October 17, 2021

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Non-Compensatory Damages in Civil and Common Law Jurisdictions: Requirements and Underlying Principles

Reza Mohtashami QC, Farouk El-Hosseny and Romilly Holland, Three Crowns LLP and McDermott Will & Emery UK LLP

This is an extract from the fourth edition of GAR’s The Guide to Damages in International Arbitrations. The whole publication is available here

Introduction

Arbitral tribunals are routinely presented with requests for compensation for sums corresponding to the economic loss that the claiming party has suffered as a result of its counterpart’s wrongful acts. This compensation is typically referred to as ‘monetary damages’, ‘compensatory damages’ or simply ‘damages’. The purpose of such an award of damages is to put the claiming party in the position it would have been in but for the wrongful acts.

‘Non-compensatory damages’ are an exception to the rule, in that they are not intended to compensate for the claiming party’s loss. Instead, they may be intended to correspond to the benefits gained by the wrongful party, for example, or even to punish the wrongful party.

In this chapter, we first review the availability of different types of non-compensatory damages under common law and civil law systems.  We then look at the limitations on the authority of arbitral tribunals to award non-compensatory damages, before considering the position under international law and exploring the extent to which moral damages – traditionally considered to be compensatory – are assuming a non-compensatory function. Finally, we provide some concluding reflections.

Concept of non-compensatory damages under common and civil law systems

Damages inexorably serve the function of compensating an actual loss. However, as already mentioned, there are exceptions to this rule. Non-compensatory damages in the common law and civil law systems have interlacing characteristics that can be identified.

Damages as the main form of compensation

Monetary damages in both the common law and civil law traditions aim to compensate the claimant but not to place the claimant in a better position than if the contract had not been breached. 

In the House of Lords decision of Attorney General v. Blake, Lord Nicholls affirmed that ‘damages are compensatory. That is axiomatic’.  The overarching principle articulated by Lord Blackburn in Livingston v. Rawyards Coal Co is that their measure ‘is to be, as far as possible, that amount of money which will put the injured party in the same position he would have been in had he not sustained the wrong’.  Similarly, under US law, as stated in the Second Restatement of Contracts (the primary treatise on contract law),  the measure of damages is generally the injured party’s expectation interest,  which is defined as ‘his interest in having the benefit of his bargain by being put in as good a position as he would have been in had the contract been performed’. 

Reflecting the same ethos, the French Civil Code provides that ‘[d]amages owed to a creditor are, in general, for the loss he sustained and for the profit of which he was deprived’.  The principle of full reparation (which is often referred to as le principe compensatoire) lies at the heart of French law on damages.  In following this principle, French courts are bound to indemnify the breach, and nothing but the breach.  The Court of Cassation is wary of eliminating the risk of unjust enrichment and seeks to ensure that compensation does not result in either loss or profit.  Beyond France, compensation for an actual loss is the main function of civil liability under most civil codes.  The Introductory Act to the German Civil Code, for example, excludes damages that ‘obviously serve purposes other than an adequate compensation of the injured party’. 

Notwithstanding the foregoing, both common law and civil law systems permit certain exceptions to the general principle that monetary damages are designed to compensate an aggrieved party, as we explore below.

Non-compensatory damages – an exception to the rule

Although the House of Lords, in Blake, emphasised the compensatory nature of damages, it also recognised that there are situations in which the strict application of this rule would lead to an injustice.  The House of Lords in that instance granted the state restitutionary damages by requiring the defendant to account for the benefits he had received from his wrongful act.  US contract law recognises a similar concept, known as ‘restitution interest’.  An award of restitutionary damages goes beyond the notion of compensation, as is discussed further below.

The French Civil Code is silent on the question of non-compensatory damages.  Unusually, the Civil Code of Quebec provides that in cases of breach of contract, a Quebec court may award punitive damages if it finds that a statute  allowing it to award damages has been violated.  A proposal to incorporate a provision for punitive damages in the French Civil Code that, when awarded, would be paid to the state to sanction lucrative faults, thus remaining faithful to the principle of full reparation and eliminating the risk of unjust enrichment, was roundly rejected. 

Certain European legislation also permits the award of non-compensatory damages. For example, Directive 2004/48/EC on the enforcement of intellectual property rights, which has been implemented in the United Kingdom  as well as in France,  provides that the amount of damages for infringement should take into account ‘unfair profits made by the infringer and, where appropriate, any moral prejudice caused to the rightholder’.  However, the Directive’s aim is compensatory rather than punitive.  Indeed, as underscored by the Rome II Regulation,  punitive damages are widely considered to be contrary to public policy in most EU jurisdictions. 

Types of non-compensatory damages available under civil and common law systems

In this section, we address those categories of damages, available in civil and common law alike, which do not strictly follow the compensatory principle. These include nominal damages, liquidated damages, restitutionary damages and punitive (or exemplary)  damages.  We also examine moral damages, at times a Manichean form of damages that can be viewed through the prism of both compensation and non-compensation, particularly in investment treaty arbitration, as will be discussed further below. 

Nominal damages

Under English law, nominal damages are symbolic and thus non-compensatory. They are awarded when a wrong has been committed by a defendant but no loss or damage has been inflicted upon the aggrieved party.  US law similarly tends to recognise nominal damages where there has been a contractual breach, but there is no loss or if the amount of loss is not proved.  Nominal damages are often described as a ‘mere peg on which to hang costs’ as the award of costs routinely follows the event. 

Under French law, courts have long accepted actions for ‘un franc symbolique’ whereby damages are awarded to the aggrieved party in addition to costs in claims related to group or public interests.  As establishing damage is a precondition to standing, aggrieved parties may invoke nominal damages to have their claim heard. 

Liquidated damages or the clause pénale

Under both civil and common law systems, parties to a contract are free to determine the damages payable in the event of a specific contractual breach before the breach has arisen. Predetermined damages are known as liquidated damages. A liquidated damages clause is referred to as a clause pénale in French, which is somewhat confusing given there is no punitive element to such a provision.

Under English law, a liquidated damages clause should represent a ‘genuine pre-estimate of loss’.  The amounts stipulated should be commercially justified and not intended as a deterrent; otherwise, the clause risks being qualified as an unenforceable penalty.  In a 2015 decision, the English Supreme Court emphasised that liquidated damages have long been available under English law, and noted that they are equally common to the French, Italian, German, Swiss and Belgian legal traditions. 

There is a real chance, however, that a liquidated damages clause will provide for a sum in damages that does not correspond to the losses of the aggrieved party. Thus, although they have a compensatory function, liquidated damages cannot be said to be purely compensatory. It is for this reason that, under French law, a judge has discretion to reduce or increase the amount stipulated under a liquidated damages clause if it is deemed manifestly excessive or derisory. 

Restitutionary damages

Restitutionary damages arise ‘where the commission of a wrong results in a benefit to the wrongdoer which exceeds and outstrips the loss to the person wronged, who suffers a lesser loss or, frequently, no loss at all’.  In Blake, the Crown was not awarded compensatory damages because it had suffered no loss as a result of Blake’s breach of contract.  However, in exceptional circumstances, defendants may be ordered to restitute benefits that have arisen from a breach of contract.  Accordingly, an innocent party may recover an amount of profit from the wrongdoer even in the absence of a measurable loss.  Under US law, restitution also exists as a remedy for certain contractual breaches. Restitution interest is defined as ‘[the promisee’s] interest in having restored to him any benefit that he has conferred on the other party’. 

The developments unravelled by Blake were well noted in civil law jurisdictions in general, and in France in particular, precisely because there are no remedies in France addressing ‘lucrative faults’ that lead to illicit gains.  French legal doctrine rejects restitutionary damages because they could lead to unjust enrichment.  The French Intellectual Property Code, transposing Directive 2004/48/EC into French law, is an exception to this rule. 

Punitive damages

English law regards compensatory and punitive damages as being as ‘incompatible as oil and vinegar’.  Punitive damages are, as the term suggests, concerned with punishing the wrongdoer rather than compensating the aggrieved party. By definition then, their assessment is not commensurate to the latter’s loss.  Under US law, punitive damages are widely available and may be awarded in commercial and contractual cases.  However, most US jurisdictions do not allow punitive damages for breach of contract, unless the breach itself constitutes an independent tort, such as fraud. 

Under English law, a court may order the payment of punitive damages in circumscribed and exceptional situations.  However, as a matter of general principle, they are not an available remedy for breach of contract.  They confuse ‘the civil and criminal functions of the law’ and are, therefore, regarded with scepticism.  English courts may rely on Blake to award restitutionary damages but have expressed no interest in awarding punitive damages in a contractual context. 

In most civil law jurisdictions, punitive damages are not available for contractual breach unless such breach is tainted by fraudulent or malicious conduct.  The Swiss Federal Tribunal has qualified punitive damages as ‘foreign to Swiss law’.  As already noted, Rome II recognises that punitive damages are contrary to the public policy of several Member States.  However, the French Court of Cassation has refrained from deeming punitive damages to be a violation of international public policy.  Of course, such a violation would effectively bar the recognition and enforcement of foreign judgments and awards ordering the payment of punitive damages – an issue that is discussed in greater detail in the section on ‘Non-compensatory damages in international commercial arbitration’, below.

Moral damages

The notion of ‘moral damages’ derives from the French concept of le préjudice moral,  which refers to a wrong done to an individual’s emotions, honour or reputation.  Moral damages are thus, in the civil law tradition, compensatory – they are claimed pursuant to the principle of full reparation in the French Civil Code.  The right to recover moral damages as compensation is explicitly set out under several civil codes in the Middle East, including most notably in Egypt, Libya, Lebanon and Yemen.  The assessment of moral damages, including the quantum of such damages, in France is subject to the court’s discretion.  As the conduct of the defaulting party will not, in principle, be relevant to the court’s assessment,  an award of moral damages cannot be characterised as punitive. Separately, the availability of moral damages to legal persons has been called into question by certain civil law commentators.  However, acts or omissions that affect a company’s reputation, creditworthiness or goodwill causing non-pecuniary harm may be compensated. This has been recognised by the French Court of Cassation,  and by the higher courts of several other civil law jurisdictions, including Chile  and Egypt. 

English law imported this terminology from EU intellectual property law.  Moral damages equate to non-pecuniary loss, which English courts can compensate, including in contractual and commercial matters. These particularly cover physical inconvenience or discomfort, pain and suffering and loss of amenities, mental distress and social discredit.  Although damages for non-pecuniary loss were previously awarded to legal persons in tort cases,  it appears that the position under English law is shifting towards the opposite direction based on the principle ‘that aggravated damages were not to be awarded to a corporate claimant with no feelings to injure’.  Notwithstanding that moral damages are considered as compensatory in both the civil and common law systems (as well as in international law),  they stand distinct to monetary damages. Moreover, certain recent investment treaty awards demonstrate that moral damages are beginning to be understood as having a punitive (and therefore non-compensatory) function. We explore this development in the section ‘Non-compensatory damages awarded in investment treaty arbitration’ below.

Non-compensatory damages in international commercial arbitration

As discussed above, common and civil law systems consider various forms of non-compensatory damages, such as nominal and liquidated damages, as readily available. Excluding intellectual property protection, restitutionary damages are only accepted under English common law and US law, but not French civil law. Moral damages are meant to be compensatory and are awarded on that basis under both systems and under international law. Finally, an outright rejection of punitive damages in the contractual realm also seems to be a common rule, which makes them the most problematic form of non-compensatory damages when they arise in the context of an international arbitration.

An arbitral tribunal’s authority to award non-compensatory damages is constrained in two ways: the first substantive and the second procedural. With respect to the first, the applicable law, the lex arbitri, the arbitration agreement, and the arbitration rules (where applicable) will together determine a tribunal’s authority to award such damages. The procedural scrutiny of arbitral awards by courts in set-aside and recognition proceedings constitutes the second limitation, particularly with respect to the award of punitive damages.

Authority of arbitral tribunals to award non-compensatory damages

The applicable law

The applicable law governs ‘the consequences of a total or partial breach of obligations, including the assessment of damages’.  As such, the applicable law will determine, for instance, whether the arbitral tribunal has the authority to reduce an amount set forth under a liquidated damages clause – as provided under French, Swiss and Libyan law, for example.  The same applies to moral damages. Relying on the Libyan Civil Code, which explicitly states that ‘compensation covers moral injury’,  the ad hoc tribunal in Al-Kharafi & Sons Co v. the Government of Libya and others awarded the claimant US$30 million for reputational damage.  In the same vein, a tribunal sitting at the Cairo Regional Centre for International Commercial Arbitration, applying Egyptian law, granted moral damages to a state tourism authority for the breach of contract by an event planning firm ‘which gave a very bad image of the country’ as a result of its defective contractual performance. 

Conversely, an ICC tribunal seated in Zurich, hearing a technology licensing dispute to which Indian law applied, found that it was not empowered to award punitive damages as under Indian law ‘an arbitral tribunal, will normally give “damages for breach of contract only by way of compensation for loss suffered, and not by way of punishment”’.  Although the choice of New York law as the applicable law (instead of Indian law) might have empowered the arbitrators to award punitive damages, the enforcement of the ensuing award would depend on the applicable public policy of the enforcing state.

The lex arbitri

Opinions differ as to whether the availability of a specific head of relief, and the authority of an arbitral tribunal to grant it, is a substantive or a procedural matter.  Thus looking at whether the applicable law grants arbitral tribunals the authority to award non-compensatory damages is not sufficient.  The lex arbitri requires equal and careful consideration.

In an often-cited case, an ICC tribunal seated in Geneva refused to award punitive damages sought by the respondent for the claimant’s termination of a wine distribution agency agreement governed by New York law,  on the grounds that to do so would be contrary to Swiss law as the lex arbitri.  In support of its decision, the tribunal relied on a provision of the Swiss Federal Private International Law Act, which provides that, in the context of product liability claims based on foreign law, ‘no damages can be awarded in Switzerland beyond those that would be awarded under Swiss law for such damage’. 

The arbitration agreement

An arbitration agreement may explicitly authorise an arbitral tribunal to award non-compensatory damages. For instance, such an agreement could preclude  or provide for the award of punitive damages, as is not uncommon in the US,  and as validated by the US Supreme Court in Mastrobuono v. Shearson Lehman Hutton Inc.  The arbitration agreement could also set a cap on the amount of damages. A good example of this is the Tapie arbitration, in which the parties’ agreement to arbitrate capped Bernard Tapie and his spouse’s claim to moral damages at €50 million.  The arbitral tribunal awarded the claimants €45 million to account for the ‘humiliation’ and ‘destructive manoeuvres’ suffered.  As shown above, moral damages are available under French law; however, the sum awarded to Tapie is widely considered to be unprecedented in the French legal system. The authority given to the tribunal under the arbitration agreement thus shows the pivotal role that such clauses can play.

Arbitration rules

Arbitration rules are generally silent on arbitrators’ authority with respect to damages.  One notable exception is the ICDR-AAA International Arbitration Rules, which expressly exclude the award of ‘punitive, exemplary, or similar damages’ unless the parties agree otherwise.  It is interesting to note that the AAA Arbitration Rules (i.e., the equivalent domestic arbitration rules) do not contain such a provision.  Perhaps this can be viewed as a recognition that such damages are not available in many (if not most) jurisdictions. This is also evidenced by the exclusion of the award of arbitration costs on the basis of a party’s misconduct from the scope of this provision, which could be viewed as a form of non-compensatory damages. 

Excess of jurisdiction and public policy considerations – the scrutiny of awards on non-compensatory damages

One of the primary duties of arbitrators is to ensure that their awards are enforceable.  To this effect, tribunals have to be mindful of the provisions of the lex arbitri as mentioned above, as well as of the New York Convention.  For instance, an award of non-compensatory damages could be set aside or denied recognition on the grounds of excess of jurisdiction where a tribunal grants moral damages when no party sought such damages, or where a tribunal refuses to order punitive damages in breach of the terms of the arbitration agreement. 

In addition, the award could be challenged on the basis of the public policy exception,  a point of primary relevance in relation to punitive damages. Interest in this issue stems from developments in the US, notably the Supreme Court decisions in the Mitsubushi and Shearson/American Express cases, that confirmed the authority of arbitral tribunals to award treble (i.e., punitive) damages.  Nevertheless, punitive damages are not common in international commercial arbitration. 

Given their relative rarity, there is little jurisprudence concerning the set-aside or enforcement of arbitral awards ordering punitive damages.  The recognition and enforcement of US judgments that allow for punitive damages in continental jurisdictions sheds some valuable light, however. There are, for instance, examples of decisions from France,  Spain  and Italy  refusing to recognise US judgments, or parts thereof, containing an award for punitive damages, particularly on the basis of the public policy exception.

However, in a trademark infringement case, the Spanish Supreme Court granted exequatur to a Texas judgment awarding punitive damages and found that, in the circumstances, such damages could not be considered as undermining public policy.  In the same vein, Kaufmann-Kohler and Rigozzi consider that an award of punitive damages does not constitute per se a violation of Swiss public policy.  The Swiss Federal Tribunal has found that the principle whereby an award of damages and interest must not result in the enrichment of the injured party ‘pertains to Swiss or domestic public policy, but commentators do not consider it as a concept belonging to international public policy’.  Rather than outright rejecting punitive damages, it is argued that the relevant test should be whether the amount of punitive damages is compatible with public policy. 

This position was echoed by the French Court of Cassation.  Addressing a denial by the Poitiers Court of Appeal to grant exequatur of a Supreme Court of California judgment, the Court of Cassation affirmed that ‘a foreign judgment ordering the payment of punitive damages is not, as a matter of principle, contrary to the ordre public international de fond’.  However, it stated that a foreign judgment will not be recognised in France if the amount of damages ordered is ‘manifestly disproportionate in relation to the damage caused as well as the breach of contractual obligations’. 

Against this backdrop, it appears that the concept of punitive damages does not systematically trigger alarm bells of the courts in jurisdictions where punitive damages are not normally awarded. This is reflected in an attempt to set aside an ICC award before the English High Court. In this case, the claiming party argued that the arbitral tribunal awarded damages under an indemnity clause of a share purchase agreement in a manner that would characterise them as ‘punitive damages’ and, therefore, contrary to Spanish public policy.  This failed to convince the High Court, which found that the arbitral tribunal may have erred in the application of Spanish law (as the applicable law) rules on the assessment of damages. However, according to the Court, such an error in the application of Spanish law did not meet the threshold to constitute a valid ground of challenge to an arbitral award. 

In summary, although the award of punitive damages is not accepted in an overwhelming majority of jurisdictions, such awards seem to be dealt with by the courts in such jurisdictions in subtle and nuanced ways.

Non-compensatory damages awarded in investment treaty arbitration

In this section, we look at the particular status of moral damages in international law. As we have seen, moral damages are considered as compensatory in both the civil and common law traditions, as well as in international law. However, a number of investment treaty awards show that tribunals are increasingly considering moral damages to serve a punitive function.

Brief overview of compensatory and non-compensatory damages under international law

The International Law Commission’s Articles on Responsibility of States for Internationally Wrongful Acts (the ILC Articles) seek to codify international law concerning, inter alia, the legal consequences for the responsible state of internationally wrongful acts. 

Article 31 provides that the responsible state is to make ‘full reparation’ for the injury caused by its wrongful act, that is to ‘wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed’. 

Reparable injury includes any material or moral damage.  The latter includes ‘individual pain and suffering, loss of loved ones or personal affront associated with an intrusion on one’s home or private life’. As confirmed in the Rainbow Warrior case, moral damages can be awarded for violations of international law even in the absence of a pecuniary loss. 

The Lusitania case underlines the long-established availability of moral damages under international law, specifying that an aggrieved party could be compensated for ‘an injury inflicted resulting in mental suffering, injury to his feelings, humiliation, shame, degradation, loss of social position or injury to his credit or reputation’.  In Diallo, a diplomatic protection case involving violations of international law including arrest, detention and expulsion of Mr Diallo, a Guinean citizen, from the Democratic Republic of Congo,  the International Court of Justice further established that there is no need to present specific evidence of moral injury  and that ‘the quantification of the compensation’ can be based on equitable considerations. 

Pursuant to Article 36(1) of the ILC Articles, a responsible state is obliged to compensate for the damage it causes, to the extent such damage is not made good by restitution. Compensation does not, however, have a punitive or exemplary character. 

Finally, the commentary to the ILC Articles states that intention to harm (‘fault’) is not a constitutive part of a state’s internationally wrongful act.  Accordingly, fault is not a prerequisite to an award for damages.

In line with the foregoing, investment treaty tribunals have confirmed the availability of compensation by way of moral damages under international investment protection treaties. However, a number of tribunals have recently imposed the additional requirement of fault as a prerequisite to awarding moral damages. If the loss of the aggrieved foreign investor is no longer at the crux of an evaluation of moral damages, then awarding such damages risks evolving from the compensatory mechanism described by the ILC Articles, to a punitive tool to be wielded by tribunals, in contravention of the ILC Articles.

Moral damages: the shift to a non-compensatory approach

In Desert Line, the claimant claimed 40 million Omani rials  for moral damages including loss of reputation.  The tribunal found that a party may request moral damages in ‘exceptional circumstances’.  It determined that the state’s treatment of the claimant’s executives in the case in hand was ‘malicious’ and ‘therefore constitutive of a fault-based liability’, and that as a result, the state should be liable for the substantial prejudice the claimant incurred.  The tribunal awarded moral damages of US$1 million, a sum it considered ‘more than symbolic yet modest in proportion to the vastness of the [underlying] project’.  The tribunal’s focus on the state’s fault begs the question as to whether the tribunal was seeking not only to compensate the claimant but also to reprimand the state.

The tribunal in Al-Warraq was more explicit in its conclusion that fault is a condition precedent to moral damages, which are generally awarded ‘only if illegal action was motivated or maliciously induced’. 

In Lemire, the tribunal concluded that fault is a constituent part of the ‘exceptional circumstances’ required to award moral damages (according to the tribunal in Desert Line) and elaborated a three-tiered test to determine exceptionality as follows:

– the State’s actions imply physical threat, illegal detention or other analogous situations in which the ill-treatment contravenes the norms according to which civilized nations are expected to act;- the State’s actions cause a deterioration of health, stress, anxiety, other mental suffering such as humiliation, shame and degradation, or loss of reputation, credit and social position; and- both cause and effect are grave or substantial. 

In the event, the tribunal decided that the test was not met. Interestingly, it underlined its decision by pointing out that Mr Lemire’s conduct towards the Ukrainian authorities ‘may have appeared rude and disrespectful’, which served to ‘reinforce the conclusion that a separate redress for moral damages is not appropriate’.  The tribunal’s analysis compounds the notion that the award of damages has moved away from a compensatory measure and is instead being deployed as a means of dispensing equity, with moral damages available subject to the attitudes, behaviour, intention, and motivation of the responsible state and the investor alike.

In Arif, the tribunal referred to the ILC Articles to support its assertion that moral damages may be awarded in international law, but noted that they are an ‘exceptional remedy’.  It stated that compensating a ‘sentiment of frustration and affront’ would ‘systematically create financial advantages for the victim which go beyond the traditional concept of compensation’.  It further remarked that both the conduct of the state and the prejudice of the investor must be ‘grave and substantial’ to merit the award of moral damages (thereby elevating the non-cumulative ‘grave or substantial’ standard in Lemire).

As in Lemire, the Arif tribunal’s finding that exceptional circumstances did not exist turned on considerations that did not relate to the loss actually suffered by the investor. Thus, the tribunal found that the investor should have had a certain level of ‘mental fortitude’ to deal with the authorities in a ‘transition economy’ where the institutions are ‘weak’ and governance is ‘improving’.  These facts, according to the tribunal, have a bearing on whether the exceptional circumstances test is met. In the event, the tribunal concluded that although the conduct of the state caused the investor ‘stress and anxiety’, the state’s actions ‘did not reach a level of gravity and intensity which would allow it to conclude that there were exceptional circumstances which would entail the need for a pecuniary compensation for moral damages’. 

Although the facts may not have warranted an award of moral damages, the tribunal’s analysis once again turned away from the concept of compensation as a means of fully repairing the harm suffered by the investor towards a concept that permits the tribunal to assess the extent to which an investor deserves an award of moral damages in light of its own conduct as well as that of the state.

Following Desert Line and Lemire, the tribunal in Bernard von Pezold and others awarded moral damages, overtly stating that such remedy served the dual function of repairing ‘intangible harm’ to the investor and ‘condemning the actions of the offending State’.  Thus the tribunal considered that moral damages could be deployed as a punitive measure. The tribunal also referred to Desert Line when determining quantum, awarding precisely the same sum of US$1 million, irrespective of the difference between the factual matrices in the two cases. This further calls into question the extent to which moral damages, in this instance, were awarded to compensate the injury suffered by the investor rather than to reprimand the state.

In Trinh Vinh Binh, the tribunal concluded that the facts of the case warranted a more significant sum than had been awarded in Desert Line, and decided that US$10 million represented an appropriate sum by way of compensation for the investor’s illegal detention for almost three years. 

The upshot of these cases is that an absence of malicious and egregious fault on the part of the state would seem to bar an investor from successfully obtaining moral damages, notwithstanding that fault is not a condition precedent to ‘full reparation’ under international law as codified in the ILC Articles. 

Tribunals should be encouraged to reconsider an award of moral damages as a means of compensating parties for losses suffered, possibly looking to the jurisprudence of human rights tribunals for guidance on how intangible harms have been quantified.  The authors consider that while equitable considerations concerning the manner in which the state breached its obligations should not determine the availability of moral damages, equity could play a role in determining the quantum of any moral damages awarded.  This quantum assessment should of course be subject to the usual principles of remoteness and causation and also broken down where possible so that the damages are understood to correspond to the actual loss suffered.

An investment arbitration tribunal may in practice be an investor’s sole (effective) recourse to justice for reparation of losses suffered arising out of its investment. It is therefore important that notions of equity, merit and fairness are not allowed to dominate decisions on whether or not to award moral damages, at the expense of a proper assessment of the full extent of damages suffered by the investor and how that can be repaired.

Finally, while respondent states have increasingly brought counterclaims for moral damages, to date, such claims have been unsuccessful. For example, in Europe Cement v. Turkey, Turkey claimed compensation for reputational injury and injury to its international standing through the bringing of a baseless claim.  Although the tribunal dismissed the claim because of an absence of exceptional circumstances, such as physical duress, it deemed that Turkey’s potential reputational damage would be remedied by the wording and reasoning in the award and the award of costs. In Amto v. Ukraine, Ukraine presented a claim of ‘non-material injury’ to its reputation based on the allegations made before the tribunal.  The tribunal dismissed Ukraine’s request on the basis that no counterclaim of that nature could be brought under the Energy Charter Treaty. More recently, in Iberdrola v Guatemala (II), an UNCITRAL tribunal held that the investor’s claims were barred by the res judicata effects of a prior ICSID award. Guatemala counterclaimed for breach of the relevant treaty’s fork-in-the-road provision, and asked that the tribunal should ‘sanction the Claimant for its ‘systematic and abusive resubmission of the same claim’.  In this regard, Guatemala sought no less than US$2 million in moral damages. The tribunal found that it lacked jurisdiction over the counterclaim, but the formulation of Guatemala’s request for moral damages nonetheless reflects a growing inclination to invoke moral damages to penalise a party for its conduct, rather than to compensate a party’s alleged losses.

Conclusion

In this chapter, we have examined the different types of non-compensatory damages available in civil law and common law jurisdictions, and identified the limitations to which arbitral tribunals are subject when considering a claim for non-compensatory damages, most notably in the context of a request for punitive damages where tribunals should be aware of a possible conflict between the applicable law and the lex arbitri. We have seen that moral damages, viewed as compensatory in both civil law and common law jurisdictions, including most relevantly to address the reputational harm that may be caused to either natural or legal persons in the context of the performance of contractual obligations, are evolving under international law from a compensatory tool to a non-compensatory one at the hands of investment treaty tribunals. This evolution could prove to be problematic if it leads to the award of punitive damages via the back door.

Given the overlap between participants (among users, counsel and arbitrators) in investment treaty arbitration and commercial arbitration, it is possible that the non-compensatory notion of moral damages in the former may begin to influence the award of moral damages in the latter. Such a development would have profound consequences if tribunals decide to award moral damages not on the basis of the applicable law but on the basis of equity.

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