Reflections on “Damages” in International Arbitration Awards

 

Damages in commercial arbitration are the legal remedies a claimant can seek for a breach of contract. Damages in this context can be categorized into two broad categories – compensatory damages and punitive damages. Compensatory damages are awarded to compensate the injured claimant for losses suffered, while punitive damages are awarded to punish the breaching party and to deter them from breaching the contract again. Both types of damages are available within the framework of commercial arbitration and a clear understanding of the purpose of each form of damage, as well as the various potential options for each type of damage, are essential for practitioners and parties involved in the negotiation process.

Compensatory Damages

Compensatory damages are the most common type of damages awarded in commercial arbitration. The purpose of compensatory damages is to Award a claimant with a sum of money that is of equivalent value to their losses or, in certain cases, to award the claimant with the performance of the contractual obligation when a breach has been committed. Compensatory damages serve as a substitute for the performance of the contract that was not performed by the breaching party.

When awarding compensatory damages, arbitrators must consider several factors such as:

1. Any pecuniary loss suffered – this includes any expenses incurred as a result of the breach, as well as any lost profits and any associated economic losses;

2. Any non-pecuniary loss suffered – any loss that is inherently difficult to quantify in monetary terms, such as damage to reputation or a lost opportunity to benefit from the contract;

3. Any benefit the breaching party has obtained – this serves to neutralize any financial gain that the breaching party has achieved as a result of the breach of contract; and

4. Contributory negligence – where a claimant has been partly at fault for the breach of contract, the award may be reduced, depending on the circumstances of the case.

Punitive Damages

Punitive damages are awarded to punish the breaching party for breaching the contract and to set an example to other parties who may be in breach of contract in similar contexts. Punitive damages serve to deter the breaching party and others from breaching again. Punitive damages are awarded in exceptional circumstances, and the amount of damages is usually not limited. There is no limit on the type of punitive damages that can be awarded in commercial arbitration, although damages must be considered to be in proportion to the seriousness of the breach.

In determining the amount of punitive damages awarded, arbitrators are encouraged to consider the extent to which the breach has caused harm to the claimant, the extent to which the breach has impacted the claimant’s business and reputation, the degree of culpability of the breaching party and any other relevant factors. The amount of punitive damages awarded must be considered to be appropriate for the wrongful conduct and should not be excessive.

Therefore, damages in commercial arbitration are remedies available to a claimant when a breach of contract has occurred. Compensatory damages are awarded to compensate the claimant for their losses while punitive damages are awarded to punish the breaching party and to set a cautionary example to other parties. There are various factors that must be considered when awarding damages, and it is important that the amount of damages awarded is appropriate and proportionate to the circumstances of the case.

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