- Arbitral Award
- ICC International Court of Arbitration 9078
LONG-TERM CONTRACTS - LICENSING AGREEMENT - BETWEEN A SWEDISH LICENSOR AND A GERMAN LICENSEE - LICENSEE UNDERTAKES TO NO LONGER MANUFACTURE AND SELL LICENSED THE GOODS BUT THEN FAILS TO FULFILL ITS OBLIGATION - LICENSOR CLAIMS DAMAGES FOR LOST OPPORTUNITIES
APPLICABLE LAW (GERMAN LAW) UNCLEAR AS TO WHETHER DAMAGES FOR LOST OPPORTUNITIES CAN BE AWARDED - REFERENCE TO OTHER DOMESTIC LAWS AND TO THE UNIDROIT PRINCIPLES TO SUPPORT DECISION TO AWARD SUCH DAMAGES
Claimant, a Swedish company, had concluded an agreement with Defendant, a German company, according to which the latter undertook to re-transfer to Claimant all know-how relating to the licensed equipment and to no longer manufacture and sell the equipment to third parties. According to Claimant Defendant violated their agreement by continuing to sell the equipment to third parties, thereby depriving Claimant of the chance to sell itself the equipment to potential customers. For this reason Claimant requested damages for lost opportunities.
The Arbitral Tribunal decided in favour of Claimant. However since it could not find a clear answer as to whether damages for a lost opportunity were payable under the applicable German law, it referred to French and Swiss law and to the UNIDROIT Principles, all three of which recognised the principle of compensation for harm suffered as a result of a lost opportunity and granted the adjudicating body a certain degree of discretion in the assessment of the probability of the occurrence of the lost opportunity and of the amount of harm suffered.
8.4. Principles of compensation of damages under German law
8.4.1. It results from the above that the parties have given a few indications concerning certain aspects of damage compensation law.
- claims damages resulting from positive contract violation;
- claims lost profits;
- defines lost profit as the difference between the contractual price and direct production costs ... ;
- contests that it must provide details about profit calculation because it claims a hypothetical damage;
- defines burden of proof...;
- alleges that it pays 10% interests on a loan of 13.4 million DEM;
- establishes in reasonable details the calculation of lost profits...
- points out that Claimant may only assert claims which arise from the violation of the duty to refrain from competing;
- criticises that Claimant bases its claims on “value of offers submitted” and not on the “value of offers awarded”;
- states that Claimant offers included a “30% monopoly profit”;
- alleges in general that value of offers submitted exceeded the value of offers awarded by 50%, and indicates in detail that in one case, the submission price was of DEM 4.96 million and the awarded price was of DEM 4.2 million, which corresponds to a difference of approx. 20%;
- brings forward certain profit calculation…;
- admits that [licensee] continued to use the Know How it had obtained from Defendant;
- criticised that Claimant has not proven that in the 19 claimed cases the “special features” of the licensed technology were used.
8.4.2 It also results from the above that the parties have not made any presentation of the principles governing the German law of damage compensation. The Arbitral Award had therefore to rely on its own research for establishing such principles.
8.5. The principal rules of German law relating to compensation of damages
The Arbitral Tribunal concludes that the basic rules of German law relating to compensation for damages resulting from a breach of contract may be recapitulated, in a very summarised manner, as follows:
8.5.1. The conditions for an obligation to compensate damages are
a) that breach of contractual obligations by the party, from which damages has occurred with reference to the party claiming the damages;
b) that a damage has actually occurred;
c) that the breach of contract was the adequate cause, according to the concept of the so-called “Äquivalenztheorie”, for the damage;
d) that the party in breach of contract is responsible or answerable for the breach of its obligations.
8.5.2. The Claimant bears the burden to allege in a substantiated way and to prove all the above four elements. Only under certain circumstances does one admit that the burden of proof as to the absence of the causal nexus and/or the responsibility (Schuld, Vertretenmüssen) is shifted to the Defendant.
The Claimant carries the burden to allege in a specified way and to prove not only the fact that a damage has occurred, but also the actual amount of the damage.
8.5.3. lf the conditions for an obligation of compensation are fulfilled, the party in breach of contract has to compensate to the claiming party the damage which was the consequence of the breach, in the sense that the claiming party is entitled to have restored its economical situation as if the breach of the contractual obligation had not occurred. The damage to be compensated is the so-called positive interest or performance interest (positives Interesse bzw. Erfüllungsinteresse) which includes lost profits (entgangenen Gewinn).
The damage to be compensated is calculated as the difference between the hypothetical financial situation of the damaged party as it would have been had the breach of contract not occurred, and the financial situation of the Claimant party as it actually resulted (Differenztheorie). In this calculation which is necessarily of a hypothetical nature, the lost gross income must be determined, and from that gross income all the costs connected or necessary for generating such gross income must be deducted, irrespectively of the nature of such costs, whether direct costs (for merchandise and labour) or indirect costs (fixed costs, such as administration, direct depreciation or cost of use of machinery and equipment). The principle of calculation of the damage, which Claimant sustains to be applicable according to a precedent cited by it, constitutes, in the opinion of the Arbitral Tribunal, a deviation from the generally applicable principle and is to be qualified as an exception. Such exceptions are to be applied. according to the understanding of the Arbitral Thbunal, only in such situations in which it would otherwise be virtually impossible to determine the damage or in situations where a specific manner of simplified calculation has been established in a business sector, such as for the trade in commodities or securities or in connection with the supply of standard goods with a price which can be determined based on a given market. Such exceptional circumstance is not given in this case and Claimant, therefore, was to submit a specific calculation of its damage in each single case.
8.5.4. Claimant bases its damage claim on the assumption that the sub-licensees of Claimant would have been able to enter into contracts for the supply of the relevant equipment and machinery to the named purchasers if Defendant had not offered and supplied the corresponding machinery and equipment to such potential customer. The basis of the claim is therefore merely an assumption of a probability of lost profits. An assumption respectively a probability of the conclusion of a certain business transaction, such as the supply of machinery and equipment to a given potential customer, by its very nature cannot be proven in the strict sense of legal evidence. In fact, in most cases it would be impossible to prove that the potential customer would have concluded a supply contract with the claiming party, and, further, it would be impossible in most cases to prove at what conditions, respectively prices, such contract might have been concluded. The sole fact that the claiming party has submitted an offer is, by itself, obviously no evidence for the fact that it would have been able to conclude a final contract and no evidence for the conditions at which the contract could have been concluded. There might indeed have been other potential suppliers and the Claimant might have had to concede lower prices for being actually awarded the contract.
8.5.5. The damage which Claimant claims is actually a damage for a lost opportunity, respectively the value of the missed chance or opportunity of concluding a deal and realising a profit on such deal. Claimant has not submitted materials which would support the existence of clear rules under German law as to how such cases should be dealt with, nor has the Arbitral Tribunal become aware of such rules clearly established by learned authors or precedents. It must be admitted though that damage resulting from lost opportunities is real damage and the possibility to claim the compensation of such damage caused by a breach of contract must be upheld. The principle is recognised in countries like France and Switzerland as well as by proposed Unidroit rules. The Arbitral Tribunal has not become aware of any opinions under German law to the effect that the principles should not apply in Germany.
8.5.6. Since in such circumstances neither the actual occurrence of the damage nor the extent of the potential damage can be strictly proven, the damages to be awarded must be assessed by a tribunal based on the degree of probability for the realisation of the opportunity and based on a likelihood of the profit margin which might have been obtainable by Claimant on the lost transaction.
The fact that the occurence of the loss and the magnitude of the loss cannot be proven in the strict sense of legal evidence does not realease, however, the Claimant from making sufficiently specified allegations and offering sufficiently pertinent evidence for (i) the loss of the business, (ii) the causal nexus between the breach of the contractual obligation by Defendant and the loss of the transaction, and (iii) for the next profit which the Claimant could have realised on the lost transaction. Altough a strict evidence is not possible, sufficient proof has to be required from Claimant to the extent to demonstrate at least a very high probability for the three named elements.
8.5.7. Since the award of damages in such circumstances is ultimately based on the degree of probability of certain assumptions, the Arbitral Tribunal has to assess the degree of probability of the loss of opportunity and of the lost profit. This necessarily implies a certain range of discretion for the valuation to be made by the Arbitral Tribunal when deciding on the damages to be awarded.}}
Excerpts in ICC International Court of Arbitration Bulletin, 2005 Special Supplement, pp. 73-76.}}