Recovering Lost Profits in International Disputes

By Gotanda, John Y. | Georgetown Journal of International Law, Fall 2004 | Go to article overview

Recovering Lost Profits in International Disputes


Gotanda, John Y., Georgetown Journal of International Law


I. INTRODUCTION

Under the laws of many countries, the purpose of damages for breach of contract is to place the injured party in the position it would have enjoyed had the contract been performed. (1) That is, the injured party should receive the "benefit of the bargain." In theory, the injured party should be able to recover money for actual loss incurred as a result of the breach and any net gains prevented, including lost profits resulting from the respondent's actions. (2) Yet, in transnational contract disputes, awards of lost profits do not always achieve the goal of full compensation. As one commentator noted, claimants often receive only a fraction of what they seek. (3)

Awards of lost profits often seem inconsistent or arbitrary. For example, some tribunals have refused to award lost profits if the injured business was not a going concern at the time of the breach on the ground that the calculation of such profits could not be based on historical data and, therefore, would be wholly speculative. (4) By contrast, other tribunals have awarded lost profits in such circumstances, reasoning that an award of lost profits was needed to make the claimant whole. (5) And sometimes, in fixing the amount of lost profits, tribunals appear to be simply "baby splitting," awarding lost profits at the mid-point between the claimant's and the respondent's respective valuations. (6)

Today, claims for lost profits raise arguably the most complicated issues for a tribunal deciding a transnational contracting dispute. The tribunal must first decide, under the sometimes-vague substantive law, whether a claimant is entitled to lost profits. If the answer is yes, then the tribunal fixes the amount of lost profits to be awarded. The process has proved troublesome for tribunals. It first requires the tribunal to select, from a number of methods, the method for calculating lost profits. (7) Then the tribunal must examine the data needed to calculate lost profits, such as the party's past profitability, as well as evidence and materials showing that, but for the breach, future revenues would have been earned. (8)

The tribunal must also factor in many uncertainties and work with complex calculations, where small changes in any one of the many variables can produce large swings in the amount of the award. (9) This process led one tribunal to comment, "[s]o far as the amount of ... compensation is concerned, it cannot be established exactly." (10) Another added: "Lucrum cessans [lost profits] has always been an inexact science.... '[S]uch a computation made in advance on the basis of purely theoretical data cannot hope to be absolutely accurate but only comparatively likely'." (11)

This Article examines the practice of awarding future lost profit damages in international commercial disputes. Part II provides an overview of damages for breach of contract. Part III reviews the circumstances under which lost profits may be awarded: (1) in common law countries; (2) in civil law countries; (3) under the United Nations Convention on the International Sale of Goods (CISG); and (4) under the International Institute for the Unification of Private Law (UNIDROIT) Principles of International and Commercial Contracts (UNIDROIT Principles). It concludes that the laws of all the countries studied, as well as the CISG and the UNIDROIT Principles, allow for the recovery of future lost profits in breach of contract cases, but the requirements that a claimant must meet in order to receive such profits vary from country to country. Part IV examines tribunal awards of lost profits. It finds a general consensus among tribunals that where a wrongful breach of contract has occurred, the injured party, in theory, is entitled to recover any net gain that was not realized because of the respondent's failure to perform its obligations. However, there are areas of potential concern. First, there are no universal rules to guide tribunals in calculating the amount of lost profits owed, leading to seemingly inconsistent awards. …

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