The (Im)mutability of liquidated damages in international arbitration

Abstract Liquidated damages clauses allocate risk between parties by providing for fixed rate compensation in the event of a breach. Whereas under the common law liquidated damages amounts are generally not subject to adjustment, the civil codes of countries in Europe, the Middle East, and Asia empower decision-makers to reduce and/or increase liquidated damages in certain circumstances. This article surveys 31 international arbitration cases applying the civil codes of 12 countries in which tribunals considered whether or not to adjust the amount of liquidated damages. The authors then propose a two-step framework based on the factors that arbitral tribunals consider before granting or refusing an adjustment request: first, a contractual inquiry into the parties’ intentions underlain by the tension between contract sanctity principles and fairness principles; and second, a factual inquiry into the proportionality of the contractual amount of liquidated damages relative to the actual harm.