THE AUTHORS:
Athena McDonald, Associate at Clyde & Co
Isabel van der Hoorn, Dispute Resolution Trainee Solicitor at Clyde &Co
Clyde & Co’s Young Arbitration Group provides a unique insight into international arbitration issues through the lens of young international arbitration practitioners working across different jurisdictions. In this series with Daily Jus, Clyde & Co explores the evolving landscape of damages in arbitration, analyzing recent developments, legislative changes, and their impact on dispute resolution worldwide.
In English seated arbitrations, the availability and allocation of damages generally follows the law applicable to the substance of the dispute (i.e. the governing or applicable law). In practice, an arbitral tribunal typically determines the applicable law by reference to the proper law of the contract, as chosen by the parties to govern the contract in dispute.
Whilst the availability of damages in the first instance is often a substantive law issue, aspects of the quantification of damages are considered to be procedural matters which follow the law of the forum of dispute (see, Harding v Wealands [2006] UKHL 32).
This article briefly sets out how key heads of damages are determined where English law is the elected substantive law.
Compensatory Damages: Heads of Damage and Quantification
Where English law is the elected substantive law in a contractual dispute, principles on compensatory damages will apply to remedy the non-performance of a contract.
The purpose of compensatory damages is to compensate the non-breaching party by putting it into the position it would have been in had the contract not been breached (Robinson v Harman (1848) 1 Ex 850). English law prescribes strict liability for breach of contract, meaning that compensatory damages are available regardless of the circumstances of the breach, and notably, from the point at which the breaching party should have performed the contract.
Compensatory damages are formulated by reference to the non-breaching party’s reliance and expectation with respect to the performance of the contract as follows:
- Reliance damages enable the non-breaching party to recover costs incurred in relying on the promises made by the breaching party. These damages seek to operate on the basis that the contract had never been concluded.
- Expectation damages seek to compensate the non-breaching party for the value of the benefit it would have received had performance been rendered.
- The total net loss is then calculated by reference to the quantification of the loss caused by the contract having been breached, minus the quantification of the benefits caused by the breach.
- Legal principles of causation, mitigation, and remoteness of damage operate to limit the recoverability of losses in their entirety and, by extension, expectation damages.
The awarding of expectation damages and reliance damages are not mutually exclusive. This prevents a situation whereby a party recovers compensation resulting from the same loss twice.
Non-compensatory Damages
By contrast to compensatory damages awards, non-compensatory damages awards are generally unavailable with respect to breach of contract claims under English law. That being said, these types of damages awards may be awarded in certain scenarios, as set out below.
- Contractual penalties
The intention of contractual penalties is to deter parties from breaching a contract by imposing punitive consequences on the wrongdoer. These types of penalties enable the non-breaching party to recover a pre-determined amount of compensation without having to prove loss. However, the advanced quantification of damages is generally exorbitant and does not accurately reflect the loss caused by the breach. The Supreme Court decided in Cavendish v Makdessi, [2015] UKSC 67, that a clause is held to be a penalty if it imposes a detriment that is out of all proportion to any legitimate interest that an innocent party would have had in enforcing the wrongdoer’s performance of the obligations under the contract. As a result, contractual penalties are unfavourable to the breaching party.
- Punitive damages
With respect to tort claims, punitive damages are available in specific scenarios for the purpose of punishing a breaching party for its wrongdoing. These types of damages remain unavailable for breach of contract claims (See Abbar v SEDCO [2013] EWHC 1414 (Ch)).
- Liquidated damages
Unlike contractual penalties, liquidated damages represent a pre-agreed estimate of actual loss that is payable by the breaching party to the non-breaching party. Therefore, in the event that a contract is breached, these types of damages offer commercial certainty and minimise the risk of litigation, which can be useful in respect of construction and commercial contracts. The distinction between liquidated damages and contractual penalties is paramount and yet often leads to confusion in interpretation. To the extent that liquidated damages clauses are considered to be penalty clauses, they will be unenforceable in English law.
- Restitutionary damages
Restitutionary damages are quantified by reference to the benefit gained by the breaching party as a result of the breach, rather than by the loss suffered by the non-breaching party (See Attorney General v Blake [2000] UKHL 45). An innocent party is therefore able to recover damages even where it has not suffered any loss. Under English law, restitutionary damages are uncommon with respect to contractual disputes and only awarded in limited circumstances.
- Nominal damages
Nominal damages represent compensation awarded to a debtor, where a legal right has been violated, but no recoverable loss has been suffered. As a result, they are often available in intellectual property disputes.
Interest
Under English law, the right to interest on damages awards can arise upon agreement between the parties, or as a substantive issue, pursuant to the applicable law of the contract. That being said, a tribunal will need to consider a number of procedural factors in awarding interest, which are governed by the seat of the arbitration. These include:
- The rate of interest;
- The date from which interest is to be awarded; and
- The amount of interest.
Generally, arbitral tribunals seated in England have wide discretion to award interest on damages awards, unless agreed otherwise by the parties. This is reflected in Article 26.4 of the LCIA (London Court of International Arbitration) Arbitration Rules 2020, which provides that: “Unless the parties have agreed otherwise, the Arbitral Tribunal may order that simple or compound interest shall be paid by any party on any sum awarded at such rates as the Arbitral Tribunal decides to be appropriate (without being bound by rates of interest practised by any state court or other legal authority), in respect of any period which the Arbitral Tribunal decides to be appropriate ending not later than the date upon which the award is compiled with.”
The available interest includes both pre-award interest (which compensates the non-breaching party from the date of loss until the date of the award) and post-award interest (which accrues from the date of the damages award until the date of payment).
There are no specific rules that govern a tribunal’s approach to the awarding of interest. This was confirmed in Hays v Bloomfield Investments, [2022] EWHC 1648 (Comm), where the award creditor relied on the fact that the LCIA Rules provided the tribunal with considerable discretion on the question of interest, with the only caveat that the discretion must be exercised in a rational way. It is worth noting that, in this context, an award of interest was made at 65% per annum (compounded quarterly), which the court claimed was exorbitant.
Non-pecuniary Loss
Under English law, damages for non-pecuniary loss or moral damages (e.g. reputational harm which may be caused in the context of the performance of contractual obligations), are generally considered compensatory in nature yet distinct from monetary damages. This is because the need to compensate the injured party arises from the widely recognised obligation of full reparation of an injury. The Final Award in Zhongshan Fucheng v. Nigeria, 26 March 2021, confirmed that moral damages can and are awarded by tribunals. Paragraph 133 states that: “Zhongshan contended that it was entitled to a sum which was the aggregate of (i) compensation for the loss of its rights under the 2010 Framework Agreement and the 2013 JVA and (ii) what is often called moral compensation or moral damages.” These are further explained at paragraph 136 as damages awarded for “injury inflicted resulting in mental suffering, injury to his feelings, humiliations, shame, degradation … and such compensation should be commensurate to his injury“. Such damages can be applicable to investor-state arbitration awards, for example.
Whilst the general common law rule is that non-pecuniary damages are not available for breach of commercial contracts, damages may be awarded where the purpose of the contract is such that its breach will produce emotional harm.
Conclusion
Given that English law is often the applicable law in commercial contracts, it is critical for commercial parties to be familiar with the principles governing the assessment of damages under English law. However, arbitrators tend to have wide discretion in their application of the principles set out above when awarding damages. It is common for tribunals to adopt conflicting approaches, indicating that there is scope for interpretation and further development in this area of law.
ABOUT THE AUTHORS
Athena McDonald is an associate in Clyde & Co’s London office. She specialises in complex commercial litigation and international arbitration, with experience in technology, energy and financial disputes.
Isabel van der Hoorn is a dispute resolution trainee solicitor in Clyde &Co’s London office.
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
