REUTERS | Leonhard Foeger

Exemplary damage limitation? Award for potentially punitive damages upheld despite public policy concerns

Under English law, it has long been held that “exemplary damages ought not to be, and are not according to any true principle of law, recoverable” for claims in breach of contract. The injured party in a contractual claim is entitled to “adequate compensation in money for the loss of that which he would have received had his contract been kept, and no more” (Addis v Gramophone Company Ltd).

In a recent case, Process & Industrial Developments Ltd v Federal Republic of Nigeria, however, the English Commercial Court gave permission for one claimant to enforce an award in the same manner as an English Court judgment, raising the topic of when damages are so high as to be punitive and therefore contrary to public policy. Pursuant to sections 66 (for domestic awards) and 103 (for New York Convention awards) of the Arbitration Act 1996, the courts may refuse enforcement of an award if to do so would be contrary to public policy.

P&ID case

The claimant, Process and Industrial Developments Ltd (P&ID), successfully enforced an award against the Federal Republic of Nigeria. The Commercial Court judge, Butcher J, rejected Nigeria’s application to set aside the order granting enforcement on the grounds that the damages awarded to P&ID were so high as to be punitive and against public policy.

P&ID issued arbitration proceedings against Nigeria in August 2012 for a repudiatory breach of a gas supply and processing agreement dated 11 January 2010. P&ID accused Nigeria of failing to make available to P&ID any natural gas for processing as required under the agreement. The term of the gas supply and processing agreement was 20 years.

As a result of the judgment, P&ID has leave to enforce the award for US $6,597,000,000 plus interest. Interest accrues on the award sum at a rate of 7% per annum, meaning that Nigeria’s debt increased by some US $1.3 million with every day that passes.

Nigeria claimed that the quantum of the award was so manifestly in excess of what could be considered compensatory, that the award was punitive in effect. In particular, Nigeria claimed that the tribunal:

  • Had applied an unduly low discount to its assessment of P&ID’s future cash flows.
  • Ignored Nigeria’s 10% carried interest under the agreement.
  • Failed to make a deduction for P&ID’s failure to mitigate.

The court noted on multiple occasions that the tribunal had clearly intended to award compensatory, and not punitive, damages. In such circumstances, the court concluded that “there is no public policy which requires the refusal of enforcement to an arbitral award which states and is intended to award compensatory damages”. It could therefore be argued that the decision is distinguishable from any future claim in which the damages are expressly referred to as punitive. However, the court’s comments elsewhere suggest that there is a principle of wider application in play.

Butcher J stated that “the public policy in favour of enforcing arbitral awards is a strong one, and, if a balancing exercise is required at all, outweighs any public policy in refusing enforcement of an award of excessive compensation”.

Exemplary or punitive?

It would appear, therefore, that even if the tribunal had explicitly and deliberately described the damages awarded as exemplary or punitive, that the public interest in the reliability and enforceability of arbitral awards would still be the prevailing principle.

Such a conclusion is supported by the decision in Pencil Hill Ltd v US Citta Di Palermo SpA which came before the Manchester Mercantile Court and concerned the “registration rights” of the Argentine footballer, Paulo Dybala. The relevant contract in that case included a provision whereby failure to pay any of the instalments due would incur a penalty which doubled the outstanding amount due.

The Court of Arbitration for Sport (CAS) reduced the penalty by 75% in accordance with the applicable Swiss Code of Obligations but did not refuse to enforce the clause as a matter of principle. Accordingly, the damages awarded to the claimant expressly included a penalty. The defendant sought to resist enforcement in this jurisdiction of the portion of the award which constituted a penalty, on the basis that it was contrary to English public policy.

The court disagreed, the judge concluding that “the public policy of upholding international arbitral awards… outweighs the public policy of refusing to enforce penalty clauses” and upheld the award in its entirety. The court was of the view that the imposition of a penalty did not offend “a universal principle of morality”, nor was it “so injurious to the public good” as to justify a departure from the ordinary course, giving recognition to awards made in accordance with the New York Convention.

The seminal case of Westacre Investments Inc v Jugoimport SDPR Holding Co Ltd implored courts to be mindful of the “importance of sustaining the finality of international arbitration awards in a jurisdiction which is the venue of more international arbitrations than anywhere else in the world”.

P&ID v Nigeria is thus the latest in a line of authority in which the public interest in the enforceability of arbitration awards has trumped the circumstances said to offend public policy contained in those awards.

Leave a Reply

Your email address will not be published. Required fields are marked *

Share this post on: