Compensation in Contract

Categories: Contract Law
Typology: Articles

The European Commission has shown a renewed interest in putting together a systematic framework of the fundamental principles of private law, primarily in the fields of contracts and sales. The Green Paper from the Commission on policy options for progress towards a European Contract Law for consumers and businesses,[1] constitutes a further invitation to examine not only the text of the Draft Common Frame of Reference of European Private Law, or DCFR,[2] but also the works that preceded, accompanied and followed its publication, first as a draft edition, then as an Outline Edition and also as a text with commentary. An interesting and wide-ranging literature is now available on the subject: I shall refer in particular to the Commentary on the Draft Common Frame of Reference, in several volumes, edited by the Study Group on a European Civil Code[3], to the exploration of the terminology and principles of European private law,[4] to the articles and essays that have been appearing in several journals, and to lectures to conferences[5]. One of the most important matters dealt with in these texts is that of the recovery of damages for breach or non-performance of a contract. This is a central theme in the theory of contractual liability and loss and damage, to give these concepts their names according to the categories used by continental European legal doctrine and case law. In the English system it is preferred to place these problems in the context of remedies,[6] rather than in the context of the general theories and institutions of private law and the law of obligations.

The drawing up of a text of principles, to be used for the purpose of regulating the recovery of damages for breach or non-performance of contracts, satisfies not only the need one is referring to when one tries to justify the usefulness of introducing an optional instrument – or, as someone has said somewhere – the 28th judicial model of the European Union – but also satisfies a further, additional, need that is by no means negligible: that of identifying (i) within each national model, sufficient means of harmonisation to make it intelligible to its own legal theorists, and then, separately from these, (ii) a set of rules in which commonly acknowledged principles can be placed in combination or, failing that, new principles that will be acceptable to all the stakeholders.

The topic is introduced, as will be clear, with caution. The reason is simple: the subject of damages for breach and non-performance of contract is generally regarded as particularly complex and has a noble and complicated history. Starting with classical Roman law, through the millennia, theories, solutions and tendencies have alternated, and found expression, both in the texts of the European civil codes and English case law, and in an elaborate and wide-ranging body of legal doctrine and judgments.

History is always useful, but in this field it is absolutely essential. It explains to us the origins of the terms and principles in current use in the various legal systems and the firmness with which convictions, prejudices and differences persist and prevent us from identifying common approaches, similar solutions and legal models that can be agreed upon by all.

If the argument were to be embellished by a full bibliographical apparatus and a proper survey of cases, it would have to extend to many volumes, rather than to the few pages of elementary summary represented by the present work. But even if we examine it in elementary terms, the theme does not lose its particular fascination, because it forms part of the more general question, which is by what criteria should we assess contractual liability, relief, the consequences of breach or non-performance, i.e. damages, restitution and so on. It directly affects the transactions carried out by means of contracts, whether between private individuals (C2C), between businesses (B2B and B2b) or between parties with different status (B2C, where some would include B2b).

In order to start the discussion, several more general remarks are in order to set out the background and provide a focus.

In the civil codes the subject is usually dealt with in rules of a general nature; the provisions are not detailed, and they incorporate terms that can aptly be described as general, and very elastic. This gives rise to two important consequences. First, the judge construing them really has to actively use or manipulate them, precisely because the directives given to him to follow are rather vague; secondly, he is given wide powers to evaluate loss and damage on equitable grounds. Thus the ambit of his discretion is very wide. These powers are at the same time limited by the evidence, but reinforced by presumptions. To offer a quick example, we may recall two provisions of the Italian Civil Code, enacted in 1942 and still in force. Article 1223 states: ‘The measure of damages arising from non-performance or delay shall include the loss sustained by the creditor and the lost profits insofar as they are a direct and immediate consequence of the non-performance or delay.’ Article 1126 says: ‘if damages cannot be proved in their exact amount, they are equitably liquidated by the court.’

There are aspects that pertain to national legal systems and which seem difficult to reconcile with the peculiar characteristics of the competing (European or international) models with which they ought to coincide to form a ‘common frame of reference’. Here are some examples. In most legal systems, no punitive (or exemplary) damages will be allowed; but in some of them, the same concept is hidden behind a variety of names and forms; and in yet other systems it is openly allowed. In almost all the systems, it is lawful to specify an amount of liquidated damages in a penalty clause; but in some systems the penalty clause is distinguished from other types of clauses, and it is necessary to engage in complex efforts of exegesis in order to distinguish those clauses that are lawful from those that must be treated as void. In some systems ‘moral damages’ (for pain and suffering) are allowed also in cases of breach of contract; and in others the idea of compensating damage which does not pertain to the economic sphere is considered outrageous. Finally, in the common law systems, the non-performing party is free to choose whether to comply with the contract or to breach it and pay damages to the other,[7] whereas in the continental systems the non-performing party in wilful breach is liable even for unforeseeable damages.

These differences (among the many that could be listed) have not discouraged the compilers of the UNIDROIT principles, the Principles of European Contract Law and the Draft Common Frame of Reference. They have succeeded in agreeing proposals, for the most part uniform, for the rules to apply to contracts and thus to contractual loss and damage.

In order to demonstrate the difficulties encountered by the lawyers belonging to the various working groups, and by the legal theorists who have ventured upon this hard task, it is necessary to reconstruct the history of this problem, as if it were a thin red line connecting the past to the present time, and to summarise its successive phases.


The tradition of Roman law

The study of Roman law and the medieval tradition is fraught with difficulties. Among others, the illustrious legal academics Jhering, Mommsen and Kaser have dedicated themselves to this study. The debtor was obliged to pay, and if he did not pay, judgment against him became inevitable. But Roman law had various types of judgment, according to the formula of application. The most common, in actions ex stipulatu and in those ex testamento certi was ’quanti ea res est’ (how much the thing is worth), which corresponded to the mere value of the thing that must be given; in judgments bonae fidei iudicia the interests of the creditor were paramount ’ id quod interest’ (that which constitutes his interests) and judgment against the debtor consisted in ’ quidquid ..dare facere oportet’ (whatever he ought to give or to do). The interests even at that time, were of two types: the positive interest, represented by the economic advantage that the creditor would have obtained from fulfilment of the contract, and the negative interest, represented by the situation the creditor was in before entering into the contract. Vincenzo Arangio Ruiz explains that judgments in decided cases oscillated between these two approaches, just as it was uncertain whether to include in the award of damages, that is in the id quod interest, both the lucrum cessans (loss of the economic advantage the creditor would have obtained) and the damnum emergens (economic loss caused by the breach of contract); the loss and damage, however, had to be direct and must not exceed (according to Justinian) twice the value of the thing.[8] In any case the id quod interest included the positive interest; and an award was made in respect of the negative interest, only when the aggrieved party claimed that the other was liable in dolus in contraendo (deception or fraud in contracting).[9]

Another great scholar of Roman law, Silvio Perozzi, clarifies in an exemplary manner the questions that beset Roman lawyers concerning the obligation imposed upon the author of the loss and damage, to pay for it.[10] He says:’(…) Here we must sound a fundamental note of caution. The present-day legal systems confirm the general principle that whoever has by his own fault caused loss and damage must pay for it. The rights of the creditor are included in the range of entitlement to damages. It is because of this that the theory of damage recovery has assumed such extraordinary importance in the perception of the rights of the creditor. Roman law does not recognise either the one or the other principle. No Roman judgment uses the word condemnatio to express the idea that the court must condemn the defendant to pay for loss and damage. The formulae quod aequius melius erit, quanti ea res est, and quid quid N.N.A.A. dare facere praestare oportet which are the widest do not signify: an order ‘condemning’ the defendant to pay damages. It was case law that determined that in certain circumstances the judge must order payment of damages, on the basis of these formulae.’. The outcome of the action was different: restitution, recovery of the market price of the asset, or recovery of the value of the thing as determined by the parties. To continue the quotation:’(…)Thus the theory of compensation for loss and damage is of modern origin and nature. But there are facts and ideas associated with it, in addition to that of loss and damage (…): (such as) the causal relation between the act and the loss and damage, liability for unlawful or tortious acts (culpa) and the award of damages (damnum), which deserve to be considered together’.

Thus, the modern rules for the recovery of loss and damage are the result of a re-working of the rules of Roman law.

Meanwhile, it is important to recognise that, at the end of the eighteenth century, legal doctrine found itself faced with a choice, whether to apply the rules of Roman law (according to Justinian) directly, or whether to take account of the law applied in Middle Ages that had formed since the fall of the Roman Empire. The latter is full of problems, since it rests on the plurality of legal systems continuing Roman Law, customs, Law Merchant, statutory law etc.) In addition to the local laws, which governed legal relations between individuals by means of statutes, one must take account of the rules imposed by foreign conquerors and of Canon law, which has also affected the development of civil law. Furthermore, over the space of almost fifteen centuries, the tradition of Roman law had gradually remodelled itself on the interpretations of the glossers, the commentators and the lawyers called culti, in the opposition between mos italicus and mos gallicus (the Italian and the Gallic different interpretation of the law). In other words, it was not easy for the legal theorists of the seventeenth and eighteenth centuries, or indeed those of the nineteenth century, to identify unequivocal rules of law, based on the Roman sources.

According to one reconstruction[11] in the Middle Ages, three different interpretations had been proposed for the formula id quod interest : (i) the value of the asset or service as agreed between the parties, (ii) the market value of the asset or service, (iii) the value ascribed to the asset or service by the creditor. One of the most famous legal theorists, Azone, identified the id quod interest with the actual fact of the loss and damage caused to the creditor by the unlawful act of the defendant or a third party. Jacques de Révigny criticised this conception of loss and damage, considering, on the contrary, that the id quod interest was not a fact (that is, the objective detriment to his material assets suffered by the creditor) but the assessment or quantification of the loss and damage caused by the breach or non-performance, viewed in the context of safeguarding the interests of the creditor (the so-called individual’s (singulare) interests). On this construction, the loss and damage did not coincide with the market price, or even with the price agreed between the parties, but took on subjective connotations, that is, it corresponded to the value of the performance as assessed by the creditor. By this means, even the differences in calculation of value according to the different types of contract were overcome, since the rule was of universal application.

This theory did not find favour. It was not accepted even by Révigny’s pupil Belleperche. He preferred to return to the tripartite division of the cause of action . In any case, since the obligation to perform is not the same as the obligation to pay, it was not possible to apply the same solution to all cases.

Despite the best efforts of the glossers and their successors in defining the boundaries of contractual loss and damage, and despite the fact that statute law had assimilated and amended the Justinian rules, as they were interpreted by the legal theorists in Middle Ages centuries, the original rules had the last word:’ Roman law triumphed in the end’, as Schupfer remarked in his book Il diritto delle obbligazioni in Italia nell’età del Risorgimento.[12]

The Napoleonic model

Really recapturing the sources of Roman law, which in their decisive way they have called la loi, the French jurists have long been using the formula dommages-intérêts.[13]

Since contemporary French legal academics are questioning the meaning of this hendiadys, and wondering whether damages should be separated from interest, it may be useful to explain that the term ‘interest’ used by the Romans did not apply to the interest on a sum of money, but, as has been shown, to the interests, or cause of action, of the creditor. The formula has given rise to many misunderstandings, partly due to the fact that the breach of an obligation to pay a sum of money – which gives rise to interest – is quite different from non-performance of an obligation to do something. The two give rise to different kinds of indebtedness. And interest can be divided into several categories, as mentioned below.

To trace the origins of the Napoleonic codification it is necessary to refer to the pages of Domat and Pothier, whose sentences the compilers have often lifted wholesale into the provisions of the Code civil.

Domat in Les loix civiles dans leur ordre naturel states clearly and simply that whoever does not comply with the terms of a contract is bound to pay damages and interest to the other party ‘in accordance with the nature of the agreement, the nature of the non-compliance and all the circumstances of the case’.[14] In another Section (the sixth) of this Part, Domat adds that termination of the contract with retroactive effect (résolution) for non-performance of a service involves restitution (of benefits obtained under the contract) and the payment of damages and interest[15].

Pothier, in his Traité des obligations selon les règles tant du for de la conscience, que du for extérieur[16] explains that dommages & intérêts represent’the loss that someone has suffered and the profit he has not been able to make’, as Roman law teaches (us), at L.13 ff. Rat.rem hab.: Quantum mea interfuit; id est, quantum mihi abest, quantum lucrari potui (How much it affected my assets: that is, how much I have lost, how much I could have gained)’. ‘Dommages & intérêts’ thus denotes both the damnum emergens (economic loss) and the lucrum cessans (loss of profits). It becomes almost natural to pair off economic loss (damnum emergens) with’dommages’ and loss of profits (lucrum cessans) with’intérêts’. Even Pothier then refers to the various types of obligation, and calls for ‘moderation’ in the assessment of the damages to be awarded against the debtor. There is a causal connection between breach or non-performance and loss and damage; it is necessary to assess the extent of wrongful conduct on the part of the debtor, the absence of force majeure and whether the loss and damage were foreseeable. Unforeseeable loss and damage can be recovered only in the event of dolus (fraud or deception) on the part of the debtor.

It was from these simple formulae that the rules were formed upon which the entirety of continental law still rests.

The words of Domat and Pothier were transposed into the text with the force of law and were placed in Book III of the Code civil, On contracts and contractual obligations, after the rules on the obligation to pay or give up possession of, to deliver, to perform or not to perform, in Section IV of Book III, entitled ‘dommages et intérêts resulting from non-compliance with an obligation’. Article 1147 of the Code civil recites therefore:’the debtor is ordered (condamné), if appropriate, to pay damages and interest’, both in the case of failure to pay or perform and in the case of delay; Article 1149 specifies that ’the dommages et intérêts due to the creditor are, in general, for the loss he has made and the gain of which he has been deprived’.

Dommages et intérêts’ was thus the magic formula that included both the loss arising from non-performance of a service to be performed or not performed; and the non-performance of an obligation to pay. Even for the obligation to pay, the Code does not speak only of interest, but of damages and interest. Article 1153 is clear on this point: ’for obligations limited to the payment of a certain sum of money, damages and interest arising from delay in payment never amount to more than judgment for interest as fixed by law; save for the special rules applying to commerce and to contracts of guarantee’.

Obviously the provisions of the Code civil had to be subjected to interpretation and the simple formulae became complex over time.

Actually, discussion of them in the Tribunate was almost non-existent, and the motifs explaining the meaning and drafting of the text emphasise that the subject is an extremely difficult one to deal with.[17] The vagueness of the terms, which encompass a very wide field, the diversity of the circumstances that can arise, enable those interpreting the law to give free play to their imagination and their powers of exegesis.

Not many years after the enactment of the Code civil, we find the author of La Clef des Lois Romaines ou Dictionnaire analytique et raisonné de toutes les matières contenues dans le Corps de Droit[18] warning us that the range of possible cases is infinite. In his view the difficulty of assessing damages and interest lies not in the law but in the facts, and (he says)’the court, not always seeing clearly what the dommages-intérêts should be that one party can justly claim against the other, tends to reduce them as much as it can’. The Roman sources continue to be the keystone of the subject, and the exponents of the School of Exegesis turn to them to interpret the text of the Code.

Here are two significant examples.

Toullier, in his Droit civil français, cites the passage of Paulus, ( second century A.D.) from whom the formula of ‘domages-intérêts’ has been drawn, and explains that domages-intérêts, in the case of non-performance of pecuniary obligations, consist of ‘interest established by law’, save for the special rules on commerce.[19] He dwells on the application of the Code in decided cases. Baudry-Lacantinerie and Barde state that loss and damage must include the loss suffered (damnum emergens) and the loss of profit (lucrum cessans); and add: ’these two elements, according to most authors, are represented in the very expression, ‘recovery of domages-intérêts’ (domages: damnum, lucrum), which thus would almost contain a definition of the remedy.[20] But it is highly probable that the word lucrum, added to the word damnum, is merely otiose, as is often found in the style of ancient notaries’. Then they draw a distinction between compensatory damages, for non-performance of a service; and damages for delay, for the delay in paying a sum of money.

The origins of the Italian models (1837, 1865, 1942)

These Napoleonic formulae passed into the Italian pre-Unification Codes, in particular the Albertine Code (Articles1237 and 1240) of 1837; and then into the Italian Civil Code (Article 1227) of 1865. In the text of the Italian Civil Code , the hendiadys danni e interessi no longer appears; it speaks only of damages (danni), while interest (interessi ) is mentioned in connection with those obligations pertaining to a sum of money. Legal doctrine and judgments in decided cases continued however to use both the expression ‘danni e interessi’ and the French expression ‘danni-interessi’. The Code provides that interest for delay in paying a sum of money is due at the legal rate (Article1231) save as otherwise agreed between the parties. Interest is due without the creditor having to give any justification. In any case, the loss and damage (danno) to be remedied arises from a positive interest.

The treatment in the Austrian Civil Code of 1811 (translated into Italian and enacted in 1816 in the Italian provinces) is altogether different. It specifies, at §912 that ’sometimes the creditor may, in addition to (payment of) the principal debt, claim further payment or performance from his debtor. This consists in (delivery of) accretions to and derivations from the principal asset; in interest, whether contractual, or due because of delay on the part of the debtor; in damages in respect of the loss and damage caused, or the consequential loss to the creditor caused by the obligation not having been duly discharged; and finally in the sum that one of the parties has stipulated should be payable in those circumstances’. At §1293, on the subject of non-contractual loss and damage, a distinction is drawn between loss and damage and the loss of profit (lucrum cessans) that in the ordinary course would have been anticipated; and between indemnification (the remedy for the damnun emergens) and full satisfaction (the remedy including also the lucrum cessans). The two heads of damage are however not indissolubly united; in fact §1324 provides for recovery of the lucrum cessans only in the event of fraud or deception (dolus) or obvious negligence.

The German Civil Code is even more detailed and precise, at §§ (paragraphs) 241 and following. § 249 provides that the person liable in damages must re-establish the state of affairs that would have pertained if the facts leading to that liability had not occurred; § 252 provides that loss and damage also includes the lucrum cessans, and that this means the profits that would reasonably have been expected in the usual course or in the particular circumstances, specifically in line with the measures and precautions taken; § 253 provides that damage that is not pecuniary loss has a remedy only in the cases specified by law. The subject is placed in the category of legal relationships of indebtedness. There are special rules for the remedy in damages deriving from an unlawful act against the person, for loss and damage extending to prejudice to the earnings or well-being of the victim (§842) and in the case of injury to the person or to health, or deprivation of liberty, the offended party has the right to compensation in money even for non-pecuniary loss and damage (§847).

The text of the B.G.B. (Bürgerlicher Gesetzbuch) simply reproduces the conclusions that German legal doctrine had reached in the years in which it was drawn up. Dernburg in his Pandette explains that in the case of breach or non-performance of the obligations, there are two heads of loss and damage, namely the damnum emergens and the lucrum cessans; the first is easily quantified, the second must be determined in a sum that is more or less problematical. He says: ’certainty cannot be required, and usually cannot be achieved, but the mere illusions of a (prospective) profit must not be taken into account. The law does not take account of fantasy’.[21] In other words, the creditor must show that he has taken particular steps that offered a reasonable hope of his obtaining the profit that he believes he has lost.

Faced with this varied picture, Italian legal doctrine, from the middle of the nineteenth century, began to elaborate its own legal categories, taking account of Roman law, of French law and of the re-working of Roman law in German legal doctrine. The French legal prototype is interpreted using the categories worked out in the Pandette school . Thus, in the 1930’s, when in Italy the need to renew the Civil Code was most strongly felt, the cultural climate was favourable not so much to proposing a combination of the Roman, French and German traditions, as to renewing the rules, setting them out more clearly and placing them in the text in systematic order.

But not all the problems were resolved. The years preceding the new Codification of 1942 had seen the opening of a debate about the recoverability of moral, or non-economic contractual loss and damage.

The idea was dismissed in the then prevailing legal doctrine, both on the grounds that breach or non-performance of a contract should not be treated as requiring punishment, and on the grounds that the Code of 1865 was silent on the question and that therefore its inclusion as a ground of loss and damage would have placed an excessive burden on the non-performing party.

But the Italian legal theorists nevertheless tended to adapt the formulae of Roman law to the needs of modern life in their own way. Shortly before the new Codification, Nicola Stolfi, the author of a weighty and successful treatise on civil law, had reason to report that the evolution of Roman law had led to the ’affirmation of the principle that the debtor who defaults on an obligation must pay to the creditor such sum as is equivalent to the advantage that would have enured to (the creditor) from the precise, effective and punctual compliance with that obligation. And this sum in compensation (indennità) specifically constitutes domages-intérêts’.[22] Giovanni Pacchioni explained that ’the damnum emergens consists in every diminution of the creditor’s assets by reason of the breach or non-performance; lucrum cessans is all the value that the owner of the assets would have been able to realise by means of his own business activity, if his debtor had complied with his contractual obligations: all that profit that he could have made, as an exclusive or principal consequence of the increase to his assets that compliance with the contract, which had not been forthcoming, would have caused’. To support this theory, he refers to the Roman tradition, which was reluctant to allow recovery of the lucrum cessans and allowed it only on the basis of a specific claim, which was referred to the court’s discretion: this (he says) must therefore be the rule for Italian law as currently in force.[23]

The present-day Italian model

The decision made by the drafters when the Civil Code and the Commercial Code were unified was to place the rules on this question among those governing obligations (Articles 1223 ff.) and to assign special additional rules to non-contractual loss and damage (Articles 2056-2059). Relief for moral damage, in the strict sense, was recognised only in cases of non-contractual unlawful or tortious acts.

The Italian Civil Code devotes seven provisions to compensation for contractual loss and damage. It starts with the general principle that loss and damage consist in two factors, the loss (already) suffered by the creditor and his (future) loss of profits (Article 1223). Loss and damage (il danno), to be recoverable, must be direct and immediate; for pecuniary obligations, there is provision for an award of interest at the legal rate as from the day they became payable, and further loss and damage (il danno maggiore) is recoverable, if the creditor provides proof of it (Article 1224); the loss and damage must also have been foreseeable at the time the contract was entered into (Article 1225); in the event that it cannot be proved in an exact amount, the court is authorised to assess it equitably (Article 1226); if the creditor’s negligence has contributed to cause the damage, the compensation is reduced according to the seriousness of the negligence and the extent of the consequences arising from it. The debtor is also liable for the dishonest, tortious or unlawful acts of his servants or agents (Article 1228); and contract terms excluding liability for intentional wrong or gross negligence are void (Article 1229).

As can be seen, there are two distinct heads of loss and damage, just as interest for non-performance of pecuniary obligations is separately treated. In the Report of the Minister for Justice (Relazione del Ministro Guardasigilli) (no.572, 1942) the two heads are re-assigned to damnum emergens and lucrum cessans, and the Report insists on the causal connection between the breach or non-performance and the loss and damage, that is, on the fact that to be recoverable, the loss and damage must be an immediate and direct consequence of the breach or non-performance, and must have been foreseeable at the moment the obligation arose. The discretion of the court is wider in evaluation of lucrum cessans. Moral damages are not recoverable in contract.

Italian doctrine and case law have defined in some detail the wide formulae that tradition has handed down to us: the creditor must be put in the same financial situation in which he would have found himself if the wrongful act had not taken place; damages must be liquidated in a sum equal to the actual value of the lost profits , the lucrum cessans is defined as the extent to which the assets of the creditor have not grown, and the creditor must provide adequate evidence as to the use of them that he specifically planned and actually prepared, and which he has not been able to achieve (Court of Cassation 7.7.1981 no. 4455). A well-founded and reasonable expectation is adequate, without absolute certainty that the profit would have been made (Court of Cassation 20.1.1987 no. 4280). The loss and damage, for which an award is made on the basis of the wrongful act or omission, must be direct and immediate as well as foreseeable, save in the case of deliberate breach or non-performance, which leads to liability also for unforeseen loss and damage. For loss and damage suffered as a consequence of breach of pecuniary obligations, interest at the legal rate is the remedy, save where further loss and damage (il maggior danno) is proved.

Interest is divided into the categories ‘moratori’ for delay in payment of a sum of money; ‘corrispettivi’ to remedy the creditor’s loss of use of the sum of money; and ‘compensativi’, due to the creditor independently of the interest for delay in payment, in order to re-establish the economic balance between the contracting parties (Court of Cassation 19.8.1998, no. 8196).

For debts in the Italian currency, there is no addition to interest at the legal rate for currency revaluation; in order to obtain more than interest at the legal rate, the creditor must show that he has suffered a greater loss (maggior danno). The accumulation is however applicable to debts in money’s worth, because the revaluation is intended to restore the assets to the value they had before the breach, whereas the interest is of a compensatory nature (compensativi) (Court of Cassation 18.8.1998, no. 8165). Judgments in decided cases have developed various presumptions, dividing creditors into socio-economic categories (businesses, professions and consumers) and thus graduating the amount of the greater loss (maggior danno); this was in view of inflation, which has now been partly overcome by Italy’s adopting the Euro (Court of Cassation 19.10.1995, no. 10844).

It is now possible to recover moral damages (danno morale) in contract, for ruined holidays, bullying, stalking, or damage to one’s image. Moral damages are recoverable in particular – in the category of so called ‘existential damages’ – in the case of medical malpractice, since judgments have found that there is a ‘contractual’ (the so-called ‘social contact’) relationship between doctor and patient, even if the doctor is employed by the health service (Court of Cassation 4.1.2010, no.13)

Punitive damages are not recoverable, even in the context of extra-contractual liability. On this point the Court of Cassation has observed that ’in the current legislation, the fundamental function of restoring the asset base of the person who has suffered the injury (lesione) is a matter of civil liability, which operates to award to the injured party a sum of money intended to eliminate the consequences of the injury he has suffered, whereas the concept of punishment or penalty for civil liability is not germane to the system and the assessment of the debtor’s conduct is for that purpose irrelevant. The principle of punitive damages is therefore incompatible with the Italian legal system; nor does it apply to the recovery of non-pecuniary or moral damages. Such recovery is always dependent on an assessment of the suffering or injury caused by the unlawful or tortious act or omission, and cannot be treated as proved ‘in re ipsa’‘. In addition there is no possibility of arriving at an assessment of damages on the basis of a consideration of the poverty of the injured party or the wealth of the person liable (Court of Cassation 19.1.2007, no.1183).

But on the question of recovery of damages for non-performance of pecuniary obligations, the Court of Cassation has not yet shown a united trend in its judgments.

There is one trend that propounds the principle that in pecuniary obligations ’the phenomenon of inflation does not give rise to an automatic adjustment of the amount of the debt, nor does it constitute a head of damage in itself, but may involve, pursuant to Article 1224 of the Civil Code only an award to the creditor, in addition to interest, of whatever greater loss (maggior danno) has flowed from his being unable to use that sum during the period preceding payment, if and only if the creditor himself pleads and proves that prompt payment would have enabled him to avert the impoverishing economic effects that inflation has on all owners of money: because the interest on delayed payment awarded to the creditor pursuant to the first part of Article 1224 of the Civil Code has a restorative function, since it represents the replacement, in a lump sum, of the loss of availability of the amount of the debt.’ (Court of Cassation 10.11.2009, no. 23744).

Another trend holds on the contrary that when the creditor is a business and there is delay in payment, there is no need (for the creditor) to prove the greater loss (il maggior danno) equivalent to monetary devaluation, because there is a presumption ’on the basis of the ‘id quod plerumque accidit’ (as is usually the case), that if the payment had been made promptly, the sum owing would have been put to anti-inflationary uses’ (Court of Cassation 31.5.2010, no. 13228).

Pietro Trimarchi, one of the most authoritative Italian jurists, has in a recent book revisited the problems of contractual loss and damage, having recourse not only to logical and pragmatic, but also to economic considerations. His starting point, in the context of a wider analysis of the remedies available to the creditor in the Italian legal system, in the case of non-payment by the debtor is that to resolve the problems of the award of damages’it is necessary to analyse the function of contractual liability, that is, in the context of a contract, which is necessarily concerned with economic transactions’ it is necessary to ascertain how ’the rules on liability may influence the motivation of the operators so as to achieve efficient results’.[24]

The functions of contractual liability are many: to establish a relationship of trust between the parties, to provide an incentive for the debtor, to achieve the aims of the creditor. From this point of view the theory appears preferable that gives precedence to the remedy for the interesse positivo, (economic advantage expected by the creditor) since it is difficult in almost all circumstances, to prove the interesse negativo (situation the creditor would have been in had the contract never been formed). According to Professor Trimarchi,’breach or non-performance must not be discouraged when it gives the non-paying debtor a greater advantage than the loss to the other party (efficient non-payment), so the damages must not be less, nor must they be greater than the positive interest’. This conclusion leads Professor Trimarchi to consider that the rule that deliberate breach or non-performance gives rise to liability even for unforeseeable loss and damage, should be applied with caution and restrictively [25]. This solution thus brings the Italian model close to the English one.

Professor Trimarchi wonders whether in Italian law the interesse negativo is recoverable as an alternative to the interesse positivo. If, that is, the creditor, rather than claiming the price of the thing or the service that he has not obtained, and the lucrum cessans, could claim instead restitution of the price and payment of the expenses he incurred in preparing to carry out his own side of the bargain. His answer is in the negative, because the payment of damages is a consequence of the breach or non-performance, and thus there is a question of causation; ’it is only the recovery of expenses reasonably incurred in vain that is economically justified and appropriate, when the loss and damage is not quantifiable, or not easily quantifiable, in money’. In this way the distinction between interesse positivo and interesse negativo is blurred, since Article 1226 of the Civil Code permits the courts to assess the loss and damage claimed by the creditor on an equitable basis, that is, taking the circumstances into account.

The distinction between an estimation of the thing or facts (aestimatio rei) and an estimation of the effect on assets (id quod interest) appears to Professor Trimarchi to be too schematic. The latter is better suited than the former to the Italian legal system, because it includes the lucrum cessans, and is based on objective and therefore easily verifiable criteria, whereas the former is dependent on subjective criteria. If, however, the creditor engages in a substitute transaction at a time close to that of the breach of the contract, ’it is reasonable to treat the price actually agreed as representing (…) a market price’ which is not easily ascertainable[26]. The creditor may obtain the damages he hopes for (damages representing the profit he expected) only if he succeeds in proving that he could otherwise have obtained a superior advantage. To this extent, he regards the rules laid down by the UNIDROIT principles, the PECL (Principles of European Contract Law) and the DCFR as being in line with Italian law.

And yet, Professor Trimarchi wonders whether, when performance of the contract has been incomplete or defective, the damages should supplement the lesser market value of that performance, or reimburse the cost of completing it or of eliminating its defects. He considers that, except in cases where the results of these two approaches would be the same, the principle must be followed, of producing a result that is in accordance with the particular type of contract. In the case of a contract of works, the debtor must pay the cost of proper performance, if the works are not completed; if the works are completed but defective, it is necessary to balance the opposing interests, without burdening the debtor excessively; and the same applies to a contract of sale. But it is necessary to distinguish between types of sale, and in particular to consider the remedies available to the purchaser if he has the status of consumer.

On the question of loss of opportunity, legal and case law are uncertain whether to ascribe it to damnum emergens or lucrum cessans. Professor Trimarchi argues that the question is otiose, since opportunity can from time to time be assigned to one or the other category of loss and damage; loss of opportunity is only problematical in terms of causal connection and burden of proof [27].

Recovery of damages in the case of non-compliance with pecuniary obligations – on which interest at the legal rate is owing from the day that payment should have been made - should not be confused (he says) with the greater damages (maggior danno) for delay. The rate of legal interest varies according to whether Article 1284 of the Civil Code is applied, or Legislative Decree no. 231 of 2002 (Article5), which brings into force EC Directive on delayed payments (EC Directive no.35/2000). There is a considerable difference, and the courts will be required to reduce that difference, by evaluating the evidence put in by the creditor[28] . Article 1283 of the Civil Code exempts the debtor from liability for payment of interest upon delayed interest; according to Professor Trimarchi this rule is justified because otherwise the debtor would be exposed to too great a burden; but it must be applied reasonably; for example interest upon delayed interest is due if the creditor has voluntarily paid such interest, so that the rule does not apply in the case of recovery of damages for the loss actually caused by the delay or for the actual loss as liquidated in a judgment.

According to case law , in the assessment of unliquidated damages, ’monetary revaluation and interest constitute elements in the obligation to make good the loss, and can be awarded by the court even of its own motion, or on appeal, and even if not specifically claimed, since they must be treated as having been included in the originating formulation (‘petitum’) of the claim in damages, wherever they have not been expressly excluded’ (Court of Cassation 30.9.2009, no. 20943). In cases of unlawful or tortious non-contractual acts’ compensatory (compensativi) interest owing for the loss caused by delay in paying, cannot be calculated from the date of the unlawful or tortious act on the sum that has been liquidated as to capital and (then) revalued up to the moment of the judgment but must, on the contrary, be calculated either with reference to the single moments at which the sum equivalent to the lost asset nominally increases, by reason of the previously chosen average indexes of monetary revaluation, or, likewise on the basis of an average index, bearing in mind that damages for delay fall within the scheme of liquidated (damages) pursuant to Article 2056 of the Civil Code, which includes the equitable valuation of the loss and damage itself pursuant to Article 1226 of the Civil Code’ (Court of Cassation 9.3.2010 no. 5671).

In the case of breach, or delay in discharge, of an obligation to pay a sum of money (pecuniary obligations)– which is subject, as such, to the provisions of Article 1277 of the Civil Code -’damages may be awarded in respect of monetary revaluation of the debt, only on condition that the creditor alleges and proves, pursuant to Article 1224, second sentence, of the Civil Code, that there is a greater loss (maggior danno), flowing from the non-availability of the sum during the period of delay, which is not compensated by the payment of legal interest at the rate predetermined by Article 1224, first sentence, of the Civil Code; however there is in any event no possibility of compounding monetary revaluation and compensatory interest’ (Court of Cassation 3.6.2009,no. 12828).

The Courts, however, calculate the revaluation with reference to the ISTAT consumer prices index, compounding it with the interest, and thus revaluing the sum initially obtained, from year to year. This solution, according to Professor Trimarchi, was justifiable, years ago, when those engaging in commercial transactions were exposed to a very high rate of inflation. Now, however, the situation has changed and these rules are no longer justified. Thus, for the debt in money’s worth, the pecuniary equivalent ’must be determined with reference to the moment at which the entitlement to the asset or service is replaced by an entitlement to liquidated damages, or to the moment at which substitution of the asset or service became possible and has not been forthcoming. Interest can only be considered, during the subsequent period in which the liquidated sum is not forthcoming, but not for the period in which the asset or service was not forthcoming; these are life values which do not produce interest; for the preceding period account should be taken of the non-acquisition of the money and thus automatic revaluation is justified’ [29].

The English model

The fundamental rule in the matter of damages in the English com­mon law is that the loss and damage must be the measure of the damages and therefore the function of the latter is purely one of satisfaction (damages are compensatory). Therefore punitive dama­ges, which would tend, on the contrary, to punish the party at fault, are not allowed: the loss and damage to be dealt with is the loss suffered by the claimant, not the gain of the defendant. The loss includes any diminution in his assets caused by the breach or non-performance, either to the person or the assets of the creditor, including loss of profits on business transactions not brought to a satisfactory conclusion: it is only exceptionally that damages for non-pecuniary loss are awarded, in particular for damages for ‘injury to feelings’, as in the case of tourism services which turned out to be disastrous (Jarvis v. Swans Tours Ltd., [1973] 2 Q.B. 233). Finally in cases in which there has been no loss, for example because the party has succeeded in finding on the market, at the same price, goods equivalent to those which the non-performing party has not delivered, English law awards only ‘nomi­nal damages’.

The body of rules on contractual damages has to a large extent been formed since the middle of the nineteenth century and appears to have been profoundly influenced by continental law (particularly the French) following the translation into English of Pothier’s Treatise (1806). The most important case is that of Hadley v. Baxendale[30] in which the court held that: ‘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, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be sup­posed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it’.

According to learned legal writing there are three types of recoverable damages: expecta­tion damages, reliance damages and restitution damages.

Expectation damages consist of recovery for loss of bargain, which is equivalent to the lucrum cessans. The aim here is to put the aggrieved party in the position in which he would have found himself if the contract had been properly performed. The loss of bargain has two aspects, one consisting in the immediate loss suffered because of the non-performance of an expected service (for example the non-delivery of a car that has already been paid for), the other consisting in the consequential loss directly resulting from the non-performance (for example the loss suffered by not having been able to use the machine that has been purchased, to carry out works and produce profits). The assessment of expectation damages, in the former case, is usually made, as necessary, on the basis of the difference in value (that is, the difference in value between the goods or services received and those that the aggrieved party should have received), or on the basis of the ‘cost of cure’ (that is, the costs incurred in remedying the breach, for example by repairing defective goods).

Reliance damages represent the expenses and losses incurred by the aggrieved party in reliance upon the contract, whether in the course of its performance or in the period before it was made, which correspond to the damnum emergens. The function of these damages is to restore the aggrieved party to the position he would have been in if the contract had not been made.

Restitution damages, finally, represent the ‘benefit’ that has enured to the non-performing party by reason of the aggrieved party’s reliance upon the contract. In the event of a breach so serious as to give rise to total failure of consideration, this benefit must be restored in kind or to an equivalent value in money, to the party that conferred it. The function of these damages is to put the aggrieved party in the position in which he would have found himself if the contract had not been made. They are distinguished from reliance damages by the fact that they are based not on the loss suffered by the aggrieved party but on the unjust enrichment received by the non-performing party.

The aggrieved party maintaining an action for damages, must prove the existence of the contract, the breach and the loss and damage resulting from the breach. The claimant can choose the type of damages to claim in the action and can also claim for more than one type, provided that the amount of recovery is not greater than the loss and damage itself. There are limits however: the claimant cannot claim expectation damages if he fails to prove loss of bargain, or the value of his expectation, nor can he claim reliance damages if the expenses he has incurred have been greater than those reasonably foreseeable and the reimbursement of them would put him in a better position than that in which he would have found himself if the contract had been complied with. Finally the claimant cannot claim restitution damages if the breach by the other party is not so serious as to amount to a ‘total fai­lure of consideration’. Moreover, it is possible that termination of the contract with payment of restitution damages may mean that the claimant finds himself in a better position than that in which he would have found himself if the contract had been complied with: for example, if a contract of sale of a car turns out to be a bad bargain, because the agreed price was 10,000 pounds sterling, whereas its real value was 7,500 pounds sterling, in the case of non-delivery of the car by the vendor, the purchaser claiming termination for breach of contract and restitution dama­ges can obtain restitution of the 10,000 pounds sterling he has paid, rather than a car of lower value.

In English law it is the case of Hadley v. Baxendale that gives directions on this point: the defendant carrier who did not deliver a mill shaft in time for the mill to be repaired, caused a stoppage at the mill; however the defendant did not know and could not have known the serious economic consequences of the delay.

It follows from the rule in Hadley v. Baxendale, that to be recoverable, loss and damage must correspond to that which would normally occur in similar circumstances; the award of damages can be increased if the defendant had knowledge of specific circumstances; and loss and damage that have no causal connection with the breach cannot be recovered. Loss and damage suffered as a consequence of the claimant’s failure to discharge his duty to mitigate cannot be recovered. The claimant in fact has a duty to do everything possible to mitigate the loss and damage, taking reasonable steps to limit or prevent it increasing; if he does not do so he is liable for the further loss and damage caused.

Damages can be limited if the loss and damage has been contributed to by the default of the victim. This principle, which corresponds to that of contributory negligence in the law of tort, applies in English law only when the wrongful conduct of the victim amounts to an unlawful act, whether contractual or non-contractual, as can happen in a contract of transport or in contracts for professional services but not when the unlawful act is merely a breach of contract.[31]

In conclusion, it should be stated that if the facts support them, reliance and restitution damages can be claimed in an action for damages or an action for restitution, even when the contract has not yet been entered into, or when it is void, or has been avoided, or when it has been dissolved subsequently for frustration, or for total failure of consideration. Expectation damages on the other hand can be claimed only in contract, when the contract has been entered into but not been properly performed.

A comparative reading of PICC, PECL and DCFR

On the basis of the foregoing review of the reference material, we now turn to the PICC, the PECL and the DCFR. I omit the CISG, even though it inspired these other texts, which have followed one other in a short space of time, because it relates to contracts of sale, whereas the others relate to the recovery of damages for breach or non-performance of contract in general. The formulae are a little more precise, but still very general and allusive.

The three texts have a common core and some variants.

The general principle is that damages should constitute full satisfaction of the loss and damage caused by breach or non-performance of a contract (in the PICC and the PECL) or of an obligation (in the DCFR), as appears respectively at their Articles 7.4.2.; 9.502; and III. 3.701. That is, the aggrieved party must be placed in the same situation in which he would have found himself if the contract or obligation had been complied with.

The loss and damage (danno) is referred to as harm in the PICC and as loss in the other two models; and the award of damages represents both the damnum emergens and the lucrum cessans. In contrast to the provisions of many of the national legal systems, moral injury (non-pecuniary loss) is recoverable: the PICC specify, for example, that it includes ‘physical suffering or emotional distress’ (7.4.2); the DCFR describes this type of loss and damage as ‘pain and suffering and impairment of the quality of life’ (III.3.701.(3)); the PECL do not offer further particulars.

All these models provide that the loss and damage must have been reasonably foreseeable (7.4.4.; 9.503; III.3.703), but whereas the PICC do not provide that damages should be recoverable for voluntary breach or non-performance (following the CISG), both the PECL and the DCFR include unforeseeable loss and damage as recoverable, if the non-performance was ‘intentional or grossly negligent’ (PECL) or ‘intentional, reckless or grossly negligent’ (DCFR).

The PICC also include a provision as to ‘certainty of harm’ and the possibility of recovering damages for the loss of a chance (7.4.3).

In line with the provisions of the Italian Civil Code, the three models take account of circumstances in which the creditor reasonably mitigated the loss and damage (7.4.8; 9.505; III.3.705), in which case he has the right to be reimbursed for his expenses incurred in obtaining this advantage. They provide also for the possibility of contributory negligence on the part of the creditor and for a consequential reduction in the damages awarded against the debtor (7.4.7; 9.504; III.3.704), just as provided in the Italian Civil Code (Article1227 c.1).

The three models provide for the possibility of making up the difference in damages, where the creditor has reasonably made a ‘replacement transaction’ with third parties (7.4.5.; 9.506; III.3.706); in the Italian system this possibility is not provided for.

In contrast to the Italian model, which is silent on the point, the three models refer to the current price (7.4.6; 9.507; III. 3.707), and provide that in the event that the aggrieved party has not entered into a replacement transaction he can recover the difference between the contract price and the current price at the time of termination of the contract, in addition to damages for all further loss and damage suffered. This provision is useful in any case; in Italian law it would be possible to achieve the same result with recourse to lucrum cessans, if the aggrieved party can prove that he could have used or enjoyed possession of the subject matter of the contract to make a profit.

In the event of failure to discharge a pecuniary obligation, the three models – in contrast to the Italian Civil Code, which refers to interest at the legal rate, except in case of greater loss and damage (il maggior danno) – all follow the same formula, that is, payment of interest calculated ‘at the average commercial bank short- term lending rate to prime borrowers’ (DCFR III.3.708; PICC, 7.4.9; PECL, 9.508). In all three models the possibility is provided, of obtaining further damages if further loss and damage is proved. On this point it seems a little surprising that the PECL and the DCFR agreed with the choice of the PICC, since their rules are not intended to regulate only business-to-business contracts, as those of the PICC are.

The questions of penalty clauses, and payment in a particular currency, involve principles that go beyond the general rules on contractual damages and therefore the examination of them must be postponed to another occasion.

In conclusion one has to take account of the differences between the various models currently in the national legal systems, of which some examples have been given above. All in all the rules in the DCFR are reasonable. The solutions offered in the DCFR to the problems mentioned above constitute a step forward in the definition of common EU-wide principles. They may not only facilitate trans-national economic operations but also make for greater clarity in the national legal systems.

(Altalex, 30 July 2014. Article by Guido Alpa)


This text has been translated from Italian into English by dr. Anne Thompson and discussed and revised by prof. Mads Andenas and dr. Nello Pasquini. I am very grateful to all of them for their great help.

[1] COM (2010) 348 final, Brussels, 1.7.2010. Available on: click here. See also Commission Communication on European Contract Law and the revision of the aquis: the way forward - COM(2004) 651, 11.10.2004.

[2] von Bar, Clive, Schulte-Nölke, Principles, Definitions and Model Rules of European Private Law. Draft Common Frame of Reference (DCFR) (Munich, 2009). Available on: click here.

[3] Munich, 2009-2010.

[4] European Contract Law. Materials for a Common Frame of Reference: Terminology, Guiding Principles, Model Rules (Munich, 2008).

[5] A detailed account of this literature is offered by Alpa and Andenas, Fondamenti del diritto privato europeo, Milan, 2005 with a revised edition in Grundlagen des Europaischen Privatrechts, Heidelberg, 2009).

[6] And this is also reflected in teaching where the topics may be taken not only as part of a general obligations course but also as a remedies course, see the text book by Andrew Burrows Remedies for Torts and Breach of Contract (4th ed, Oxford 2004).

[7] An extension of this is found in the efficient breach theory associated with Richard Posner and the Law and Economics school of thought in US law, see Posner’s majority opinion in Lake River Corp. v. Carborundum Co., 769 F.2d 1284 (7th Cir. 1985).

[8] Ruiz, Istituzioni di diritto romano, Naples, 1943, pages 389 following.

[9] Talamanca, Istituzioni di diritto romano, Milan, 1990, page 658.

[10] Silvio Perozzi, Istituzioni di diritto romano, Rome, 1928, II ed., page 158 ff.

[11] Volante, Il sistema contrattuale del diritto comune classico (Classical common contract law] Milan, 2001, page 441 ff.

[12] Schupfer Il diritto delle obbligazioni in Italia nell’età del Risorgimento (Volume I, Turin, 1911) page 266.

[13] Girard, Manuale elementare di diritto romano, (An Elementary Manual of Roman law) Italian translation, Milan, Rome, Naples, 1909, page 658 following.

[14] Domat, Les loix civiles dans leur ordre naturel, 1689 (The natural order of the civil law] (Italian translation), Naples, 1796, I, page 241 , Part I, Book I, Title I, Section III.

[15] Page 279.

[16] Traité des obligations selon les règles tant du for de la conscience, que du for extérieur (Treatise on obligations according to the rules of the court of conscience as well as the external court) 1761 (Paris, Orléans, 1768, I, pages 176 following.

[17] Code civil des Français, Volume. V, Paris, Year XII,1804, Volume V, page 115.

[18] La Clef des Lois Romaines ou Dictionnaire analytique et raisonné de toutes les matières contenues dans le Corps de Droit, (The key to Roman law, or An analytical and reasoned dictionary of all matters contained in the Body of Law), Metz, 1809.

[19] Toullier, Droit civil français, Brussels, 1837, volume III, page 530.

[20] Baudry-Lacantinerie and Barde, Trattato di diritto civile. Delle obbligazioni, (Treatise on civil law. Obligations.) Italian translation, Volume I, Milan, s.d., pages 496 following.

[21] Dernburg Pandette (Volume II, Diritto delle obbligazioni (The law of obligations), Italian translation, Milan, 1903, pages 178-179.

[22] Nicola Stolfi, Diritto civile, Turin, 1932, Volume III, page 308.

[23] Diritto civile italiano. P.II Diritto delle obbligazioni. Volume.II Dei contratti in generale, (Italian Civil Law, part II The law of obligations, Volume II, Contracts. Padua, 1936, page 217.

[24] Pietro Trimarchi, Il contratto : inadempimento e rimedi (Contracts: breach or non-performance and remedies) Milan, 2010, pages 83 ff.

[25] Page 180.

[26] Page 116.

[27] Page 150 ff.

[28] Page 154.

[29] Page 169.

[30] [1854] 9 Exch. 341.

[31] Forsikringsaktieselskapet Vesta v. Butcher (1989) AC 852.

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