Criteria Influencing the Damages Granted as a Remedy for Contract Breach

Abstract

The assessment of economic loss and compensatory damages for contract breach has traditionally navigated between two practical difficulties: judicial uncertainty and technical complexity. Judicial uncertainty is particularly high when objective data are missing. And when data exist, current financial and statistical methodologies are too complex and costly for most cases. This leads to inefficient bargaining, unnecessary litigations and/or unpredictable judicial decisions. Hence there is a need for alternative methods that are both objective and simpler than current quantitative methods. One of those methods would be to develop damages scales for certain types of economic losses as they exist for personal injury. A good way to start is to study case law and to survey rulings that can be used as precedents for different classes of economic damages. We have selected three types of business situations where we think the use of simple quantitative methods is most relevant to assess damages: breach of an agreement to negotiate, damage to commercial reputation, lost profits for a new business. For each of those situations we successively designed hypothesis of the findings we were looking for, developed a template with fact specific criteria, searched and identified several hundreds of relevant cases and built a comprehensive database. We then used the database to validate or amend the initial hypothesis, to identify patterns or correlations and to suggest damage ranges or scales. We observe a certain consistency for the basic metrics: win rate and recovery rate. The trends are upward in French law and downward in American law but they both converge towards similar rates. International law gives slightly higher rates. However we also observe wide deviations from those metrics averages. The performed empirical analysis to-date leads us to four main arguments as to how and why cases deviate from the average. The first argument is a clear negative correlation between the quantum of the plaintiff’s claim and the recovery rate. This is true for most situations in all three laws. The gap between claim and defense widens when claim increases, so court decision logically reflects this wider gap. That may also indicates there is a “psychological” ceiling for the compensatory damages courts will eventually grant. “Hidden punitive damages” cannot be excluded either when extremely high damages are granted to plaintiffs while courts mention bad faith of defendants. Secondly, there is a positive correlation between the sophistication of the methodology used by the claimant and the successful outcome of the case for that claimant. Sophistication of the methodology developed by the claimant in support of her claim has logically a positive impact on the win rate and the recovery rate. This is true in all three situations for US law and French law. However that positive driver remains weaker than the above mentioned negative driver i.e. the quantum of the claim. Thirdly, claimants operating in mature industries have much better chance to be granted damages than those operating in more risky businesses such as high tech. This is very consistent across the three laws and it somehow contradicts the economic theory saying that risk should be compensated by higher damages for claimants operating in thin markets. One possible explanation is that those claimants in high tech industries are smaller than others and, as such, probably command less ability to evidence their lost profits. The fourth and last result concerns specifically international commercial disputes resolution. Larger cases are still brought before arbitral tribunals; however, in our sample, national courts seem more generous in granting damages than arbitral tribunals. This latter result somehow contradicts the common belief that arbitral tribunals are less reluctant than national courts to grant large awards. In conclusion, we show that reference ranges can be built from observed precedents of contract damages. We claim such ranges may benefit the academics debate and the parties’ attorneys in their contract drafting or pre-litigation settlement. We suggest continuous empirical research on certain types of contracts damages could eventually lead to shared and updated compensatory scales which courts and judges would then use as tools to assist their rulings.