2.  Comparative Overview 44.267

      3. 3.  Functions of Agreed Sums 44.271

        1. (a)  Securing Performance 44.272

        2. (b)  Compensation 44.273

        3. (c)  Liquidating Losses 44.275

        4. (d)  Effect of Limiting Liability 44.276

      4. 4.  Protection of the Debtor 44.277

        1. (a)  Formal Requirements 44.278

        2. (b)  Limits Fixed by Law 44.280

        3. (c)  Unenforceability of Penalty Clauses 44.281

        4. (d)  Reduction of Excessive Sums 44.284

      5. 5.  Relationship to Other Remedies 44.287

        1. (a)  Specific Performance 44.288

        2. (b)  Avoidance of Contract 44.291

        3. (c)  Damages 44.292

    2. II.  Limitation Clauses 44.295

      1. 1.  General 44.296

      2. 2.  Typical Clauses 44.299

        1. (a)  Exclusion Clauses 44.300

        2. (b)  Certain Losses Excluded 44.303

        3. (c)  Caps 44.304

      3. 3.  Restrictions 44.306

        1. (a)  Express Warranties and Guarantees 44.308

      4. (b)  Minimum Adequate Remedy 44.310

      5. (c)  Gravity of Fault 44.311

      6. (d)  Personal Injury 44.316

  10. J.  Proof 44.318

    1. I.  Burden of Proof 44.319

      1. 1.  General 44.319

      2. 2.  Causality 44.321

      3. 3.  Foreseeability 44.323

      4. 4.  Fault 44.324

      5. 5.  Loss Sustained 44.325

    2. II.  Standard of Proof 44.328

      1. 1.  General 44.329

      2. 2.  Different Approaches to Certainty of Loss 44.332

      3. 3.  Situations Where Standard Lowered 44.334

A.  General

44.01  In practice the most important remedy to which parties resort in a sales contract is damages for breach of contract. From a comparative perspective and broadly speaking, two approaches can be discerned which are taken towards the remedy of damages. One focuses on the legal term ‘loss’ and attempts to develop an abstract definition determining what is to be understood to be ‘loss’. This approach has enjoyed particular popularity in civil law legal systems and here specifically in German-speaking countries.1 On the other hand, common law legal systems have—consistent with their background of primarily thinking in ‘actions’—rather devoted (p. 578) their attention to what is achieved by the remedy of damages with little consideration for concrete definitions.2

44.02  Today both approaches appear to have recognized that it is necessary to move towards each other. In Germany thousands of court decisions, journal articles, doctoral theses, and other monographs over roughly 160 years have attempted to conclusively determine what the term ‘loss’ actually means.3 Hence, there is some truth in the ironic statement of the German Federal Supreme Court—when distinguishing pecuniary and non-pecuniary loss—that in relation to the harsh criticism directed by doctrine against court decisions from all angles, scholars had only made a minor contribution to actually solving the problem and had, in fact, not provided courts with any useful guidance.4 Today, it seems at least agreed that no matter which understanding one has of the term ‘loss’, one will always have to take policy reasons into account.5 Therefore, the question of which interests are protected by the remedy of damages must also be addressed. Put simply, a pure dogmatic approach will not, if history is any guide, lead to a solution on its own.6

44.03  Common law legal systems equally have faced problems avoiding debates on the dogmatic underpinnings of the law of damages. This has recently become visible in the discussion of ‘restitutionary damages’ following the decision of the English House of Lords in Attorney-General v Blake.7 It is not clear from this decision whether the outcome was based on the law of damages or the law of restitution.8 However, either way it is clear that the outcome was motivated by policy.

I.  Purposes of Damages

44.04  The purpose of damages for breach of contract is traditionally understood to compensate the aggrieved party for the loss sustained.9 In almost all cases the term ‘damages’ is associated with the payment of a sum of money. However, as discussed below, there remains a difference among legal systems as to whether this is always the case; for example, under German law damages first take the form of restitution in kind.10

44.05  When the purposes of damages are examined from a temporal perspective, it is clear that compensation is naturally associated with the time after the loss has occurred. However, there is a growing debate as to whether damages should also be concerned with the time before the loss. In other words, the question is whether damages not only serve a compensation purpose but also a preventative one. This debate presents a challenge to traditional understandings of the role of private law and its relationship to public law and criminal law.

(p. 579) 1.  Compensation

44.06  It is undisputed among legal systems that damages, especially those awarded for breach of contract, serve a compensatory function. Sometimes it is even said to be a cultural achievement of civilized legal systems that punishment is exclusively within the domain of criminal law.11

44.07  The focus on compensation is, however, not absolute. While in some jurisdictions compensation is certainly recognized as the primary purpose of damages, it is not necessarily its sole purpose in private law. For example, in relatively recent English case law on damages in tort it was noted that ‘[i]t cannot lightly be taken for granted, even as a matter of theory, that the purpose of the law of tort is compensation, still less that it ought to be … or that there is something inappropriate or illogical or anomalous in including a punitive element in civil damages’.12

2.  Prevention

44.08  While the compensatory function of damages is undisputed, the opposite is true for the preventative function of damages. Frequently such purpose—if at all recognized—is regarded to be an ancillary effect of damages which does not go beyond the scope of the purpose of compensation.13 However, there is an increasing opposite view acknowledging an independent prevention function of the law of damages.14 These authors rely on a number of cases in which the outcomes could not be explained by purposes of compensation.15 In a number of other legal systems the independent preventative purpose of damages has long been recognized.16 With regard to common law in particular, the concept of awarding at least nominal damages—while not usually viewed in this light17—clearly shows that compensation is not the sole grounds for awarding damages but to make clear that any breach will entail an obligation to pay damages.18

44.09  The position that the law of damages also serves a preventive function is reinforced by legal systems which make the degree of fault a determinative factor for the damages recoverable. This approach is most clearly expressed in the Middle Eastern and Arab legal systems where (recoverable) direct losses and (irrecoverable) indirect losses are distinguished on the basis of the degree of fault on the part of the breaching party.19 Traces of this approach can also be found in Switzerland where the adjudicator in assessing damages is to take into account the degree of fault.20

44.10  At the international level the debate on prevention by the law of damages is relatively young. With regard to the CISG the typical statement by German-speaking commentators is that (p. 580) damages under the Convention serve a purely compensatory function.21 Others take a different stance.22

(a)  Deterrence v Punishment

44.11  The traditional reluctance to acknowledge prevention as an independent function of the law of damages mainly arises from the concern that this would lead to an intrusion of criminal punishment into private law.23 However, a clear line must be drawn between deterrence and punishment. The latter is clearly the exclusive domain of criminal law. The former, however, should not be so considered. Indeed, criminal punishment involves a social disapproval; the use of private law damages to prevent a breach of contract is entirely different. At its simplest, a criminal conviction requires an offence against the laws of a jurisdiction, whereas damages simply require a breach of contract. Hence, acknowledging that private law damages have a preventative purpose does not lead private law into the criminal law sphere.

44.12  However, it is also not difficult to find elements of true punishment in private law. The prime example is the French concept of ‘astreinte’. This concept allows the adjudicator to penalize a party with a sum of money—payable to the aggrieved party(!)—where the breaching party does not comply with the adjudicator’s previous order to perform as required by the contract.24 This concept has been adopted also at the international level by the PICC and retained also in the latest version, the PICC 2010.25

(b)  Punitive Damages

44.13  Punitive or exemplary damages are traditionally associated with common law jurisdictions. In essence, this concept envisages that in certain cases the adjudicator may award a sum of money to the plaintiff independent of the actual loss sustained. Traditionally, however, punitive damages in all common law legal systems are available in tort actions only26 but not where the claim is based on contract.27 This position has already been changed to some extent and is expected to see further changes in the future.28 A first attenuation was achieved in the United States and in Canada by allowing an award for punitive damages in breach of contract actions, where the breach itself constitutes an independent tort for which punitive damages are available.29 In England, Australia, New Zealand, and Ireland this (p. 581) development has so far not been followed.30 However, alongside US and Canadian courts,31 the breach of a fiduciary duty has been sufficient for a punitive damages award also in Australia and New Zealand,32 even if it does not in itself amount to an independent tort.

44.14  Most recently,33 in Whiten v Pilot Insurance Co 34 the Canadian Supreme Court has even dispensed with the requirement of an independent tort or the breach of a fiduciary duty to award punitive damages in breach of contract actions but requires merely an ‘actionable wrong’.35 In England it has been suggested that, with the award of account of profits for breach of contract in Attorney-General v Blake36 by the House of Lords, punitive damages could and should be permitted in breach of contract actions under English law.37 More guarded statements have at least interpreted these decisions in connection with the Canadian developments as indicating an overhaul of the rule against punitive damages in contract actions established in Addis v Gramophone.38,39

(c)  Disgorgement of Profits

44.15  An important part of the debate on the preventive function of damages is the sub-question of disgorgement of profits. In other words, if damages are meant to prevent breaches, it would be a logical consequence that they should also not let the breaching party run away with a gain, once the breach has occurred. This debate is a broad one, relevant across the law of obligations. However, it is important to distinguish whether the profit made by the breach of contract is disgorged for preventive purposes or whether that profit is merely used as a method of calculating the aggrieved party’s loss where other methods of proof fail.

(p. 582) 44.16  The first approach was clearly taken by the English House of Lords in Attorney-General v Blake.40 In that case Blake,41 a British spy who defected to the Soviet Union, published an autobiography in 1990. In so doing, Blake was found to have violated his confidentiality obligations under his contract with the Secret Intelligence Service. The Crown sued for the £90,000 Blake was to receive from the publisher. With a majority of four to one42 the Law Lords awarded the claimed sum to the Crown. The majority reasoned that ‘in the same way a plaintiff’s interest in performance of a contract may render it just and equitable for the court to make an order for specific performance … so the plaintiff’s interest in performance may make it just and equitable that the defendant should retain no benefit from his breach of contract.43 … The law recognizes that damages are not always a sufficient remedy for breach of contract. … Even when awarding damages, the law does not adhere slavishly to the concept of compensation for financially measurable loss. When the circumstances require, damages are measured by reference to the benefit obtained by the wrongdoer.’44

44.17  Within the realm of sales contracts, cases comparable to the Blake case are difficult to conceive. Hence, it appears that in this context the second approach to dealing with gains from breach of contract—that is, calculation of losses—will rather be of relevance. Two scenarios may illustrate this: first, where the seller sells the same goods twice and, secondly, where the buyer violates a prohibition of competition which has been agreed upon under the contract.45 In the first scenario, the profit made by the seller can be seen as what the aggrieved party has lost on a possible resale.46 In the second scenario, the profit derived by the buyer may be seen as the loss of the seller on the market due to competition.47

II.  General Principles

44.18  The purposes of damages discussed above are built on underlying general principles. Broadly speaking, three major issues arise in all legal systems. The first is the understanding of the notion of full compensation and its relation to and delimitation from over-compensation. The second issue questions the reference point of protection and whether this focuses exclusively on expected economic benefits or whether it is performance in and of itself which is the core interest. Both of these issues find themselves also present in the perpetual debate on the recovery of pecuniary and non-pecuniary loss.

1.  Full Compensation v Over-Compensation

44.19  It is undisputed among legal systems—both domestic and international—that the aggrieved party must be entitled to recover all losses incurred due to the breach of contract. This principle is referred to as the ‘principle of full compensation’.48 In this regard, the standard set out by (p. 583) Article 74 CISG ‘is brief but powerful’.49 According to this provision, damages ‘consist of a sum equal to the loss … suffered … as a consequence of the breach’.50

44.20  Whilst this principle is a particularly easy concept to appreciate, it is considerably more difficult to implement. It is in the implementation that differences amongst legal systems become apparent.51

44.21  In the pursuit of full compensation on the basis that compensation traditionally is the primary purpose of damages it is a logical consequence that overcompensation should be avoided. Difficulties arise in determining what amounts to over-compensation. The pecuniary versus non-pecuniary loss debate is a particularly striking example of this issue;52 so too are questions of benefits gained by the aggrieved party as a result of the breach which are generally subsumed under the rubric of betterment.53

2.  Economic Benefits v Performance Principle

44.22  In traditional understanding, the sole expectation of contracting parties is to obtain an economic benefit from the transaction. Consequently, the law of damages—albeit with variances—is perceived to protect only the economic position of the aggrieved party. This approach is commonly referred to as the ‘economic benefits principle’. Strict adherence to this principle entails that those detriments not appearing on the economic balance sheet of the aggrieved party are not recoverable.54 In particular, this rules out damages for non-pecuniary losses.

44.23  In recent times doubt has been cast as to whether the strict adherence to the economic benefits principle is appropriate for modern trade.55 Under the heading of ‘performance principle’ one view argues that an aggrieved party should be compensated for the benefits it would have had as a result of actually possessing the goods rather than simply possessing their value.56

(a)  Difference Hypothesis of German Descent

44.24  Particular emphasis on the economic benefits principle is found in Germanic legal systems. Nineteenth-century Roman law scholars in Germany endorsed the calculation of damnum emergens and lucrum cessans.57 Recoverable loss was calculated by subtracting the value of the aggrieved party’s balance sheet after the breach from the hypothetical value of the aggrieved party’s balance sheet had the breach not occurred.58 This method of calculation was termed ‘Differenzhypothese’ (‘difference hypothesis’ or ‘difference theory’).59 Subsequently German scholars adopted this mere method of calculation as the actual definition of loss. As a consequence anything which cannot be calculated using this formula is by definition not a legally recoverable loss. In this understanding the difference hypothesis takes the economic benefits principle to its extreme form.

(p. 584) (b)  Economic Analysis of Law

44.25  The notion that the law of damages is only concerned with the economic benefits of a contract finds support among many scholars in the field of economic analysis of law and who built upon the works of Justice Oliver Wendell Holmes. Justice Holmes famously argued that: ‘The duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it,—and nothing else. If you commit a tort, you are liable to pay a compensatory sum. If you commit a contract, you are liable to pay a compensatory sum unless the promised event comes to pass, and that is all the difference.’60 Damages therefore present an alternative to performance effectively available at the unilateral election of one party.

44.26  These ideas formed the basis for the so-called doctrine of efficient breach. In essence, this doctrine encourages a party to breach the contract where it is able to obtain an economic advantage by doing so even after providing compensation for the breach.61 Coupled with the consequently necessary rejection of specific performance as a principal remedy, this doctrine does not attribute value to performance in and of itself. Hence, the efficient-breach doctrine strictly promotes the economic benefits principle over the performance principle.

(c)  Performance Principle

44.27  As indicated earlier, the so-called ‘performance principle’ is increasingly advocated and has prompted discussion particularly under English law.62 This principle is based on the notion that contractual obligations are assumed by the parties rather than imposed by law.63 In other words, it is the will that binds the parties and the law is an instrument giving effect to this will.64 It follows from this understanding that remedies for breach of contract are not provided by law merely as deterrent, punishment, or compensation65 but also as an enforcement of contractual obligations.66 It acknowledges that ‘there is more to the law of contract than the protection of financial interests’.67 Consequently, the remedy of damages in this view also serves as a means of securing performance of the obligation owed.68 The Australian Federal Court has most recently expressly stated that it is ‘a faulty analysis of legal obligations to say that the law treats a promisor as having a right to elect either to perform his promise or to pay damages’,69 but rather holds that the purpose of the contract is performance.70 Nominal damages are not considered to adequately serve as protection of the (p. 585) performance interest.71 This notion has also received support in other legal systems72 and at the international level.73

44.28  From a dogmatic perspective the consequence of this approach is that, in contrast to the understanding of the economic benefits principle, the law of damages does not merely protect the obligee in its expectation of the value of performance but its expectation to receive performance as such. Hence, where a party is deprived of the benefits associated with having obtained performance itself but not with the value of the goods, such detriments can be characterized as losses using the performance principle. Two examples shall illustrate this.

44.29  For example, a non-governmental-organization (NGO) buys trucks to deliver food to the Sahel.74 The trucks, however, are not delivered in time. No trucks are available for rent where they are needed. As the goods would not have been sold and no expenses were made to rent trucks, no pecuniary loss occurs. Under the economic benefits principle this would not amount to a recoverable loss.

44.30  In another example, a company buys t-shirts on the contractual condition that the goods must not be manufactured by children.75 The company pays a price 100 per cent higher than the market price of t-shirts in general to ensure observance of this requirement. If the seller breaches the contract in this regard, the goods themselves have no physical defect. Given that the public does not become aware of the breach of contract and no drop in sales occurs or damage to the buyer’s reputation is inflicted,76 apparently no pecuniary loss has been suffered.

44.31  Both examples show that the buyer has not received that for which it has bargained. The principle of pacta sunt servanda is undermined in these cases by the economic benefits principle. The performance principle would protect the buyer’s expectations in these situations.

44.32  In the context of the performance principle, the House Lords decision in Ruxley v Forsyth77 has provoked considerable debate. In that decision the House of Lords did not reject a damages claim on the basis that there was no economic loss but rather found that under the circumstances the cost of the cure was disproportionate to performance interest.78 The Court of Appeal had earlier awarded to the homeowner (Forsyth) damages for the costs of demolishing and rebuilding a swimming pool which had not been of the contractually required depth. The difference in depth was minimal and the court found that there was no additional value to be obtained by increasing the depth. The Court of Appeal decision clearly enforces the performance principle. The position taken by the House of Lords has left open the question as to whether in other circumstances the House of Lords or another common law court would award the costs of cure and thereby protect the performance interest.

(p. 586) 3.  Pecuniary v Non-Pecuniary Loss

44.33  Pecuniary losses are recoverable in all jurisdictions. However, the recovery of non-pecuniary loss is one of the most disputed areas of the law of damages. Applying the traditional economic benefits principle does not permit classification of these detriments as losses, as they do not appear on the economic balance sheet. Furthermore, the debate is impeded by difficulties in drawing the line between the two types of loss.

(a)  Line Drawing

44.34  It is sometimes difficult to draw the line between what is a pecuniary loss and what is a non-pecuniary loss. The most generally accepted as non-pecuniary losses are pain and suffering or loss of amenities but also the violation of personality rights, discrimination, or sexual harassment.79 The often tortuous nature of the acts leading to such detriments has prompted a number of legal systems to term these detriments as ‘moral damages’.80 In most situations where such detriments are suffered it will be also possible for the aggrieved party to bring a claim in tort. Whether recovery of such losses is also available when bringing a claim based solely on the breach of a sales contract is disputed amongst legal systems.81

44.35  While the losses described in the previous paragraph are clearly non-pecuniary, a party’s loss of reputation or the buyer’s loss of use are less easily categorized. With regard to loss of reputation (also referred to as loss of goodwill)82 it should first be noted that this is a different concept to defamation and similar attacks on a person’s or business’s reputation. As goodwill often appears as a line item on a balance sheet, particularly when a business is being sold it is possible to consider a loss in goodwill to be a pecuniary loss. On the other hand, like non-pecuniary losses it is not easily susceptible to quantification.

44.36  The buyer’s loss of use is similarly troublesome in the law of damages.83 The typical scenario is a buyer who is deprived of the possibility to actually utilize the goods due to the non-delivery of the seller. Questions arise as to whether there is an economic value in the mere ability to use the goods. There may certainly be economic consequences, such as the rental costs associated with substitute goods.84

(b)  Moral Damages in Contract

44.37  The debate among legal systems has produced essentially two general approaches. There are those legal systems which permit without significant exception the recovery of non-pecuniary loss. Under the heading of ‘préjudice moral ’, this approach is taken by France85 and legal systems following French tradition in this regard such as the Middle Eastern and Arab countries86 as well as a number of Ibero-American systems.87 Occasionally the recoverability of non-pecuniary loss depends on whether it can be reasonably calculated.88

44.38  In common law jurisdictions it used to be thought for some time that moral damages were not available in breach of contract actions but that only financial loss was recoverable. (p. 587) Nowadays this is not the case.89 In particular where a breach of contract causes pain and suffering and loss of amenities, physical inconvenience and discomfort or mental distress compensation may be sought also in breach of contract actions.90 For English law the groundbreaking decision was rendered in the famous case of Jarvis v Swan Tours.91

44.39  Other legal systems take a significantly more restrictive approach. In these legal systems recovery of non-pecuniary loss is only available where it is so established by statute.92 At the international level the uniform projects explicitly allow for the recovery of non-pecuniary loss.93 With regard to the CISG the situation is less clear as some detriments which may be classified as non-pecuniary are included but a range of other non-pecuniary losses are explicitly excluded.94

44.40  At the international level Article 5 CISG explicitly excludes the application of the Convention to cases of personal injury and death. Consequently, moral losses associated with such injuries are not recoverable under the CISG but left to the applicable domestic law. This effectively excises the major heads of moral loss from the sphere of application of the CISG.95

44.41  In the measurement of moral damages some legal systems have particular regard to the degree of fault on the part of the breaching party.96 This naturally applies primarily to fault-based liability systems.

B.  Causation

I.  General

44.42  The general idea of the causation requirement is straightforward. There must be a causal link between the loss suffered by the aggrieved party and the co-contractant’s breach. The manner in which the causation doctrine is used, however, differs among legal systems.

II.  Causation Doctrine

44.43  Although a seemingly straightforward concept, a comparative description and explanation of the causation doctrine is surprisingly difficult; indeed explanations often differ within a single jurisdiction.97 While at one level the debate is somewhat simply terminological,98 in other respects the differences are of dogma. All legal systems employ methods of limiting recovery for loss. In some legal systems, the concept of causality is of primary importance for this purpose. For example, in Germanic legal systems and some systems influenced by these systems such as Greece and Portugal, causality is—apart from the concept of fault—the decisive instrument in limiting recovery.

44.44  In contrast, in other legal systems, such as France and legal systems influenced by French law in this regard, in particular the Ibero-American legal systems99 and the Middle Eastern and Arab systems, the concept of foreseeability is used as the main recovery-limiting instrument.(p. 588) The same occurs in common law jurisdictions where the concept of foreseeability is interlinked with the notion of remoteness.100 A somewhat hybrid position is taken in Finland and Sweden where the concepts of causality as a limiting tool to recovery and foreseeability are merged to some extent under the heading of ‘adequate causality’.101

44.45  The observation that for the purposes of limiting the recoverability of losses Germanic systems place exceptionally high emphasis on the concept of causation while other systems use different concepts for that purpose is, however, not to say that the factual considerations and arguments are materially different in their substance. What is different is the reference point for these arguments. The consequence of this difference is that Germanic systems need to devote more attention to the development of the concept of causation than other legal systems which have typically not faced a similar discussion.

1.  Natural Causality

44.46  The starting point taken by all legal systems with regard to the necessity for a causal link between the breach and the loss claimed is what may be described as natural causality. This is independent of the function the concept of causation generally assumes within a legal system’s law of damages. Consequently in the scheme of cause and effect the loss must be attributable to the action or omission of the party from which recovery is sought. In Latin this is described as conditio sine qua non. This means that any action that cannot be eliminated from the equation without consequentially eliminating the loss is considered a cause of that loss. Each of these causes is treated as equally relevant for the matter of causation.102 The same proposition is essentially found in the common law under the name of the ‘but-for test’, which asks whether ‘but for’ the action or omission of the party against whom loss is claimed, would the loss have still occurred.

2.  Restrictions on Natural Causality

44.47  This concept of natural causality, which is grounded on strictly scientific considerations, may of course lead to extremes.103 In an example used by Treitel a causal link between a breach and a loss could be established where a tailor is late in delivering to its customer the clothes ordered. As a result of the late delivery the customer has to take a later train and is injured when that later train crashes.104 Under the above-described test of natural causality105 there is no way around the finding that the delay of the tailor was causal for the harm sustained. It is therefore necessary to further narrow down the events that would be regarded as causal under the natural causality test. These restrictions are ultimately based on policy considerations.

(a)  Adequacy/Common Sense Approach

44.48  The first and seemingly most prevalent approach to restrict natural causality is to consider only actions that as a matter of day-to-day life experience in the ordinary course of things can reasonably be expected to cause losses such as the one sustained.106 In many civil law jurisdictions, Germanic systems in particular, this has come to be known as a test of ‘adequate causality’. Expressed in this way it appears closely related to concepts such as foreseeability and remoteness in other legal systems, and has been said to be indistinguishable from the foreseeability test of English descent.107 Similarly, it has been said to (p. 589) assume the same function of excluding remote losses from recovery as the foreseeability rule in Article 74, sentence 2 CISG.108

44.49  While from a purposive perspective (ie limiting recoverable losses) the analogy with the foreseeability test in common law may be correct, the structural counterpart in the common law is referred to as the ‘Court’s common sense’ test.109 In the common law, a court is required to apply common sense when determining whether the breach caused the loss itself, or instead only caused the circumstances which allowed the loss to happen.110 The breach needs to be the ‘effective’ or ‘dominant’ cause111 though it need not be the sole cause.

(b)  Scope of Protection of the Breached Duty

44.50  A second approach to the restriction of causation, increasingly favoured in Germany,112 is to determine the type of loss which the breached duty sought to prevent. Losses outside this scope of protection are then not considered to have been caused by the breach of the respective duty. The underlying idea is that every legal duty, be it in statute, contract, or developed otherwise, protects certain interests. Consequently, a breach of that duty causes losses only in regard to the interests protected. Hence, in determining whether there is a causal link between a breach and a loss sustained, adjudicators must determine whether the interest harmed was protected by the duty breached. If so, that loss is recoverable; if not, there is no causal link. This may be shown by Molinaeus’ old Roman law example of a seller delivering a defective beer barrel.113 Whereas its duty under the contract certainly protects the buyer against losing beer it does not relate to more expensive wine that unexpectedly has been filled into the barrel.

III.  Intervening Events

44.51  Where between the breach of contract and the suffering of loss by the aggrieved party another event occurs (novus actus interveniens), questions arise as to whether this intervening event breaks the chain of causation. In essence, three scenarios can be distinguished. The first involves actions by a third party. The second concerns acts or omissions by the aggrieved party itself. Finally, it is clear that events for which neither the contract breacher nor the aggrieved party are responsible may intervene. While all of these situations may be associated with causation in legal systems which assume that the chain of causation once established can nevertheless be broken, they may also be associated with questions of fault and foreseeability,114 exemption,115 or substantiation of loss.116

1.  Third Party Intervention

44.52  In some situations a third party will intervene between the breach of contract and the suffering of loss by the aggrieved party. For example,117 a seller may deliver a door with a defective lock. Subsequently, burglars break through the door and steal the buyer’s possessions. (p. 590) Undoubtedly, there is a logical causal link between the defective lock and the loss. Legal systems must therefore decide whether the acts of the third party break the chain of causation.

44.53  Broadly speaking, those legal systems which are prepared to accept the general idea that an established chain of causation can be broken, are restrictive in the application of that idea. The intervening event must be of such nature so as to render the initial cause—the breach of contract—negligible. The most obvious scenario is the voluntary interference of a third party with knowledge of the relevant circumstances.118 However, even in these cases the chain of causation may not be found to be broken where the duty breached was intended to prevent that interference. Thus, in the example above, had the breach of contract been a failure to provide a door for the particular purpose of securing the buyer’s possessions, the seller could not rely on the voluntary interference by the burglars.119

2.  Act or Omission by the Aggrieved Party

44.54  A further question in the context of causation is whether an act or omission by the aggrieved party that has at least contributed to the loss sustained affects only the extent of recovery120 or can eliminate the causal link between the breach of contract and the loss.

44.55  The notion that an act by the aggrieved party may in fact disrupt the chain of causality is discussed extensively in Germanic legal systems. The debate, however, primarily pertains to tort law and little consideration is paid to losses claimed on a contractual basis.121 Generally speaking, it appears that in these legal systems a disruption of the chain of causality by an act or omission of the aggrieved party is conceivable.122 However, it appears that such a disruption is only assumed in very rare cases and it seems that all cases in which this was assumed to date concerned tort law.123 In typical instances of the aggrieved party contributing to the breach itself or the total loss sustained—for example to failing to mitigate—this is dealt with in the context of reduction of the recoverable loss.

44.56  The situation is similar in common law jurisdictions; however in some respects it may be considered more stark as it is typically an all-or-nothing question and not one of reducing the quantum of damages.124 As noted above, the common law only requires the contract breacher’s breach to be the ‘effective’ or ‘dominant’ cause of the loss.125 Thus it is conceivable that the aggrieved party could contribute to the loss without impacting on the causation element. Furthermore, as a general proposition,126 the common law does not apportion liability based on causation in contract matters.127

44.57  When considering whether the contract breacher’s breach caused the loss itself or only the circumstances occasioning the loss,128 the common law will consider whether the intervening act of the aggrieved party was reasonable.129 An unreasonable act will suggest that the breach only caused the circumstances occasioning the loss. For example, Party A had a contract (p. 591) obligation to provide Party B with a ladder in order to do the contractually agreed work. In breach of that obligation Party A failed to provide the ladder. Party B chose to work on a makeshift trestle, subsequently fell, and injured himself. The use of the makeshift trestle by Party B was found to be unreasonable, and thus Party A had only caused the circumstances in which the injury could occur, rather than causing the injury itself.130

44.58  Nevertheless, allegations of contributory negligence do have relevance for breach of contract actions. Even where the acts or omissions of the aggrieved party are not sufficient to interfere with causation, they may give rise to a (partial) exemption131 or—if the contribution of the obligee occurred after the breach—to a reduction of damages for breach of the duty to mitigate.132

C.  Fault and Foreseeability

I.  General

44.59  While the above-discussed principle of full compensation133 is globally accepted, it is likewise globally accepted that this principle can—if strictly followed—lead to extreme and absurd results. Thus, in addition to the general requirement of a causal link between the breach and the loss sustained, all legal systems have developed further mechanisms of limiting liability.

44.60  The two concepts having emerged from Roman law134 and now found in legal systems are fault on the one hand and foreseeability on the other. In common law jurisdictions the term ‘remoteness’ is frequently used when determining the extent of liability of the breaching party. However, as explained below,135 the remoteness test is generally understood to be one of foreseeability. Hence, for present purposes it is justified to operate with the categories of fault and foreseeability only.

44.61  The fact that two instruments of limiting liability have been developed does not necessitate that legal systems should be grouped by their use of these categories. Furthermore, the distinction of common law and civil law jurisdictions is also only of limited use for that matter. From a comparative perspective, the concept of fault can be identified as a typical feature of civil law legal systems, although some traces can also be found in the mixed and Nordic systems. Foreseeability, as discussed below,136 as a concept clearly separated from the concept of fault137 originates in French law and is thus employed by a number of French-influenced civil law systems in addition to the concept of fault.138 However, it has also come to be the primary instrument of limiting liability in common law systems which do not operate with the concept of fault. At the international level the concept of foreseeability is favoured over the concept of fault in both uniform law and projects. Traces of the concept of fault only exist in some of the uniform projects where an intentional and/or reckless breach of contract is presumed to be a fundamental one.139 Modern civil law jurisdictions which were influenced by the international level in many (p. 592) instances have abandoned the concept of fault and content themselves with the use of foreseeability.140 Thus, broadly speaking, the concept of fault appears to be in remission.141

44.62  A somewhat hybrid approach is taken in Dutch law, where ‘reparation can only be claimed for damage’ that ‘can be imputed to the debtor’.142 Imputability is understood to encompass the concepts of foreseeability and fault and regard must also be had to the nature of the damage, the nature of liability, and the seriousness of the unlawfulness.143

II.  Fault

1.  General

44.63  Roman law operated with the concept of fault as a prerequisite for liability for damages. One reason might have been that at the time private law and criminal law were not as strictly separated as they are today. Depending on the nature of the claim, of course, different degrees of fault were required.144 The basic concept of fault was subsequently adopted by all legal systems influenced by Roman law. This primarily applies to civil law systems but also South Africa and Scotland amongst the mixed jurisdictions.

44.64  A differentiated approach is taken by some of the Nordic systems. These generally follow the concept of foreseeability. However, specific rules apply with regard to delay. In Denmark the Sale of Goods Act distinguishes sales of specific goods and sales of generic goods.145 In the first scenario the obligor is not liable, if the delay was not due to the fault of the obligor. This is different with regard to the sale of generic goods, where the obligor is only exempted by impediments beyond its control and no fault is necessary for the delay.

2.  Notion of Fault

44.65  The notion of fault is laden with centuries-long philosophical and, more recently, natural-sciences debate on the concept of free will and the influence of surrounding circumstances and personal life experience on an individual’s behaviour. For private law this debate is less pressing than it is for criminal law and hence this matter shall not be embarked upon here. For present purposes, it is sufficient to deal with the different degrees of fault that traditionally are distinguished and their interplay with the remedy of damages.

44.66  Roman law distinguished negligence (culpa) and intentional acts (dolus);146 a basic distinction that is made to this day in all systems operating with the concept of fault. With regard to the notion of culpa in particular, it becomes clear that the concepts of fault and foreseeability were not always perceived as clear-cut individual categories as they are today.147 Under Roman law negligence (culpa) was assumed where the party from whom recovery was sought had not foreseen what a reasonable person would have foreseen.148

(a)  General

44.67  In both criminal law and private law the basic distinction of negligence and intent is only the starting point for further categorizations. However, in private law the notion of intent has not received nearly as much attention as it has in criminal law. In private law the (p. 593) debate mainly focuses on the notion of negligence. In fault-based liability systems different degrees of negligence may have different effects on a claim for damages and the possibility of limiting or excluding liability while intent—independent of the respective form it may take—always has the same legal consequences.