Data

Date:: 00-12-2000
Country:: Arbitral Award
Number:: 10346
Court:: ICC International Court of Arbitration, Barranquilla (Colombia) 10346
Parties:: Unknown

Keywords

SALES CONTRACT - BETWEEN TWO COLOMBIAN COMPANIES - GOVERNED BY COLOMBIAN LAW – REFERENCE TO THE UNIDROIT PRINCIPLES TO DEMONSTRATE THAT THE SOLUTION FOUND UNDER DOMESTIC LAW CORRESPONDS TO MODERN INTERNATIONAL COMMERCIAL LAW.

DUTY TO CO-OPERATE (ARTICLE 871 OF THE COMMERCIAL CODE OF COLOMBIA; ARTICLE 5.3 [ART. 5.1.3 OF THE 2004 EDITION] OF THE UNIDROIT PRINCIPLES.

DUTY TO ACT IN GOOD FAITH (ARTICLE 1.7 OF THE UNIDROIT PRINCIPLES).

DAMAGES – COMPENSATION FOR LOSS OF CHANCE (ARTICLE 7.4.3 OF THE UNIDROIT PRINCIPLES).

DAMAGES – DUTY TO MITIGATE LOSSES (ARTICLE 7.4.8 OF THE UNIDROIT PRINCIPLES).

DAMAGES – COMPENSATION LIMITED TO FORESEEABLE LOSSES (ARTICLE 7.4.4 OF THE UNIDROIT PRINCIPLES).

Abstract

Claimant, a Colombian company, and Defendant, another Colombian company, entered into a contract for the sale of electricity by the former to the latter. The agreement was never performed and Claimant sued Defendant for breach of contract and damages. Defendant objected that the contract was null and void for lack of registration in the Public Registry.

The contract contained a choice of law clause in favour of Colombian law. The Arbitral Tribunal decided to apply Colombian law as well as the provisions of the contract and the relevant trade usages in accordance with Article 17.2 of the ICC Rules of Arbitration.

In deciding the merits of the case the Arbitral Tribunal applied the relevant provisions of the Commercial Code of Colombia and in support of the solutions found therein referred repeatedly to the UNIDROIT Principles, both the black letter rules and comments.

Thus, when rejecting Defendant’s argument of the invalidity of the contract and qualifying the registration of the contract as a joint task of both parties that was not accomplished because of Defendant’s failure to perform the duties it had to perform in order to obtain the registration, it referred not only to Article 871 of the Commercial Code of Colombia but also to Article 5.3 [Art. 5.1.3 of the 2004 edition] of the UNIDROIT Principles (black letter rule and comments), both of which laying down the general principle of the duty of co-operation between the parties.

Still with respect to the Defendant’s failure to comply with the contractual provisions setting out the acts it had to perform in order to obtain the registration, the Arbitral Tribunal referred also to Article 1.7 of the UNIDROIT Principles which in its opinion “translates into the fact that the party, specifically the creditor, who has not acted with the diligence, measures and foresight which are required of him, as the case may be, is not only disqualified from alleging a breach of contract and seeking compensation for damages which, in the event that they have been suffered, would be due to his own fault, but, on a preventative and more direct basis, assumes the consequences of his dishonesty or turpitude and the attendant liability towards the other party where the services provided for in the contract cannot be performed and its purpose has become impossible or has been frustrated […]”.

Finally in addressing Claimant’s request for damages as a result of Defendant’s breach of contract, the Arbitral Tribunal referred to the comments on Article 7.4.3 of the UNIDROIT Principles in order to determine to what extent also a contingent loss or loss of a chance may be compensated, to Article 7.4.8 of the UNIDROIT Principles (black letter rule and comments) in order to establish “the principle that the reparation for the loss, whilst it has to compensate the aggrieved party […] cannot impose exaggerated burdens on the liable party”, and to Article 7.4.4 of the UNIDROIT Principles in order to limit the recoverable harm to what the non-performing party could have reasonably foreseen at the time of the conclusion of the contract as being likely to result from its non-performance.

Fulltext

With respect to Respondent’s plea of unenforceability of the contract
C - Issue no.3

This is covered in point V (2) (c) (iii) of the Terms of Reference and requests the Tribunal to examine and decide the following:
To reject the allegation of absolute nullity of the contract, including addendum no. 1 and addendum no. 2, if it finds as proven and therefore accepts one or more of the remaining defense pleas put forward by Respondent, that is to say the pleas of “unenforceability of the contract due to lack of registration with the Sistema de Información Comercial - SIC [Commercial Information System]”; “defense of unperformed contract” and “force majeure”.

2. Having set out the above, the Tribunal states the following with regard to the first plea, that is to say the plea of “unenforceability of the contract due to lack of registration with the Sistema de Información Comercial - SIC”:

(a) Aside from the allegation of breach of contract put forward by [Claimant] due to Respondent’s unwillingness to execute the documentation required for the registration of the contract, which is a matter that, whilst connected with this one, relates to another issue, [Respondent] has denied the allegations contained in the claim, relying on a fact which is fully established in the proceedings, namely that the contract was not registered in the SIC. As a result the task of the Tribunal is to decide whether this circumstance legally exonerates Respondent from the allegations of Claimant regarding Respondent’s performance of its contractual obligations.

(b) The first point to specify is that it is not the contract which is enforceable or unenforceable, but rather the obligations generated by it, in order then to distinguish between the validity of the contract and the enforceability of the services provided for in it. Registration of a contract in the SIC is clearly a prerequisite in order for its ultimate effects —supply of the energy, billing, fixing of the price, payment, etc. — can come into play In other words, until the contract is registered the services provided for in it cannot be enforced. In that sense the final efficacy of the contract is pending and is subject to a condition whose performance, in this case, depended on positive joint action by the parties: the amendment of the corresponding terms of the agreement, in view of the position taken by the director of the SIC.

Such registration is, therefore, an administrative requirement which relates to regulation of the electricity service and is not, we repeat, a formality adsubstantium actus as Defendant alleges. The contract is made upon fulfillment of the substantive requirements for such type of contract and, in the event that it is a state contract, with the formal requirements corresponding to such category of contracts. Registration is not an essential part or prerequisite of validity, nor even a procedure to publicize the contract, but rather, and we repeat, an administrative requirement for its enforcement. This being the case, Respondent is obviously confused between validity of a contract and enforceability of its obligations and between prerequisites for validity and conditional nature of the performance of the services provided for in it.

(c) In addition to the above, that is how the parties must have understood it, particularly Respondent who drafted its text, in view of the fact that the contract only makes reference to the obligation to register it in clause 18 when, in an impersonal way, it provides: “This contract shall be deemed to be perfected by the duly legalized signatures of the parties, but to be enforceable it requires registration with the SIC.”

The above terminology, leaving aside for the moment any reference to clause 16.5 of the contract, implies that the registration with the SIC was a joint task of the parties, in line with article 871 of the Commercial Code (Codigo de Comercio) and, by its nature, with the so-called “duty to collaborate” which is a rule of conduct that is clearly a “responsibility” which is discharged by the performance of the necessary acts, and whose omission, depending on the circumstances, may simply mean that the party concerned cannot attribute to the other party the adverse consequences of the omission and, therefore, claim breaches against that party which are only attributable to the party concerned itself. It may even amount to a breach of the duty of good faith, a source of liability, by preventing the performance of the services and the attaining of the purpose of the contract, that is to say by causing its frustration to the detriment of the other party.

In relation to this duty and responsibility article 5.3 of the “Principles of International Commercial Contracts” prepared by the International Institute for the Unification of Private Law, “Unidroit”, characterizes the “duty of collaboration” as follows: “Each party shall cooperate with the other party when such co-operation may reasonably be expected for the performance of that party’s obligations” and the text comments as follows:
A contract is not merely a meeting point for conflicting interests but must also, to a certain extent, be viewed as a common project in which each party must cooperate. This view is clearly related to the principle of good faith and fair dealing (art. 1.7) which permeates the law of contract, as well as to the obligation to mitigate harm in the event of non-performance (art. 7.4.8).
The duty of co-operation must of course be confined within certain limits (the provision refers to reasonable expectations), so as not to upset the allocation of duties in the performance of the contract. Although the principal concern of the provision is the duty not to hinder the other party’s performance, there may also be circumstances which call for more active cooperation.’

The Council of State (Consejo de Estado) , Chamber for Administrative Disputes, Section 3, in its judgment of 9 March 2000 (case no. 11447 —Aseguradora dei Valle S.A and Seguros Comerciales Bolivar S.A v. Empresas PzThlicas de Pereira) , made the following comments on duty and responsibility:
It must be remembered that in state contracts too the duties imposed on the parties have to be observed. They include the duty to act with sagacity which means with reasonable diligence when assuming commitments and fixing remuneration according to the circumstances of the stipulated services; and the duty of clarity by which a party to a contract must ensure that the other party knows, and must itself know, the details and circumstances which make up the agreement; the duty to provide information in order to give and receive all the elements which lead to greater clarity and purity in the agreements reached. It is therefore not viable to take account either of dishonest conduct, which is prohibited by the nemo auditur rule, or of contrary conduct whereby one party seeks to use audacious behaviour as a way of obtaining unfair advantages, either over the other contracting party, or over third parties which, as happens in public contracts, are taking part as bidders.

(d) It therefore follows from the above that at the root of the relationship between the parties was the unquestionable and clear duty in the first instance by reason of their own interest, but at the same time by reason of a real obligation towards the other party to do everything in their power to adjust the provisions of the contract to the requirements of the resolutions of the CREG [Comisión de Regulacion de Energia y Gas - Energy and Gas Regulation Commission] and the director of the SIC, on pain of frustrating the purpose of the contract, to their own prejudice, and of being in breach of an obligation which is inherent to the operation of the contract and complementary or ancillary to its express contents, in this case a preliminary or preventative obligation, in view of the fact that if this step is not taken, all possibility of the performance of the contract is blocked, giving rise to the obligation to make full compensation. As a result we have to investigate what the parties — or the SIC — did or omitted to do in relation to the registration of the contract in order to determine the inherent consequences, that is to say the failure of the defense plea in the event that Respondent failed to act with the required diligence, or the success of the defense plea in the event that (i) the SIC, arbitrarily, and despite the efforts of Respondent (and of Claimant) refused to register the contract; or (ii) only Respondent acted diligently; or (iii) neither of the parties showed any effective inclination to obtain the registration of the contract.

(f) The above summary means that one can infer that [Claimant] clearly tried to obtain registration of the contract in the SIC and did everything within its power, in particular proposing amendments to the contract which, whilst safeguarding the parties’ positions on the question of “delivery points” for the contracted energy, would have enabled the registration of the contract.

(h) The diligent and reasonable attitude of [Claimant], which is supported by the circumstances described above and which is consistent with the principle of preservation of contracts ut res magis valeat quam pereat is however in contrast to the attitude of [Respondent] which, apart from agreeing to the request of the director of the SIC to take part in a meeting in order to analyse the obstacles to registration and to execute the Addendum No. 2, extending the “start date” of the contract, given that “the purchaser and the vendor require additional time over and above the start date to study the legal aspects of the contract”, took no steps to overcome the difficulties and there is no evidence in the proceedings of any proposal whatsoever other than the very dubious suggestion that it would be flexible in return for the unrestricted acceptance by [Claimant] that “the energy must be supplied at the measuring points at a voltage level of 110 kv, 661w and 13.8 kv" As we saw earlier, this interpretation could easily have been wrong and was contrary to the very conduct of Respondent, as revealed in the seven (7) contracts referred to above which, moreover, were assigned to [X] , albeit on a short-term basis.

It is therefore neither logical nor reasonable, nor in line with the aforementioned provision of article 871 of the Commercial Code (Código de Comercio) or the “duty of collaboration” that none of [Respondent’s] many officers and advisers showed any indination towards an alternative solution, nor put forward any idea, nor prepared any counterproposal to the amendments suggested by [Claimant] in order to obtain the registration of the contract in the SIC and thereby, if its interpretation is finally accepted by the dispute resolution body provided for in the contract, to reap the very important income, savings and benefits for the end-users described by Respondent...

On the contrary, the evidence shows that despite the provisions of its statutes and the “contracting regime”, [Respondent] took no effective steps to overcome the problems with the registration of the contract and simply opted to hide behind the observations of the director of the SIC as a reason for washing its hands of the contract, to the point where it considered itself released from it, by virtue of its desire for it to be null and void as a result of the said deficiencies or non-conformities which it refused to resolve as it could and should have done. Moreover, applying the doctrine of “own acts” [estoppel] this conduct would prevent “one party [Respondent] from relying on its own inconsistency to the detriment of the other [Claimant]”.

With respect to the alleged breach of contract due to the transfer of Respondent’s assets:

[1] This being the case, the Tribunal concludes and will declare in the operative part of the Award that the transfer of assets by Respondent which was contained in notarized deed no. 2633 breached clause 10.3 of the contract as the authorization from [Claimant] contemplated in that provision was not obtained.

[2] The next aspect of the issue which is evaluated here concerns the breach of clause 10.2 of the contract as a result of the execution of notarized deed no. 2633 by Respondent. In this regard the first point which the Tribunal makes is that the part of clause 10.2 which is relevant to this part of the Award is subsection one, which as part of clause 10 of the Contract on “Representations and Warranties; Additional Covenants by the Vendor and the Purchaser”, provides: “Both the vendor and the purchaser shall preserve and maintain in full force and effect their existence and all the state authorizations which are required for the proper performance of their business, including the performance of this contract.” The aspect of the provision transcribed which concerns this issue is limited to the economic capacity of Respondent, as the change to its existence is a matter which pertains to a different issue. This circumstance in turn means that the following analysis is also conducted by reference to a possible breach by Respondent of clause 2 of the contract by reason of the transfer contained in notarized deed no. 2633 which has already been mentioned several times.

(a) It is clear that in the light of the principle of good faith and fair dealing each party to a contract must, without fail,3 adopt or maintain reasonable measures to ensure that they can perform their respective obligations. This implicit duty is even more rigorous where, as in this case, there is a specific provision, that is to say the part of clause 10.2 with which this part of the Award deals, which, moreover, is a rule which was proposed as a mandatory requirement by [Respondent].’

Whether failure to register the contract constituted a breach of contract ‘E - Issue No.6

This corresponds to point V (2) (c) (vi) of the Terms of Reference, that is to say:
Whether Respondent was or was not unwilling to execute the documentation required for the registration of the contract in the SIC, and if it was, whether it breached clauses 16.5 and i6.7 of the contract as a result.

1. The comments made in the analysis of the defense plea of “unenforceability of the contract due to lack of registration with the Sistema de Información Comercial - SIC” mean that one can naturally infer that Respondent will be found to have breached clause 16.5 of the contract which gave contractual force to “the duty of collaboration” when requiring the issue of documents or the performance of acts which were “necessary or desirable to comply with the terms of this contract”, a provision which is complemented by the provision contained in clause 16.7 of the contract in relation to the obligation to replace provisions which prevented the performance of the contract with similar provisions enabling it to be performed, specifically the registration in the SIC. Having analyzed therefore tile contractual provisions in question, tile Tribunal considers the following to be relevant in relation to each one:
(a)The undertaking to collaborate reflected in clause 16.5 in relation to the registration of tile contract in the SIC can be classified as an “obligation to try” (obligación de medio) in contrast to “obligations to produce results” (obligaciones de resultado). However, this classification does not mean that tile first type of obligation, which is an undertaking on the part of the debtor to use all diligence to obtain a result which it cannot guarantee, is transformed into an instrument for reducing liability As expressed in an arbitral award of 26 April 1998, the “obligation to try” is an obligation:
in which the duty of the debtor is to conduct itself in such a way as to use all reasonable means within its power— namely knowledge, experience, material resources, diligence — to obtain the result expected by the creditor but without guaranteeing that it will be achieved. In this sense a failure to comply means a failure to use such means, that is to say providing the services without having adequate knowledge or experience, or failing to use the available scientific and technical resources, or failing to exercise ordinary diligence, all of which reflect the coming into existence of fault, that is to say it is an error of conduct which leads to the negative evaluation of the behaviour of the professional.

Therefore, in the light of what has been established in tile proceedings with regard to the conduct of Respondent in the matter under analysis, it follows that Claimant has been successful in demonstrating that [Respondent] did not exercise due diligence in relation to the obligation to try to procure the registration of tile contract in tile SIC, which is equivalent to having proved fault on the part of Respondent. This is one of the connotations of this kind of obligation, in contrast to the general rule on contractual liability where there is a presumption of fault on the part of tile debtor in tile event of failure to provide the service specified.

(b) As for as clause 16.7 is concerned, the Tribunal notes that the relevant part of the provision for tile purposes of this part of the Award is not the inclusion of partial nullity which is contemplated by article 902 of the Commercial Code (Código de Comercio) , but rather the reference to the amendment of the contract in order to sort out tile difficulties involved in its registration and hence its performance, a situation which arose from the clarifications required by tile director of the SIC, an official who in turn could be classified as a “state authority” whose interpretation of the contract ought to lead to the corresponding amendments in accordance with clause 16.7.

2. Given these conditions, and without it being necessary to carry out additional investigations, the Tribunal finds, and will so declare, that the conduct of Respondent in relation to the registration of the contract in tile SIC was contrary to the obligation to try enshrined in clause 16.5 of the contract and to tile positive obligation agreed in clause 16.7 thereof, and it remains only to repeat for the sake of greater clarity in relation to the duty of collaboration, which is central to various parts of tile Award, that academic opinion, case law and even legislation itself are paying increasing attention to the duties of correction and fair dealing or, to put it in another way, to the duty to act in accordance with the standards of good faith at all times. Thus for example article 1175 of the Italian Civil Code, the legislation which the Commercial Code (Codigo de Comercio) took as its model for the subject of obligations and contracts, provides: "The debtor and the creditor must act in accordance with the rules on correctness", and article 1.7 of the aforementioned Unidroit Principles of International Commercial Contracts provides: “(1) Each party must act in accordance with good faith and fair dealing in international trade. (2) The Parties may not exclude or limit this duty”, which translates into tile fact that tile party specifically the creditor, who has not acted with the diligence, measures and foresight which are required of him, as the case maybe, is not only disqualified from alleging a breach of contract and seeking compensation for damages which, in the event that they have been suffered, would be due to his own fault, but, on a preventative and more direct basis, assumes the consequences of his dishonesty or turpitude and the attendant liability towards the other party where the services provided for in the contract cannot be performed and its purpose has become impossible or has been frustrated due to the lack of the activity (more than collaboration) which it should have shown and which is indispensable in order to achieve the common aim corresponding to tile practical or socio-economic function of the contract.

Each party has duties in relation to clarity, precision, information and collaboration so that if a party omits to perform the necessary acts, it assumes exclusive responsibility for tile adverse consequences of its inertia or negligence. This is more important and demanding in contracts involving collaboration and in the obligations which presuppose and impose such collaboration, and it may lead to the very extinction of the obligation in the absence of such collaboration by the creditor which prevented, hindered or delayed the exercise by the debtor of his right to release himself from the obligation by means of full performance and to obtain the desired economic result which is tile natural consequence of the satisfaction of the reciprocal and common contractual duties and obligations.’

With respect to termination of the contract and damages
‘H - Issues Nos. 9 and 10

The issues, which correspond to point V (2) (c) (ix) and (x) of the Terms of Reference, are closely linked, as the first is a function of tile investigations into tile contractual breaches by Respondent, whilst the second depends on the outcome of the first. As a result, and having determined that there was a breach of the contract by [Respondent], the Tribunal considers it appropriate to deal sequentially and jointly with tile matters raised, the text of which reads as follows:
In the event that there is an affirmative answer to one or more of points (iv), (v), (vi), (vi) and (vii) above, whether it is appropriate to declare — and the declaration is actually made — that the contract, including addendum no. 1 and addendum no. 2, is terminated due to a breach of contract by Respondent, and in the event that the contract, including addendum no. 1 and addendum no. 2, is declared to be terminated for the reason indicated in point (ix) above, that Respondent be ordered to pay compensation for loss and damage and, if it is so ordered, what would be the heads and amounts of such compensation.

1. One of the cornerstones of the legislation on obligations and contracts involving interrelated services, which is based on the interdependent character of the contractual commitments whereby each of the parties is both creditor and debtor of tile other— without implying simultaneous performance of tile services — is the so-called “tacit resolutory condition” which is enshrined in article 1546 of the Civil Code (Código Civil) and article 870 of the Commercial Code (Codigo de Comercio). This means that, in the case of a bilateral contract, a breach by one party enables the other party at its election to request the rescission or termination of the contract or its performance, in both cases with compensation for loss and damage, which will be compensatory if the choice is to demand the rescission or termination, or will cover the delay if the choice is to require its performance. Our analysis in relation to tile issues corresponding to points (B), (C), (D), (E) and (F) of this chapter shows on the one hand compliance with tile requirement to have a valid bilateral contract and on the other the fact that Respondent has committed a definitive breach of its obligations, given that Claimant was ready to comply with its part of tile agreement, and furthermore the arguments put forward by [Respondent] in defense of its conduct have no prospect of success...

2. Moreover, in accordance with developments in case law and academic tilinking,6 based on equity demanding that breaches of contract which mean that the resolutory action is successful have to be serious and material, tile Tribunal finds that the breaches committed by [Respondent] merit such a classification from two points of view:

(a) In the first instance, due to the nature of the provisions which were not performed, starting from clauses 16.5 and 16.7 which required the adoption of measures aimed at permitting nothing less than the performance of tile contract, and going on to clauses 10.2 and 10.3 which, respectively, required tile parties to maintain their legal and economic viability and to request authorization from [Claimant] to dispose of a substantial part of the assets of [Respondent],and the breach of which made it impossible to give effect to the purpose of the contract which is set out in clause 2 thereof.

(b) Secondly, due to the conduct of Respondent which, as has been shown throughout this Award, without justification hindered tile solution of the problems which would allow tile registration of the contract in tile SIC and hence its performance; inadequately carried on its business, which led to the intervention of the public services inspector owing to the decrease in its operational capacity; and, finally, erratically and deliberately omitted to request tile authorization of [Claimant] to transfer assets and contracts to [X], excluding tile contract at issue, so as to place itself in a position where it was totally incapable of meeting its obligations thereunder. Having proved the breach of contract by Respondent with the characteristics noted above, Claimant had the option of choosing between performance of the contract or its termination, with the consequent damages. [Claimant] unequivocally elected for tile first of these options by requesting the termination of the Contract, which it was legally entitled to do for tile reasons stated, and this will be addressed in tile operative part of the Award.

3. Having discussed the question of the termination of the contract due to its breach by Respondent, it is necessary to consider the consequent compensation for loss and damage that Respondent must pay to [Claimant], which tile Tribunal develops as follows:

(a) In the terms of articles 1613 and 1614 of the Civil Code (Código Civil), the question of compensation would appear to be resolved merely by applying the concepts of damnum emergens and lucrum cessans, the first of which means a reduction in net worth (an outlay) and the second a frustrated gain (income not received) or, as the Supreme Court of Justice (Corte Suprema de Justicia), Civil Appeals Chamber, in its judgment of 7 May 1968 expressed it:
Damnum emergens relates to the loss of elements of net worth, payments which have been necessary or which will in future be necessary and the advent of liabilities, caused by the facts from which liability is sought to be deduced; whereas lucrum cessans, as the expression suggests, consists of all the certain gains which have not been received or remain to be received, based on the same facts. And the claim for compensation has to conform to this classification and adequately place the various heads of damage.
The position is however, as the judgment transcribed above states, that for a loss to be compensated it must be “certain” rather than a “contingent” loss.7 The latter does not give a right to compensation, a sensitive subject where “unconsolidated losses” are involved and particularly acute when these losses are associated, as in the present case, with situations which did not materialize.

In this respect the Tribunal considers that tile classification of damage as certain or as contingent, arising out of situations which were prevented from occurring, constitutes a necessary filter for the determination of the reasonable losses and tile Tribunal will deal with this task later, taking as its point of reference the degree of seriousness and the scientific or technical solidity possessed by tile prediction of what would have occurred had the harmful event not intervened, and from there go on to quantify the loss which will amount to 100% if there is legal certainty that tile situation would have occurred. As Juan Carlos Henao notes:
Nothing of itself is contingent, save for physical or legal impossibilities. Everything is resolved in evidential terms. ... As the Mazeaud brothers say “the probabilities that have been lost are not always the ‘castles in the air’ of Perette and his jug of milk. Sometimes they are real.”

(b) Having set out the aforementioned framework as the reference to evaluate tile absence or presence of recoverable losses, tile Tribunal also comes up against clause 14.3 of tile Contract, tile text of which clearly has its origins in the Anglo-Saxon legal systems and makes it necessary to venture into tile area of “direct” and “indirect” loss in order precisely to understand the provision, which is consonant with the principle that tile reparation for the loss, whilst it has to compensate the aggrieved party which is a mandatory parameter in tile evaluation, cannot impose exaggerated burdens on the liable party. Thus, as for as direct and indirect losses are concerned, the obligatory starting point is to state that in accordance with article 1616 of tile Civil Code (Codigo Civil), absent a contractual provision, the debtor is only liable for direct losses, which means those losses which are a “ necessary and strict consequence of his unlawful act. In contrast, the debtor does not have any liability if the loss is not a certain and necessary product of his conduct or, in other words, there is no causal relationship, a characteristic which then becomes determinative when classifying a loss as direct.” Therefore what the judge has to evaluate is not the mediate or immediate character of the loss (temporal or spatial proximity) but rather its inevitability or causal nature, so that on the basis of such analysis he can determine the absence or presence of the obligation to compensate.

(c) It is not however enough to denote a loss as direct, as regard must also be had to the distinction between “foreseeable” and “unforeseeable” losses, with compensation being payable in relation to the former but not in relation to the latter, save where the debtor had acted fraudulently. The distinction between foreseeable and unforeseeable losses in turn presents difficulties and has a limited development in case law, which is why the Tribunal must resort when characterizing it to the criterion of what is in the contemplation of the parties which is contained in tile classic decision in Hadley v. Baxendale, which was handed down in 1854 and which said:
Now we think the proper rule in such a case as the present is this:- Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally ie, according to the usual course of things, from such breach of contract itself, or such as may be reasonably supposed to have been in the contemplation of both parties, at the time they made tile contract, as the probable result of the breach of it. Thus the judge who follows the “foreseeability” rule mentioned above will have to conduct investigations into the type of losses which ordinarily and reasonably should have been within the contemplation of the party as associated with its breach, in order to decide from there whether or not compensation should be ordered and, if so, the amount of such compensation.

(d) Thus the Tribunal will proceed to evaluate the figures proved in tile proceedings as making up damnum emergens and lucrum cessans using the following parameters:
i. Fullness of tile compensation, referable to the need to place the aggrieved party in the position it would have been in absent the loss;
ii. Certainty of the loss, material in tile case of consequential loss (crystallized situation) and legal in the case of loss of profit (contingent situation);
iii. Direct character, that is to say resulting exclusively from the cause-effect relationship;
and
iv. Foreseeability, referring to the harmful consequences of their actions being within the reasonable contemplation of the Parties.

Finally, on tile question of the connotations of having a strict causal relationship and the need for the loss of profit (lucrum cessans) claimed by Claimant to have been foreseeable, the Tribunal considers it sufficient to mention, in relation to the first point, that the only reason proved in these proceedings for tile frustration of Claimant’s expectations is tile inexcusable non-performance of Respondent. And, in terms of the second point, the requirement of “foreseeability” is clearly met as whatever method of analysis is used the loss of profit corresponds, as article 7.4.4 of the Unidroit Principles of International Commercial Contracts states, to “what [Respondent] could have reasonably have contemplated at the time of entering into the contract as the probable consequence of its breach”, or what was “in the contemplation of both parties”, as stated in Hadley v. Baxendale. It is quite clear.., that the essential objective of [Claimant] in taking part in the public tender and, naturally, in entering into the Contract, was to obtain a return on its investment.

The matters discussed hitherto suffice to conclude that, as will be set out in the operative part of the Award, the Tribunal will order Respondent to pay damages in the sum of US$. corresponding to Claimant’s loss of profit.’}}

Source

Excerpt of award published in
ICC International Court of Arbitration Bulletin, Vol. 12, No. 2 (Fall 2001), 106-115.}}