#118. Assessing compensation from the profits of the breaching party under the CISG
Por Edgardo Muñoz
The Concept
The indemnity based on the defendant's profits is often referred to as "Disgorgement of profits." It involves compelling a party who has wrongfully profited at the expense of another to surrender those profits.
In contract law, disgorgement may be ordered when a party breaches a contract and profits from that breach. The remedy aims to strip the breaching party of any economic gain derived from failing to uphold its contractual obligations. This is particularly relevant in cases involving fiduciary duties or where specific performance of a contract term is unenforceable.
In tort law, disgorgement serves a similar purpose but pertains to situations where a party has committed a tortious act, such as fraud, trespass, or infringement of intellectual property rights, and has subsequently profited from this wrongdoing. The remedy here is intended to restore the status quo by removing any financial benefit the tortfeasor may have received from their unlawful actions, thereby deterring such conduct and promoting fairness.
The Legal Basis in different Legal Systems
"Disgorgement of profits" as a private law remedy has been mainly developed in the common law tradition. In English law, the legal basis for disgorgement of profits as a contract law remedy lies in the principles of equity and restitution. Equity seeks to achieve fairness and justice in situations where the strict application of the law may lead to an unjust outcome. Disgorgement can be seen as an equitable remedy in contract law where compensatory damages are inadequate to address the breach. In cases where a breach of contract also involves a breach of fiduciary duty, the courts have been more willing to award disgorgement as a remedy. This is based on the principle that a fiduciary should not profit from their wrongdoing. English case law examples include Attorney General v. Blake (2001). In this case, the House of Lords held that a spy who breached his employment contract by publishing a memoir without permission could be required to disgorge the book's profits, as compensatory damages were inadequate to address the breach. More recently, in FHR European Ventures LLP v. Cedar Capital Partners LLC (2014), the United Kingdom Supreme Court clarified the availability of disgorgement as a remedy for breaches of fiduciary duty in the context of a breach of contract, further establishing the principle that disgorgement may be available in cases where compensatory damages are insufficient.
However, the remedy of disgorgement of profits is not exclusive to the common law tradition. In German Law, Section 812 BGB (Bürgerliches Gesetzbuch) allows for the recovery of profits gained through unjust enrichment. In Dutch Law, Article 6:104 of the Dutch Civil Code provides for the recovery of profits obtained through the breach of a contract or through an unlawful act.
CISG
The United Nations Convention on Contracts for the International Sale of Goods (CISG) does not expressly provide for the breaching party’s disgorgement of profits to the benefit of the aggrieved party. However, the author considers that the CISG allows the calculation of damages based on the profits of a breaching party.
CISG and Damages
CISG is designed to facilitate international trade by providing a uniform legal framework for international sale of goods. It provides for damages claims when a party breaches a contract (Articles 45(1)(b) and 61(1)(b) CISG), aiming for full compensation, which includes actual losses and lost profits (Article 74 CISG). The principle of full compensation, however, does not require mathematical precision but necessitates that the loss is foreseeable and related to the breach.
Full Compensation Under CISG
The principle requires that the injured party receives compensation equivalent to the financial amount that is needed to place it in the position it would have been if the contract had been fulfilled. This includes any incidental or consequential losses (Article 74 CISG). Articles 75 to 77 of the CISG discuss some methods to calculate these damages, focusing on the difference between contract price and market price or the substitute transaction costs, and on avoiding overcompensation to the aggrieved party that fails to mitigate its losses.
Good Faith Interpretation of Article 74 CISG
Article 7(1) CISG emphasises the importance of good faith in interpreting the convention. On this basis, the author suggests that when other methods of calculating damages fail, Article 74 CISG may be expanded to include calculations based on the profits of the breaching party. For instance, if the seller decided to breach the contract and resell the same goods to a second buyer, the seller deprives the first buyer from the opportunity to resell the goods at the higher market price. That lost opportunity is the expectation interest existing at the conclusion of the contract, and it is just, fair, and reasonable (good faith as required by Article 7 CISG) that the profits made by the breaching party are taken as the baseline to calculate the indemnity for the damages, where there are no other elements to prove them. This might be the case where, for example, the buyer who suffers a breach consisting of the non-delivery of the goods is unable to calculate its loss because, at the time of the breach, it had neither pre-orders from its own customers, nor had it ever in the past traded with the unique type of goods at stake in that transaction, or when it deals in a new business sector that has no record of sales to compare prices with, making it impossible for the aggrieved buyer to prove an assumed loss from its own books, because it had neither pre-orders from its own customers, nor had it ever in the past traded with the unique type of goods at stake in that transaction, or when it deals in a new business sector that has no record of sales to compare prices with, making it impossible for the aggrieved buyer to prove an assumed loss from its own books.
CISG Case Law
Let us review some CISG case law related to this topic. In 1995, the Court of Appeals of Grenoble, France, applied the principle of good faith to expand the calculation method to achieve full compensation in different circumstances.1 In said case, the seller, a French jeans manufacturer, agreed to make various deliveries to the buyer in the United States of America. The contract stipulated that the goods were to be sent to and sold only in South America and Africa. The reason was that the seller already had “contracts with many foreign distributors and that, more specifically in the case of Spain where the brand name ‘Jeans Bonaventure’ is sought after, [the seller had] an interest in not allowing a parallel network of sale [parallel imports]”.2 During the negotiations preceding the contract and its performance, the seller repeatedly demanded proof of the destination of the goods sold. Amidst the second delivery, it arose that the buyer had actually been shipping the jeans to Spain. The Court ordered the buyer to pay seller 10,000 French francs concluding that the buyer’s conduct “made worse by the judicial position taken by the [buyer] at trial constitute[d] an abuse of procedure…[and] the inconvenience caused by this trial to [the seller] justifies the sum requested.”3 As Professor Saidov states in regard to this case, “[i]t can be argued that profits made by the buyer by reselling the goods in Spain would constitute an appropriate measure of recovery of compensatory damages particularly considering that they would most likely be reflective of profits the seller lost as a result of the breach.”4
In a different case, an arbitral tribunal constituted under Stockholm Chamber of Commerce arbitration rules reached a similar conclusion.5 A Brazilian seller agreed to sell a number of high-accuracy and quality pressure sensors to a Chinese buyer that were to be integrated and used in the buyer’s new series of pressure transmitters.6 The parties also agreed that the seller would license the buyer on a non-exclusive basis so the buyer could use and integrate the pressure sensors into the buyer’s new products to be sold in Asia.7 The parties included a confidentiality clause in the contract, since the performance of the agreement meant that the seller would supply confidential information to the buyer.8 In the arbitration proceedings, the buyer brought a claim of damages for breach of the seller’s obligation to deliver pressure sensors in accordance to the contract.9 The seller raised a counter-claim for the breach of the confidentiality clause.10 The seller argued that the buyer never had the genuine intention to perform its obligations under the agreement, and that it actually only entered into it as a tactical step to obtain access to the seller’s confidential and proprietary technology in order to develop, manufacture, and sell the pressure sensors, which would directly compete with those manufactured and sold by seller.11 The seller claimed that, based on the information given to the buyer, the buyer had begun to manufacture and sell devices that incorporated proprietary technology.12
The proof offered on this matter consisted of tests conducted by the seller on the buyer’s sensors. These tests concluded that “the signal responses exhibited by [the buyer’s] Sensors are identical or substantially similar to those exhibited by [the seller’s] Sensors . . . such identity or substantial similarity is unlikely unless [the buyer’s] Sensors incorporate[d] [the seller's] proprietary technology including its software.”13 Furthermore, the seller claimed that the buyer provided a third-party Chinese manufacturer access to the technology.14 The tribunal agreed that “it would stretch incredulity too far to conclude that all the similarities were the result of chance.”15 Therefore, the tribunal concluded that the buyer copied the seller’s confidential information, and that this was a breach of the agreement entitling the seller to relief.16 The tribunal made an award for damages that equaled the amount of profits the buyer made within the twenty-four month period within which the buyer used the seller’s technology.17 While the arbitrator did not refer to any specific CISG provision for awarding damages, he did state that he considered all the facts of the case.18
Conclusion
The CISG does not expressly prohibit the calculation of damages under the method proposed here. It has been advocated that disgorgement is not allowed under the CISG because of the risk of overcompensating the aggrieved party, and that in that regard, the principle of full compensation would be infringed.19 However, as seen in scenarios such as those described above, the method for damages calculation on the basis of profits made by the breaching party may be the fairest and most effective way to achieve full compensation, because it had neither pre-orders from its own customers, nor had it ever in the past traded with the unique type of goods at stake in that transaction, or when it deals in a new business sector that has no record of sales to compare prices with, making it impossible for the aggrieved buyer to prove an assumed loss from its own books.
Edgardo Muñoz
Tenured professor of law at Universidad Panamericana in Mexico since 2014. Visitor professor and scholar in renowned universitites incluing Columbia University in New York, University of Turin in Italy, the University of Montreal and McGill University in Quebec. Research associate at the Graduate Institute of International and Development Studies of Geneva, Basel University and at the University of Lausanne in Switzerland. Arbitrator and legal expert.
Como citar: MUÑOZ, Eduardo. Assessing compensation from the profits of the breaching party under the CISG. In: AGIRE | Direito Privado em Ação, n.º 118, 2024. Disponível em: <https://agiredireitoprivado.substack.com/p/agire118>. Acesso em DD.MM.AA.
Cour d’appel [CA] [regional court of appeal] Grenoble, Feb. 22, 1995, D. 1995, JR 100, 93/3275 (Fr.), http://cisgw3.law.pace.edu/cases/950222f1.html [hereinafter Grenoble case].
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Djakhongir Saidov, The Law of Damages in International Sales: The CISG and other International Instruments 79 (2008), at 35.
Pressure Sensors Case (China v. Braz.) (Arb. Inst. of the Stockholm Chamber of Com. 2007), http://cisgw3.law.pace.edu/cases/070405s5.html.
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Nils Schmidt-Ahrendts, Disgorgement of Profits under the CISG, in State of Play: The 3rd Annual MAA Schlechtriem CISG Conference 89, 97-98 (Ingeborg Schwenzer & Lisa Spagnolo eds., 2012) at 93.