Does Breach of Contract Pay? : The Disgorgement of Profits under the UN Sales Convention
The theme of this study relates to the basic values of contract law: Is breach of contract a wrong? Is compensation the sole objective of contractual remedies? Does – and should – breach of contract pay? The themes reflect in the subject of the study, which is the disgorgement of profits under the United Nations Convention on Contracts for the International Sale of Goods (the “CISG” or “Convention”). The disgorgement of profits is a legal remedy that may come to question if breaching a contract is profitable to the defaulting party even though the aggrieved party is compensated. Disgorging profits denotes awarding the profit that arises out of the breach to the aggrieved party. The study discusses three research questions. The first question enquires whether a trend in domestic contract laws to expand the availability of disgorgement damages should be taken into account in the interpretation of the CISG. The issue revolves around the principle of uniform application. The principle entails that the interpreter should not read the Convention through the lenses of domestic law, but rather as an autonomous body of law. As a response to the first research question, the study suggests that the pro-disgorgement trend should not influence the interpretation of the CISG. The main reason for the conclusion is that the trend favouring disgorgement does not concern the majority of the CISG states, and taking such a trend into account in the interpretation of the CISG involves a significant risk of fragmenting the interpretation. The second research question asks if the CISG provides for disgorgement. The study reviews the wording and the legislative history of Article 74 CISG, as well as the principles underlying the Convention as regards contractual remedies, namely the economic benefits principle and performance principle. Following the examination, the study suggests that if the aggrieved party does not incur loss as a result of breach of contract, it is not in line with the CISG to grant disgorgement as a remedy. Such interpretation would be in glaring conflict with the wording of the Article. However, the study also suggests that the principle of protecting contractual performance may warrant an expansive reading of the term ‘loss’, thus leading to a comparable result as a true disgorgement remedy. The third and final research question asks whether the profit arising out of a breach can function as a measurement stick for compensatory damages. While the previous research question relates to granting the disgorgement of profits irrespective of whether the aggrieved party incurred loss, this section concerns the calculation of the loss caused by breach of contract. The study concludes that using the breaching party’s profit in the calculation of loss fits well in the framework of quantifying compensatory damages within the CISG, if the aggrieved party is able to show that the method is best suited to the circumstances of the individual case. To conclude, the study reflects on the disgorgement of profits through three questions; whether national developments on the area should impact the interpretation of the Convention, whether the CISG provides for disgorgement and whether the breaching party’s profits can be taken into account in quantifying the aggrieved party’s loss. As regards the bigger question of whether breach of contract pays – yes, it sometimes does. However, it is the legislator, not the interpreter, who can change this conclusion.
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