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Perspectives from CISG, UNIDROIT Principles & PECL
Chengwei, Liu [*]
September 2003
[...]
CHAPTER 13. GENERAL MEASURE OF DAMAGES
Damages is perhaps the most important relief available to an aggrieved party in the sense that it is a remedy almost invariably pursued either in and of itself or in conjunction with other remedies.[1] According to the generally held view, the object of damages is to place the party to whom they are awarded in the same pecuniary position that they would have been in if the contract had been performed in the manner provided for by the parties at the time of its conclusion.[2]
The right to damages exists in the event of failure to perform any of the obligations which arise from the contract. Thus it is not necessary to draw a distinction between principal and accessory obligations.[3] As to be demonstrated, the aggrieved party is generally entitled to recover damages "whenever it suffers loss from the other party's unjustified failure to perform".[4]
Under the CISG, Art. 45/61 provides that if the seller/buyer fails to perform any of his obligations under the contract or the Convention, the other party may "claim damages as provided in articles 74 to 77" (Art. 45(1)(b)/61(1)(b)). Furthermore, the entitled party "is not deprived of any right he may have to claim damages by exercising his right to other remedies" (Art. 45(2)/61(2)). It is confirmed in the two Principles. Art. 7.4.1 UPICC establishes the principle of a general right to damages in case of non-performance as: "Any non-performance gives the aggrieved party a right to damages either exclusively or in conjunction with any other remedies except where the non-performance is excused under these Principles." Art. 9:501(1) PECL reads similarly: "The aggrieved party is entitled to damages for loss caused by the other party's non-performance which is not excused under Article 8:108."
The right to damages, "like other remedies, arises from the sole fact of non-performance. It is enough for the aggrieved party simply to prove the non-performance, i.e. that it has not received what it was promised. It is in particular not necessary to prove in addition that the non-performance was due to the fault of the non-performing party. The degree of difficulty in proving the non-performance will depend upon the content of the obligation and in particular on whether the obligation is one of best efforts or one to achieve a specific result."[5] In other words: "Where a party's obligation is to produce a given result, its failure to do so entitles the aggrieved party to damages whether or not there has been fault by the non-performing party, except where performance is excused [...]. Where a party's obligation is not to produce a result but merely to use reasonable care and skill it is liable only if it has failed to fulfill its obligation, that is to say if it has not exercised the care and skill it has promised. In the absence of a clause specifying the required degree of care and skill, this is equivalent to the commission of a fault."[6]
In short, damages can be claimed no matter whether the breach of contract has been culpably committed intentionally or negligently or in any other way. The mere fact of a breach of contract is sufficient.[7] To submit such claims, "the aggrieved party may request damages either as an exclusive remedy (for example damages for delay in the case of late performance or for defective performance accepted by the aggrieved party; damages in the event of impossibility of performance for which the non-performing party is liable), or in conjunction with other remedies. Thus, in the case of termination of the contract, damages may be requested to compensate the loss arising from such termination, or again, in the case of specific performance, to compensate for the delay with which the aggrieved party receives performance and for any expenses which might have been incurred. Damages may also be accompanied by other remedies (cure, publication in newspapers of, for example, an admission of error, etc.)."[8]
It is said that the right to damages is simply a direct deduction from the principle pacta sunt servanda, since its mainly effect is to substitute a pecuniary obligation for the obligation which was promised but not performed. It is therefore natural that the creditor should thereby be given full compensation. This compensation includes the loss suffered (damnum emergens), for example the expenses incurred in performing the contract, and the profit lost (lucrum cessans), for example the net profit which the contract would have produced. The award of compensation for the lost profit or the loss of a possible benefit has been frequently allowed by international arbitral tribunals.[9] This principle of full compensation is also reflected in the three instruments.
Under the CISG, Art. 74 provides a general rule which is applied when a party under Art. 45/61 is entitled to claim damages, and provides that the injured party may recover as damages "a sum equal to the loss, including loss of profit, suffered [...] as a consequence of the breach". The specific reference to "loss of profit" is necessary because in some legal systems the concept of "loss" standing alone does not include loss of profit.[10] Since Art. 74 is applicable to claims for damages by both the buyer and the seller and these claims might arise out of a wide range of situations, including claims for damages ancillary to a request that the party in breach perform the contract or to a declaration of avoidance of the contract, no specific rules have been set forth in Art. 74 describing the appropriate method of determining "the loss ... suffered ... as a consequence of the breach". The court or arbitral tribunal must calculate that loss in the manner which is best suited to the circumstances.[11]
The principle of full compensation is expressly stipulated under the very heading of "Full Compensation" in Art. 7.4.2(1) UPICC: "The aggrieved party is entitled to full compensation for harm sustained as a result of the non-performance. [...][12] In this respect, Art. 9:502 PECL states that: "The general measure of damages is such sum as will put the aggrieved party as nearly as possible into the position in which it would have been if the contract had been duly performed. [...]" This Article "combines the widely accepted 'expectation interest' basis of damages and the traditional rule of 'damnum emergens' and 'lucrum cessans' of Roman law, namely that the aggrieved party is entitled to compensation of such amount as will give it the value of the defeated contractual expectation. In a contract for the sale of goods or supply of services this is usually measured by the difference between the contract price and the market or current price but where the aggrieved party has made a cover transaction [...] it can elect to claim the difference between the contract price and the cover price. The sums recoverable as general damages embrace both expenditure incurred and gains not made. Damages under this Article are not intended to provide restitution (i.e. restoration of the parties of the status quo ante by mutual surrender of benefits received); [...]."[13]
The principle of full compensation under the three texts "makes it clear that the basic philosophy of the action for damages is to place the injured party in the same economic position he would have been in if the contract had been performed".[14] However, damages may be excused as in the case of force majeure or of an exemption clause. Hardship does not in principle give rise to a right to damages.[15] In other words, the aggrieved party may not recover damages for loss not caused by the failure to perform. However, not every intervening event, even if unforeseeable, which exacerbates the loss falls within this principle. The question in each case is whether that event would have had an impact on the contract if the failure in performance had not occurred. Only if this question is answered in the affirmative will the event in question be treated as breaking the chain of causation.[16]
In short, the general measure of damages is the principle of full compensation, namely that the creditor is entitled to be put into the same position as he would have been had the debtor complied with the terms of his contract.[17] In application of the principle of full compensation regard is to be had to any changes in the harm, including its expression in monetary terms, which may occur between the time of the non-performance and that of the judgment. The rule however is not without exceptions: for example, if the aggrieved party has itself already made good the harm at its own expense, the damages awarded will correspond to the amount of the sums disbursed.[18]
It is recalled that Art. 74 provides for compensation for "loss, including loss of profit, suffered as a consequence of the breach." Following the logic of this provision, it can be concluded that loss should be divided into two main categories: actual or effective loss and loss of profit.[19]
It is said that CISG Art. 74 "seeks to give the injured party the 'benefit of the bargain', as measured by expectation interests as well as reliance expenditures".[20] Following this approach, a measure protecting "expectation interest" has been said to accord directly with the underlying morality of promise keeping. A party's expectation interest will generally represent the actual worth of the contract to that party. And perfect expectation interest will leave an injured party indifferent between performance and nonperformance. However, the expectation interest is not the only interest that may be protected by an award of damages. Sometimes, so-called "reliance interest" is protected as well, the idea behind which is that if the contract has not been duly performed, the aggrieved party may seek to recover those expenses which he incurred having acted in reliance on the contract, as these expenses would otherwise be wasted. "This occurs when the plaintiff incurs expense in performing the contract, or perhaps even in preparing for its performance, in reliance on the defendant also performing his part of the bargain."[21] The core of the protection of reliance interest is to put the aggrieved party into the situation in which he would have been had the contract never been performed. It is the other side of a coin.
In specifying the harm for which damages are recoverable, UPICC Art. 7.4.2(1), which reads in part: "Such harm includes both any loss which it suffered and any gain of which it was deprived", following the rule laid down in Art. 74 CISG, states that the aggrieved party is entitled to compensation in respect not only of loss which it has suffered, but also of any gain of which it has been deprived as a consequence of the non-performance. The notion of loss suffered must be understood in a wide sense. It may cover a reduction in the aggrieved party's assets or an increase in its liabilities which occurs when an obligee, not having been paid by its obligor, must borrow money to meet its commitments. The loss of profit or, as it is sometimes called, consequential loss, is the benefit which would normally have accrued to the aggrieved party if the contract had been properly performed. The benefit will often be uncertain so that it will frequently take the form of the loss of a chance.[22] Similarly, 9:502 PECL provides in part that: "Such damages cover the loss which the aggrieved party has suffered and the gain of which it has been deprived." Thus, in addition to its primary claim for loss of bargain (that is, the loss which any aggrieved party would be likely to suffer from the non-performance) the aggrieved party can recover for loss resulting from its particular circumstances, so far as foreseeable (see Chapter 14). In Anglo-American usage such loss is sometimes termed "consequential loss".[23]
Furthermore, the loss for which damages are recoverable under PECL clearly includes "future loss which is reasonably likely to occur" (Art. 9:501(2)(b)), "that is, loss expected to be incurred after the time damages are assessed. This requires the court to evaluate two uncertainties, namely the likelihood that future loss will occur and its amount. As in the case of accrued loss before judgment (see Article 9:502) this covers both prospective expenditure which would have been avoided but for the breach and gains which the aggrieved party could reasonably have been expected to make if the breach had not occurred. Future loss often takes the form of the loss of a chance."[24] It is further noted: "All the legal systems will allow damages for loss which will occur after the day damages are assessed provided the loss is not too remote, [...]. Such loss may follow from the death of a breadwinner (spouse or parent) or personal disablement, where recoverable as contract damages, and from loss of future profit. See for instance CISG art. 74 [...]"[25] In addition, it is said that the issue of future damages is fully dealt with in its Art. 7.4.3 UPICC under the heading "Certainty of Harm" (see Chapter 14).
In short, besides a broad division, none of the three instruments defines what concrete types of loss can be compensated. "It seems that the principle of full compensation for harm, in the light of the particular contract and circumstances, should be the basis for determining the loss. This principle, in turn, will lead us to the conclusion that all kinds of loss, suffered by the party and caused by the breach, are recoverable."[26] However, whether non-pecuniary loss can be compensated seems to be controversial and will be discussed in the following section.
13.4 COMPENSATION OF NON-PECUNIARY LOSS
As discussed above, it is the entire loss, including loss of profit, suffered as a result of the breach of contract, which has to be compensated. Art. 74 CISG is, however, not applied to claims for damages in the case of the death or the bodily injury of a person caused by the goods, irrespective of whether or not the contracting party himself or a third person is involved. Art. 5 CISG excludes the claim for such damages from the scope of the Convention. The CISG only knows of compensation in money.
However, a rule governing such non-pecuniary loss might find application, in international commerce, in regard to contracts concluded by artists, outstanding sportsmen or women and consultants engaged by a company or by an organization.[27] Therefore, recoverable loss under both UPICC and PECL, whose sphere of application is each broader than the CISG and not limited to sales of goods, is not confined to pecuniary loss but may cover non-pecuniary loss, for example, pain and suffering, inconvenience and mental distress resulting from the failure to perform. Art. 7.4.2(2) UPICC expressly provides for compensation also of non-pecuniary harm and states: "Such harm may be non-pecuniary and includes, for instance, physical suffering or emotional distress." Art. 9:501(2)(a) PECL also states that the loss for which damages are recoverable under PECL includes "non-pecuniary loss". Conceptually, non-pecuniary loss can be defined as loss, flowing from an injury or damage to non-material values, which "are such values that do not have 'economic content' and are inseparable from the personality of a bearer of these values."[28] Non-pecuniary loss may be pain and inconvenience following from physical harm or from disappointment or vexation, and may be due to attacks on a person's personality, reputation or honour or to the death of a spouse or other closely related person.[29] The compensation of non-material harm may assume different forms and it is for the court to decide which of them, whether taken alone or together, best assures full compensation. The court may not only award damages but also order other forms of redress such as the publication of a notice in newspapers designated by it (e.g. in case of breach of a clause prohibiting competition or the reopening of a business, defamation etc.).[30]
However, one should note that such a radical difference between the damages provisions in the CISG and those in the two Principles, namely in respect of non-pecuniary damages or damages resulting from personal injury or death, "does not so much reflect a difference in the basic approach between the CISG and UNIDROIT Principles [as well as European Principles] as the fact that the drafters of the CISG wished to remove the complex area of products liability from the sphere of the CISG. The fact that such a provision is included in the UNIDROIT Principles [as well as European Principles] provides good grounds for arguing that the provisions of article 5 CISG should be restrictively interpreted and only the liability for personal injury or death should be excluded, but not other personal damages such as damage to reputation."[31]
It is submitted that that there may be at least two kinds of situations in which this type of loss may be compensated under the CISG. The first situation is the one where the purpose of the transaction is entirely non-material, and the parties are aware of such a purpose. Accordingly, the loss, caused by the breach, which totally or substantially undermines the whole (non-material) purpose of the transaction, should be recoverable. However, in a context of international commerce, the situations of this kind seem to be quite non-typical. The second situation is where an injured party's business reputation was negatively affected as a result of the breach. In commerce in general and in international sales, in particular, business reputation plays an important role. It can affect and sometimes pre-determine the state of affairs of a subject of commercial activity. Thus, it is suggested that, at least in theory, loss of reputation in itself should be recoverable under Art. 74.[32]
13.5 COMPUTATION OF LOSSES AND GAINS
Despite the principle of full compensation for harm will lead us to the conclusion that all kinds of loss, suffered by the party and caused by the breach, are recoverable, it seems to be universally accepted that loss should be offset by the gains which the aggrieved party has made due to the non-performance.[33] It is submitted that the second consequence of the principle that damages are compensatory is that an award of damages should not enrich the plaintiff: he cannot recover more than his loss.[34]
In any event, the aggrieved party must not be enriched by damages for non-performance. It is for this reason that p Art. 7.4.2(1) UPICC prescribes pertinently that account must be taken of "any gain to the aggrieved party resulting from its avoidance of cost or harm", whether that be in the form of expenses which it has not incurred (e.g. it does not have to pay the cost of a hotel room for an artist who fails to appear), or of a loss which it has avoided (e.g. in the event of non-performance of what would have been a losing bargain for it).[35] To the same effect, the Official Comment to the PECL Art. 9:502 clearly states: "The aggrieved party must bring into account in reduction of damages any compensating gains which offset its loss; only the balance, the net loss, is recoverable. Similarly, in computing gains of which the aggrieved party has been deprived, the cost it would have incurred in making those gains is a compensating saving which must be deducted to produce a net gain. Compensating gains typically arise as the result of a cover transaction concluded by the aggrieved party. But it is for the non-performing party to show that the transaction generating the gains was indeed a substitute transaction, as opposed to a transaction concluded independently of the default. A compensating saving occurs where the future performance from which the aggrieved party has been discharged as the result of the non-performance would have involved the aggrieved party in expenditure."[36]
In other words, the party entitled to damages does not suffer a "loss" to the extent that the breach of contract also confers advantages on him which absorb the detriment suffered. This approach, common to most legal systems where it is said that damages should compensate the loss of the aggrieved party -- neither more nor less, focuses on how to make the injured party whole, seeking to encourage the making of contracts by assuring the injured party the value of performance and by eliminating the prospect of penalties for non-performance. In short, the non-performance must be a source neither of gain nor of loss for the aggrieved party.[37]
Finally, it is to be noted that despite of the full compensation doctrine, each of the three instruments "does not provide for nominal damages for a breach which has caused the aggrieved party no loss."[38] It is a common feature that damages are awarded only if and to the extent the aggrieved party has suffered a loss as a consequence of the non-performance of the contract. No action for damages lies where the claimant fails to prove any loss resulting to him from the breach of contract.[39]
FOOTNOTES: Chapter 13
* Chengwei, Liu. LL.M. of Law School of Renmin University of China, P.O. Box 9-01 No. 1 (International Law), Law School of Renmin University of China, 59 Zhongguancun Street, Beijing 100872, China. E-mail: Genes@263.net.
1. See editorial remarks by Albert H. Kritzer on CISG Art. 74. Available online at <http://www.cisg.law.pace.edu/cisg/text/peclcomp74.html>.
2. See Saphire Award, ILR (1967); p. 185. Available online at <http://tldb.uni-koeln.de/TLDB.html>; TLDB Document ID: 261600.
3. See Comment 1 on Art. 7.4.1 UPICC. However, one should note that some of the acts described to be obligations under the CISG are nothing but mere incumbencies whose non-performance does not entail the right to claim damages but results in a loss of rights (like the obligation to examine the goods and the buyer's obligation to give notice under Arts. 38 and 39.)
4. See Comment and Notes to the PECL: Art. 9:501. Comment A. Available online at <http://www.cisg.law.pace.edu/cisg/text/peclcomp74.html>.
7. See Fritz Enderlein, Dietrich Maskow, International Sales Law: United Nations Convention on Contracts for the International Sale of Goods, Oceana Publication (1992); p. 298. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/enderlein.html>. The right to damages may arise not only in the context of non-performance of the contract, but also during the pre-contractual period. See, for instance, under the UNIDROIT Principles Art. 2.15 in case of negotiations in bad faith, Art. 2.16 in the event of breach of the duty of confidentiality, or Art. 3.18 in the case of mistake, fraud, threat or gross disparity. (See Comment 3 on Art. 7.4.1 UPICC) However, theses issues don't fall within my discussion in this PART.
8. See Comment 2 on Art. 7.4.1 UPICC.
10. See Secretariat Commentary on Art. 70 of the 1978 Draft [draft counterpart of CISG Art. 74], Comment 3. Available online at <http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-74.html>.
11. Ibid., Comment 4. The Secretariat Commentary goes on to discuss two common situations which might arise under Art. 74 and suggests means of calculating "the loss ... suffered ... as a consequence of the breach" as: Where the breach by the buyer occurs before the seller has manufactured or procured the goods, article 70 [draft counterpart of CISG article 74] would permit the seller to recover the profit which he would have made on the contract plus any expenses which he had incurred in the performance of the contract. The profit lost because of the buyer's breach includes any contribution to overhead which would have resulted from the performance of the contract. (Comment 5) Where the seller delivers and the buyer retains defective goods [If the delivery of the defective goods constituted a fundamental breach of contract, the buyer could avoid the contract. In such a case he would measure his damages under Art. 75 or 76 to the extent that those articles were applicable.], the loss suffered by the buyer might be measured in a number of different ways. If the buyer is able to cure the defect, his loss would often equal the cost of the repairs. If the goods delivered were machine tools, the buyer's loss might also include the loss resulting from lowered production during the period the tools could not be used. (Commentary 6) If the goods delivered had a recognized value which fluctuated, the loss to the buyer would be equal to the difference between the value of the goods as they exist and the value the goods would have had if they had been as stipulated in the contract [Art. 74 gives no indication of the time and place at which "the loss" to the injured party should be measured. Presumably it should be at the place the seller delivered the goods and at an appropriate point of time, such as the moment the goods were delivered, the moment the buyer learned of the non-conformity of the goods or the moment that it became clear that the non-conformity would not be remedied by the seller under Art. 37, 46, 47 or 48, as the case may be.]. Since this formula is intended to restore him to the economic position he would have been in if the contract had been performed properly, the contract price of the goods is not an element in the calculation of the damages. To the amount as calculated above there may be additional damages, such as those arising out of additional expenses incurred as a result of the breach. (Commentary 7)
12. See Comment 1 on Art. 7.4.2 UPICC.
13. See Comment and Notes to the PECL: Art. 9:502. Comment A. Available online at <http://www.cisg.law.pace.edu/cisg/text/peclcomp74.html>.
17. See P.D.V. Marsh, Comparative Contract Law: England, France, Germany, Gower Publishing (1994); p. 313.
18. See Comment 4 on Art. 7.4.2 UPICC.
19. See Djakhongir Saidov in "Methods of Limiting Damages under the Vienna Convention on the International Sale of Goods". Available online at <http://www.cisg.law.pace.edu/cisg/biblio/saidov.html>.
20. See Farnsworth in "Damages and Specific Relief": 27 Am. J. Comp. L. (1979); p. 249. (Cf. Jeffrey S. Sutton in "Measuring Damages Under the United Nations Convention on the International Sale of Goods"; 50 Ohio State Law Journal (1989); n. 61. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/sutton.html>.)
22. See Comment 2 on Art. 7.4.2 UPICC.
23. Supra. note 13, Comment B.
27. See Comment 5 on Art. 7.4.2 UPICC.
31. See Sieg Eiselen in "Remarks on the Manner in which the UNIDROIT Principles of International Commercial Contracts May Be Used to Interpret or Supplement Article 74 of the CISG" (2002). Available online at <http://www.cisg.law.pace.edu/cisg/principles/uni74.html>. Eiselen further states that the provisions of Art. 74 CISG are reflected in Arts. 7.4.1 and 7.4.2 of the UNIDROIT Principles. In Art. 7.4.2 of the UNIDROIT Principles the emphasis is on full compensation for harm sustained as a result of breach. The wording "harm sustained" in the UNIDROIT Principles is probably wider than the words "a sum equal to the loss suffered" in the CISG reflecting the difference in approach to personal injuries discussed above. In case of doubt the interpretation of Art. 74 CISG should also lean toward full compensation for harm as far as harm has not been excluded from the scope of the CISG by Art. 5.
32. Supa note 19. However, hardly can such losses be proved, let alone the establishment of foreseeability, causal link and certainty (if applicable). In practice, the damages for loss of (injury to) reputation in itself will hardly be recoverable because of the difficulty of proof and meeting the requirements of Art. 74 CISG.
34. See Treitel, G.H. in "Remedies for Breach of Contract": David/von Mehren eds., International Encyclopedia of Comparative Law, Bd. VII, Tübingen (1976); p. 25. TLDB Document ID: 117200.
35. See Comment 3 on Art. 7.4.2 UPICC.
36. Supra. note 13, Comment C.
38. Supra. note 4. However, some legal systems, e.g., Anglo-American law, sometimes award nominal damages -- a symbolic compensation even if the aggrieved party has not suffered any loss.
39. Art. 432 of Contract Code Drawn upon on behalf of the English Law Commission. TLDB Document ID: 450200.
CHAPTER 14. LIMITS TO CLAIMS FOR DAMAGES
While it is encouraging to see broader protection for the injured party, limiting the liability of the breaching party may also be desirable under some circumstances. It is not always wise to make the defaulting promisor pay for all the damage which follows as a consequence of his breach. The principle, which is common to many legal systems, is that of limiting the contractual liability of the party in breach.[1]
14.1 GENERAL CONSIDERATIONS
Based on the idea that the recovery of damages cannot be unlimited, the purpose of using the
methods of limiting damages is to restrict the liability in damages. This purpose makes the issue
of limiting damages an integral part of the general measure of damages. In this respect, it is to be
noted that the respective techniques limiting damages vary depending on the principles established
in particular legal systems.
Generally speaking, the limits of recovery are in part derived from the conditions of the non-performing party and in part from circumstances of the aggrieved party. On the one hand, most
legal systems often give special consideration to the non-performing party and limit damages out
of consideration for it. They do so by a great variety of techniques such as requiring that the non-performing party was at fault; or that he foresaw or could have foreseen the loss; or that he
"adequately" caused the loss.[2] On the other hand, with regard to those limitations of recovery
which are derived from the conditions of the aggrieved party, two types of loss clearly stand out:
the first is loss suffered by the aggrieved party which results from his own unreasonable behavior
or his failure to take reasonable steps to mitigate his loss; and the second ground for limiting
recovery is the presence of savings or gains which result from the breach of contract (see Chapter
13).
These two heads of limiting the aggrieved party's loss and therefore of his compensation seem to
be very widely recognized. For example, the CISG has adopted the Anglo-American foreseeability
test (Art. 74). By contrast, the CMEA General Conditions for Deliveries combine the requirements
of a causal connection and of fault on the part of the non-performing party (§ 67 D(1)(c) and (d),
(2) and (3)). And the aggrieved party's burden of mitigating the loss is also expressly spelt out in
the uniform laws. However, in view of the great diversity of approaches it is not yet possible to
explain and compare all of these various approaches towards the limiting of damages. For this
reason, the author will focus below on those well-known methods such as foreseeability, certainty,
mitigation and contribution as adopted under the three instruments.
14.2.1 In General
One of the methods of limiting damages, which has received an extensive application in various
legal systems and international acts, is the principle of foreseeability, or so-called contemplation
principle. This principle has a long history. It was first established in Roman law. Much later, it
was established in the Code Napoleon and, consequently, adopted by a number of legal systems.
This rule has been adopted by the Common law as well. It was established in a famous case
Hadley v. Baxendale and further restated in Victoria Laundry v. Newman Industries.[3]
Considering numerous versions of foreseeability in particular legal systems,[4] it is decided in this
section to focus on such a test as similarly established under the three studied instruments. In this
respect, the second sentence of Art. 74 CISG closely resembles the common law foreseeability
requirement: "Damages may not exceed the loss which the party in breach foresaw or ought to
have foreseen at the time of the conclusion of the contract, in the light of the facts and matters
of which he then knew or ought to have known, as a possible consequence of the breach of
contract." It is also adopted in the two Principles. Art. 7.4.4 UPICC prescribes that: "The non-performing party is liable only for harm which it foresaw or could reasonably have foreseen at
the time of the conclusion of the contract as being likely to result from its non-performance." Art.
9:503 PECL stipulates that: "The non-performing party is liable only for loss which it foresaw
or could reasonably have foreseen at the time of conclusion of the contract as a likely result of
its non-performance, unless the non-performance was intentional or grossly negligent."
Clearly, these provisions cited above resemble in substance. I, therefore, will focus on the
approach taken on by the CISG, with a comparison with the other instruments where the approach
developed or worded differently. According to the second sentence of Art. 74 CISG, "the only
damages that must be compensated are those which the party in breach foresaw or ought to have
foreseen at the time of the conclusion of the contract. [...] The underlying idea is that the parties,
at the conclusion of the contract, should be able to calculate the risks and potential liability they
assume by their agreement."[5] This rule encourages the injured party to disclose any special
circumstances and is therefore consistent with the cooperation and communication goals. It is also
consistent with the purpose of not penalizing a breaching party who did not know of special
circumstances and could not take special precautions.[6]
Texually speaking, in considering ways to limit the liability of the breaching party under Art. 74
CISG, there is "seven clauses" referred to as "bare bones" which a court must analyze. These
clauses are: "Such damages may not exceed" the loss which "the party in breach" "foresaw or
ought to have foreseen" "at the time of the conclusion of the contract" in light of the "facts and
matters of which he then knew or ought to have known" "as a possible" "consequence of the
breach of contract".[7]And in the following paragraphs the author will selectively lucubrate into
some of these "bare bones".
14.2.2 Test for Foreseeability
It is clear that the second sentence of Art. 74 CISG provides for both subjective and objective
standards with respect to foreseeability by using the wording "foresaw or ought to have foreseen".
What is meant here is to foresee subjectively, but the Convention does not stop at that. Insofar as
damage is a completely normal consequence of a breach of contract, it should have been foreseen.[8]
In order to determine the foreseeability, it will be sufficient to prove either that the party actually
foresaw the loss, or was objectively in a position to foresee it. Therefore, it is not necessary to
prove that the party in breach actually foresaw the loss. The proof of an objective element will be
sufficient to make the party liable for loss.[9] However, such liability may be restricted on the basis
of a reasonable allocation of risks under the contract. In particular, it is not quite exact to state that
the subjective foreseeability does not matter. Subjective foreseeability plays a role when the
resulting loss is above what would have been regarded as the normal measure by any reasonable
person, but actually was foreseen by the party in breach.[10] On the other hand, "it may explicitly or
implicitly follow from the terms of the contract that certain losses should not be covered by the
party's liability, even though they were foreseen or objectively foreseeable."[11]
In short, the breaching party would be liable when proved either that the party actually foresaw
the loss, or was objectively in a position to foresee it, in consideration of particular circumstances.
To clarify this double test, there are more details needed discussing in the following paragraphs.
14.2.3 Party Concerned and Reference Point
The first question is: who is required to foresee or to be in a position to foresee? It is said that
"foreseeability, as understood in Article 74, depends on the knowledge of facts and matters which
enable the party concerned to foresee the results of the breach".[12]
In this regard, it's only "the party in breach" whose knowledge matters. This is clearly shown by
the wording in Art. 74 "the loss which the party in breach foresaw or ought to have foreseen".
This position is somewhat different in English law. In particular, in Hadley v. Baxendale, the
requirement was that the loss be "in the contemplation of both parties".[13] What's the idea
underlying this formula of Art. 74 in stating that it is only "the party in breach" who is required to
foresee or to be in a position to foresee? It is said that, "[t]he C.I.S.G. article, in limiting reference
to the party in breach, surely does not envision delivering a windfall to the plaintiff, because the
plaintiff recovers something not foreseen. Rather, this language reflects the view that the focus
should be on the party who will have to answer for the amount of the loss."[14]
Then the second issue arises: What's the relevant time for evaluation of foreseeability? Adopting
the same position as that set out in the Hadley rule or English law (where the relevant time for
evaluation of foreseeability is generally the time of making the contract), Art. 74 CISG directly
refers foreseeability to "the time of the conclusion of the contract" for determining what is
foreseeable.
It follows: "It is not sufficient that the party in breach could at the time of the delivery of the
defective goods or at the time of performance of the non-delivered goods foresee the damage to
be caused by the breach of contract. The party in breach rather should have been able to foresee
the damage at the time of the conclusion of the contract. He should at the time of the conclusion
of the contract be in a position to calculate his risk".[15] Generally, the "at the time" language in Art.
74 seems to be "problem-free", this rule is well settled and has proved remarkably resistant to
change.[16] The purpose here is to emphasize the important role played by the time precision in
assessing foreseeability. The fact that negotiating leading to the conclusion of the contract may last
a certain period of time makes it clear that precision in relation to the time becomes very
important. It is therefore to be noted that, careful attention should be paid to the requirements of
some legal systems governing the conclusion of contract.
In any event, the moment of the conclusion of the contract is the decisive time in determination
of the party's foreseeability. "No possible foreseeability, which may take place after this moment,
should have any legal consequences."[17] It is only within such limits of the particular period of time,
i.e., the time of the conclusion of the contract, that other important elements of foreseeability will
be examined.
14.2.4 Evaluation of Foreseeability
Generally, the terms of the contract, together with knowledge of the party in breach, are among
the first important factors in evaluation of foreseeability. Moreover, Art. 6 of the CISG clearly
shows that in case there are hesitations as to the sequence or priority of application of these
elements, precedence should be given to the "express or implied" intentions of the parties with
respect to the terms of the contract. However, the party's actual foresight and the ability to foresee
may not always be explicitly reflected in the contract. "It would be more correct to say that
foreseeability is partly reflected by the terms of the contract. Besides the contract terms, there are
other elements, which are essential in evaluating foreseeability: knowledge and trade usage. These
two elements may or may not be explicitly reflected in the contract."[18]
As mentioned above, the foreseeability was established at common law in the famous case Hadley
v. Baxendale and further restated in Victoria Laundry v. Newman Industries. In this regard, it was
once thought that Hadley v. Baxendale (1854) should be understood as establishing two rules,
namely that "the damages should be such as may fairly and reasonably be considered as arising
either: a) naturally, i.e. according to the usual course of things from such breach of contract itself;
or b) 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." This test was reformulated in Victoria
Laundry v. Newman in what has been referred to as a classic statement of the law: The aggrieved
party is only entitled to recover such part of loss actually resulting as was the time reasonably
foreseeable as liable to result from the breach. What was at the time so foreseeable depends on the
knowledge that the parties had at the time of the conclusion of the contract, or, "at all events", the
party in breach had at that time. The two rules of Hadley v. Baxendale become one. There is the
imputed knowledge which every reasonable person is taken to know in the ordinary course of
things and the actual knowledge of special circumstances of which the contract-breaker was aware
at the time of entering into contract.[19]
It follows that under English law, knowledge can be of two kinds: imputed knowledge (which in
"the ordinary course of things" is possessed by any reasonable person (regardless of whether the
party in breach actually possesses it or not) and actual knowledge (which means knowledge the
party in breach actually has of some special circumstances, which lie beyond "the ordinary course
of things"). In turn, the CISG does not directly establish the two parts of the Hadley rule, which
subsequently gave way to the doctrine of two types of knowledge. Nonetheless, as to be furthered
below, analogous subjective and objective standards have been established with respect to the
party's knowledge: "the facts and matters of which he then knew or ought to have known".
Therefore, such wording is likely to cover "the ordinary course of things" case as well as "the
special circumstances" case.[20]
It is here recalled the manifestation of objective and subjective standards with respect to the
foreseeability test. What are the standards with respect to the knowledge itself, which has been
established as an essential element for evaluation of foreseeability? It suggests that a similar
approach has been taken on when Art. 74 uses the wording "in the light of the facts and matters
of which he then knew or ought to have known" to define the foreseeability formula. "This wording
serves to objectify the foreseeability. What matters is not anymore the actual foreseeability, rather,
it is the foreseeability which can be expected from a reasonable party in the same situation."[21]
Interpreting this wording may involve the consideration of several sources as regards the
"knowledge" available to the breaching party at the time of the conclusion. From one source,
based on a subjective standard: "The party in breach will also be considered as having known the
facts and matters enabling him to foresee the possible consequences of the breach, and therefore,
as having foreseen them, whenever the other party to the contract has drawn his attention to such
possible consequences in due time. Should a party at the time of the conclusion of the contract
consider that breach of contract by the other party would cause exceptionally heavy losses or
losses of an unnatural nature, he may make this known to the other party with the result that if
such damages are actually suffered they may be recovered."[22] Sutton also submits that, a party to
a contract that may lead to unusually large losses may want to make these dangers known to the
other contracting party in order to implicate the subjective prong of the Art. 74 foreseeability test.
It is obvious that a party who fears suffering an extraordinary loss as a consequence of the breach
of contract by the other party, should make this known to the latter at the conclusion of the
contract so as to enable him to calculate the risk.[23]
However, it is not the only available source. The CISG does not stop at actual knowledge but
establish the imputed one as well. This is the other source, from which the breaching party will
have the knowledge that merchants in general have. The party in breach will be considered as
knowing the facts and matters enabling him to foresee the consequences of the breach of contract
if such knowledge generally flows from the experience of a merchant or, in other words, if such
knowledge can in the given case be expected of him having regard to his experience as a merchant.
"Generally, knowledge, in the light of an objective standard, should be generally imputed to the
party in breach if it can be objectively considered that such knowledge is based on the experience
of the party as a 'merchant'."[24] At that, the circumstances of a concrete case should be taken into
account as well. In this respect, to what extent the party in breach is capable of taking the
circumstances into consideration may depend on his position, especially which has been affected
greatly by advances today in technology. "Modern business practices (and equipment), accounting
methods, and the extensive communication of information make more knowledge available to both
parties. This increased knowledge may make potential amounts of loss easier to compute. A
potential breacher today will have available a great deal more information about what can happen
concerning the contract and hence 'ought to know' a great many more facts than a potential
breacher in the nineteenth century."[25]
It seems that in some cases, a trade usage can also serve as an additional factor for evaluation of
foreseeability. A trade usage can be relevant for determining both subjective and objective
standards with respect to foreseeability.[26] Where a trade usage is relevant in evaluation of
foreseeability, the applicability of an objective or a subjective standard of foreseeability can be
linked to the grounds provided for in Art. 9 CISG, which contains both subjective and objective
grounds for applicability of a usage to the parties' legal relationships.[27]
In this regard, Saidov states as follows: "If a subjective ground is applicable, i.e. if the parties have
specifically agreed to a particular trade usage, or established a practice between themselves, or
knew of a usage, then such a usage or practice will be likely to determine the actual knowledge
of a party in breach. The actual knowledge, in turn, can, on the one hand, establish the actual
foresight. On the other hand, the fact that a party actually knew of something does not necessarily
mean that he actually foresaw the consequences in question. The actual knowledge can as well
lead to the establishment of an objective standard, i.e. that a party, having known of certain
conditions, was in a position to foresee the consequences of the breach, but did not in fact foresee
them. If an objective ground for applicability of a usage comes into play, then this ground is likely
to impute the knowledge of the party in breach. Provided that a party did not actually possess the
knowledge, the imputed knowledge will be more likely to lead to determination of an objective
foreseeability ('ought to have foreseen'), rather than of an actual foresight. The reason for this
conclusion is that it is highly unlikely that a party will actually foresee the consequences if he does
not actually have necessary knowledge."[28]
In any event, "in deciding whether the party in breach can be considered as having known 'the
facts and matters', a right balance has to be found in relying on available sources. This means that
we will need to assess the proportion, in which each of the sources of information can be said to
have contributed to the formation of the party's knowledge. However, ultimately, the specific
circumstances of a particular case should be decisive."[29]
14.2.5 Content of Foreseeability
The foreseeability established under Art. 74 CISG, directly refers to the loss "as a possible
consequence of the breach of contract". "The phrase 'as a possible consequence' appears in
Article 74, while Hadley chose 'as a probable result'. [...] Thus the language of the C.I.S.G.
ostensibly widens the area of liability imposed upon a breaching party. Hopefully, 'possible' will
not cause in international sales cases the same speculation that 'probable' has caused in the British
cases."[30]
This makes it clear that, the foreseeability does not refer to a certain sum of money equal to the
loss, even though the wording of this rule may suggest it, but to the possibility of a loss as a
consequence of the breach of contract as such and the extent of the possible loss.[31 ]It follows that
foreseeability is a flexible concept falling within the wide discretion of the judge. What should have
been foreseen in each case will often have to be judged retroactively by a court or an arbitral
tribunal. Already in the jurisdiction in regard to ULIS, which in Art. 82 contained the same rule
of foreseeability, the following cases became apparent: (a) the cost of a substitute transaction and
the loss of resale profit are foreseeable; (b) missed uses of the goods to be delivered are also part
of the generally foreseeable damage; (c) additional costs for transportation, storage and insurance
are also foreseeable; and (d) even the loss of clients of the buyer because of the defect in the goods
was characterized as foreseeable. Only the loss suffered from a decline in the currency which
occurred as a consequence of the delay in payment was predominantly rejected as not
foreseeable.[32]
And with regard to the crucial question on what concrete factors the party in breach had to foresee
or ought to have foreseen to be liable for the loss, it is further summarized: "The first such factor
is the possibility of the loss. This conclusion flows directly from Article 74, which provides that
the loss must be foreseen as 'a possible consequence of the breach'. There is no doubt that the risk
of loss is in direct connection with the type of a potential loss. Therefore, the second factor, which
the party had to foresee or ought to have foreseen, is the type of the loss. It is further submitted
that foreseeability should also relate to the possible extent of the loss (the third factor). The party
in breach should not be held liable for the full extent of the loss, if he could not have reasonably
foreseen or was not in the position to foresee that such extent would follow from the type of the
loss which he foresaw or ought to have foreseen. The party should be liable only to the extent
which he foresaw or ought to have foreseen as the possible extent of the loss. It is also to be noted
that in evaluating the possible extent of the loss, the manner in which the loss was caused, or the
events which led to the loss having acquired the extent in question, can often be decisive.
Therefore, arguably, these aspects can be regarded as necessary factors that the party had to
foresee or ought to have foreseen to be liable for the extent of the loss in question."[33]
On the other hand, it can be inferred from the wording "as a possible consequence of the breach
of contract" that there is a requirement as to the presence of causal link between the breach and
the loss. Although the concept of causation in different legal systems gave rise to the development
of various theories of causation, the causal link, established in Art. 74, strongly overlaps the
foreseeability rule. Thus, a loss may be considered to be caused by an event if the event is
appropriate to bring it about and if a third person in the light of general experience and with
knowledge of all the facts could have foreseen the possibility of loss. Foreseeability and causation
are closely inter-related and hardly does it seem possible to rigidly separate them from each other.
Indeed, foreseeability largely consists of an element of causation. Without an understanding of
how events can affect each other and of "a degree of uniformity of sequence of events", it would
be impossible to foresee anything whatsoever.
However, as criticized by some authors, such an inter-connection cannot serve as a basis to
consider the two concepts as mutually exclusive. Nor is it correct to regard foreseeability as being
capable, at least on a theoretical level, of fully replacing the potential effect of causation.
Causation as a phenomenon exists on its own regardless of our knowledge of the world. It is an
objective phenomenon. Therefore, it seems incorrect to bring an objective process, which exists
independently of our perception of the world, entirely down to the way a person could foresee the
potential causal processes. The foreseeability rule under the CISG includes both subjective and
objective standards. The way a person had actually foreseen or been in the position to foresee the
potential development of events, at the time of the conclusion of the contract, does not necessarily
coincide with the way such a development has, in fact, taken place. Rather, these concepts should
supplement and balance each other. The doctrines on foreseeability and causation could be applied
in a rather consistent manner and Art. 74 is certainly flexible enough to accommodate an
application of general principles.[34]
14.2.6 Concluding Remarks
Under the foreseeability formulae, restricting the extent of the liability of the non-performing party,
as provided for in Art. 74 CISG, "the emphasis is on loss which was actually foreseen or which
the party ought to have foreseen in the light of circumstances known to him or of which he should
have known as a possible consequence of the breach."[35]
What was foreseeable is to be determined by reference to the time of the conclusion of the contract
and to the non-performing party itself (including its servants or agents), and the test is what a
normally diligent person could reasonably have foreseen as the consequences of non-performance
in the ordinary course of things and the particular circumstances of the contract, such as the
information supplied by the parties or their previous transactions. This limitation is related to the
very nature of the contract: not all the benefits of which the aggrieved party is deprived fall within
the scope of the contract and the non-performing party must not be saddled with compensation
for harm which it could never have foreseen at the time of the conclusion of the contract and
against the risk of which it could not have taken out insurance. Foreseeability relates to the nature
or type of the harm but not to its extent unless the extent is such as to transform the harm into one
of a different kind. In any event, foreseeability is a flexible concept which leaves a wide measure
of discretion to the judge.[36]
Also, it must be noted that, in some legal systems, the limitation of damages by foreseeability
as such is restricted when the breach of contract was committed intentionally. Although in
general the non-performing party is liable only for loss which it foresaw or ought to have
foreseen at the time of the contract, the last part of Art.9:503 PECL, which reads: "The non-performing party is liable only for loss which it foresaw or could reasonably have foreseen at
the time of conclusion of the contract as a likely result of its non-performance, unless the
non-performance was intentional or grossly negligent", lays down a special rule in cases of
intentional failure in performance or gross negligence. In this case the damages for which the
non-performing party is liable are not limited by the foreseeability rule and the full damage has
to be compensated, even if unforeseeable.[37]
However, no such rule exists in the CISG.[38] The UNIDROIT Principles also stresses that the
concept of foreseeability must be clarified since the solution contained therein does not
correspond to certain national systems which allow compensation even for harm which is
unforeseeable when the non-performance is due to willful misconduct or gross negligence.
Unlike certain international conventions, particularly in the field of transport, the UNIDROIT
Principles follows the CISG in not making provision for full compensation of harm, albeit
unforeseeable, in the event of intentional non-performance. Since the present rule of UPICC
Art. 7.4.4, which reads: "The non-performing party is liable only for harm which it foresaw or
could reasonably have foreseen at the time of the conclusion of the contract as being likely to
result from its non-performance", does not provide for such an exception, a narrow
interpretation of the concept of foreseeability is called for.[39] This is also important for the
restrictive interpretation of article 74 CISG in the light of the wide phrasing of Art. 74.[40]
Another important principle, together with the foreseeability rule, may be assumed from Art. 74
CISG, i.e. the party is not liable for harm which has not occurred and which is not likely to occur,
either. The requirement of foreseeability must be seen in conjunction with that of certainty of
harm.[41] Such an interpretation is strengthened by the interpretation of Art. 7.4.3 UPICC: "It is
submitted that article 7.4.3 of the UNIDROIT Principles may be helpful in interpreting article 74
CISG and to fill the apparent gap which exists. The UNIDROIT Principles clearly accept the
principle that the defaulting party is liable for future damages and provide a practical, reasonable
and equitable approach for the determination of such damages."[42] "UNIDROIT Principles article
7.4.3 complements CISG article 74 by emphasizing that the existence and extent of the harm to
be compensated must be established with a reasonable degree of certainty."[43]
In this respect, Art. 7.4.3 UPICC reads: "(1) Compensation is due only for harm, including future
harm, that is established with a reasonable degree of certainty. (2) Compensation may be due for
the loss of a chance in proportion to the probability of its occurrence. (3) Where the amount of
damages cannot be established with a sufficient degree of certainty, the assessment is at the
discretion of the court." It appears that this Article establishes two principles, namely, (a) the
defaulting party is liable; and (b) the calculation of the loss is in proportion to the probability of
the occurrence of the chance.[44] This Article reaffirms the well-known requirement of certainty of
harm, since it is not possible to require the non-performing party to compensate harm which may
not have occurred or which may never occur. Para. (1) of Art. 7.4.3 explicitly permits the
compensation also of future harm, i.e. harm which has not yet occurred, provided that it is
sufficiently certain. Para. (2) in addition covers loss of a chance, obviously only in proportion to
the probability of its occurrence. Certainty relates not only to the existence of the harm but also
to its extent.[45]There may be harm whose existence cannot be disputed but which it is difficult to
quantify. This will often be the case in respect of loss of a chance (there are not always "odds" as
there are for a horse, for example a student preparing for a public examination) or of compensation
for non-material harm (detriment to someone's reputation, pain and suffering, etc.). According to
para. (3), where the amount of damages cannot be established with a sufficient degree of certainty
then, rather than refuse any compensation or award nominal damages, the court is empowered to
make an equitable quantification of the harm sustained.[46]
The view can be taken that certainty is a matter governed, but not expressly settled in the
Convention. Certainty can be either treated as a procedural issue, "indirectly" governed by the
CISG, or merely as a substantive rule governed but not expressly settled in the Convention.
Recourse in this case, must be, first, had to one of the general principles on which the Convention
is based. If no relevant general principle is found, the matter must be settled in accordance with
the applicable rules of Private International Law. It is to be stated that the issue of certainty of
damages is directly related to the problem of proof. In practice, the proof of the precise amount
of damages may not always be possible. Therefore, the extent of compensation can be determined
on the basis of a mere discretion of a judge or an arbitrator. Such a solution of the problem of
certainty can, first of all, derive from a relevant provision of an applicable law. This result may
follow from either of the two approaches, i.e., where the issue of certainty is regarded as being
either outside the scope of the CISG or "governed, but not expressly settled" in it, as well as from
an application of the UNIDROIT Principles. This treatment of certainty represents a workable
solution, which is conducive to maintaining the CISG international character and contributing to
uniformity in its application.[47]
In short, according to the certainty test established under Art. 7.4.3 UPICC, there are two
approaches that a court may follow in calculating the harm: Where the amount of harm, including
future harm, can be established with certainty, the court will award that amount. However, where
it is certain that harm has resulted or will result, but where the amount cannot be established with
sufficient certainty, the court has a discretion in assessing the amount.
14.4.1 In General
The next method of limiting damages, provided for in some legal systems and international
documents such as the CISG, is the contribution rule. However, it is submitted that except
indirectly, the CISG does not deal with the issue of contributory conduct of the aggrieved party
which adds to the loss of harm suffered.[48]
In this respect, Art. 80 CISG is of particular relevance, which under the general heading of
"Exemptions" establishes a general principle concerning the issue of contributory negligence and
prescribes that: "A party may not rely on a failure of the other party to perform, to the extent that
such failure was caused by the first party's act or omission." This Article states the self-evident
proposition that a party cannot rely on another party's failure to perform if the failure was induced
by the first party's own conduct e.g., by supplying faulty specifications for the construction of a
machine or vessel or instructing the seller to use the paint of a particular manufacturer which
proves unsuitable for the purpose for which it is intended.[49]
In discussing the contribution rule under Art. 80 CISG, the rule of estoppel or venire contra
factum proprium has to be mentioned. This principle is known in German and Swiss law by the
maxim non concedit venire contra factum proprium and, in common law countries, as estoppel
by representation. It is found in French law in the form of a principle of consistency and has also
been recognized in arbitral case law.[50] There is a general principle of law, both international and
municipal, i.e. estoppel, which "requires that the party claiming it has relied on a representation
by another party with a resulting detrimental consequence to its own interests".[51] "[A] man shall
not be allowed to blow hot and cold - to affirm at one time and to deny at another ... Such a
principle has its basis in common sense and common justice, and whether it is called estoppel or
by any other name, it is one which courts of law have in modern times most usefully adopted."[52]
In a word, no one may set himself in contradiction to his own previous conduct.[53]The ICJ has
found estoppel to be "numbered among the general principles of law accepted by international law
as forming part of the law of nations, and obeying the rules of interpretation relating thereto".[54]
Its content is obviously an expression of general principles, in particular that of good faith,
respectively a concrete manifestation of it, the prohibition to contradict one's own behaviour
(venire contra factum proprium).[55]
Applying the principle that a party cannot contradict itself to the detriment of another, Art. 80
CISG was added at the Vienna out of an abundance of caution as a new rule which doesn't appear
in the 1978 Draft.[56] Although no match-up of Art. 80 CISG with the 1978 Draft exists, and
therefore no its counterpart in the Secretariat Commentary exists, there are various sources
helping interpret this article. The general principle established under Art. 80 CISG, restricting
remedies where non-performance is partly due to the conduct of the aggrieved party, can also be
found in both Art. 7.1.2 UPICC and Art. 8:101(3) PECL. Further, both the UPICC and the PECL
deal with the application of this general principle respectively in Art. 7.4.7 and Art. 9:504. All of
these sources will do much in my discussions below.
14.4.2 Ways of Contributing to the Harm
As for the ways of contributing to the harm, it follows from Art. 7.1.2 UPICC, which reads: "A
party may not rely on the non-performance of the other party to the extent that such non-performance was caused by the first party's act or omission or by another event as to which the
first party bears the risk", that the contribution of the aggrieved party to the harm may consist
either in its own conduct or in an event as to which it bears the risk. Art. 7.1.2 UPICC can be
regarded as providing two excuses for non-performance. Two distinct situations are contemplated.
In the first, one party is unable to perform either wholly or in part because the other party has done
something which makes performance in whole or in part impossible. Another possibility is that
non-performance may result from an event the risk of which is expressly or impliedly allocated by
the contract to the party alleging non-performance.[57]
The Official Comment on UPICC Art. 7.4.7 also makes it clear: "The contribution of the
aggrieved party to the harm may consist either in its own conduct or in an event as to which it
bears the risk. The conduct may take the form of an act (e.g. it gave a carrier a mistaken address)
or an omission (e.g. it failed to give all the necessary instructions to the constructor of the
defective machinery). Most frequently such acts or omissions will result in the aggrieved party
failing to perform one or another of its own contractual obligations; they may however equally
consist in tortious conduct or non-performance of another contract. The external events for which
the aggrieved party bears the risk may, among others, be acts or omissions of persons for whom
it is responsible such as its servants or agents."[58] However, when the contract is being made, a
party is normally only fixed with the knowledge imputed to his employees or agents involved in
making the contract. The employee or other person must have been someone who was, or who
appeared to be, involved in the negotiation or performance of the contract. If a person not so
related to the contract knows a relevant fact he may not be able to appreciate its relevance to the
contract and thus might not report it. The burden of proving that the person for whom the
contracting party is held responsible was not and did not reasonably appear to the other party to
be involved in the making or performance of the contract rests on the first party.[59]
Interestingly, Art. 8:101(3) PECL seems to contain only the first situation discussed above when
it stipulates that: "A party may not resort to any of the remedies set out in Chapter 9 to the extent
that it's own act caused the other party's non-performance." Nonetheless, Art. 9:504 PECL
contains an analogous rule, which can be used to fill the gap in Art. 8:101(3) PECL: "The non-performing party is not liable for loss suffered by the aggrieved party to the extent that the
aggrieved party contributed to the non-performance or its effects." This Article embodies the
principle that an aggrieved party should not recover damages to the extent that its loss is caused
by its own unreasonable behaviour. It embraces two distinct situations. The first is where the
aggrieved party's conduct was a partial cause of the non-performance; the second, where the
aggrieved party, though not in any way responsible for the non-performance itself, exacerbated
its loss-producing effects by its behaviour.[60] To the extent that the aggrieved party contributed to
the non-performance by its own act or omission he cannot recover the resulting loss. This may be
regarded as a particular application of the general rule set out in Art. 8:101 (3).[61]
In short, ways of contributing to harm embrace two distinct situations. The first is where the
aggrieved party's conduct was a sole or partial cause of the non-performance; the second, where
the aggrieved party, though not in any way responsible for the non-performance itself, exacerbated
its loss-producing effects by its behavior, i.e. the non-performance is caused by an external event
as to which the aggrieved party bears the risk.
14.4.3 Remedies Affected by the Contribution
The remedies available for non-performance depend upon whether the non-performance results
from behaviour of the other party. The fact that the non-performance is caused by the creditor's
conduct (act or omission) or the external events as to which it bears the risk, has an effect on the
remedies open to the obligee. Generally, this effect may be total, that is to say that the creditor
cannot exercise any remedy, or partial. The exact consequence of the creditor's behaviour will be
examined with each remedy.[62]
14.4.3.1 Remedies available upon non-performance caused solely by the contribution
There is agreement among the legal systems that a non-performance which is due solely to the
other party's wrongful prevention does not give the latter any remedy. These will mostly be
breaches of contract on the part of the creditor. In most of the systems the party who has
prevented performance will himself be the non-performing party against whom the remedies may
be exercised.[63]
Enderlein & Maskow submit that: The party in breach can, therefore, not assert any claims
because of a breach of contract. It not only has no right to claim damages, as in the event of
grounds for exemption in the meaning of Art. 79, it has no right to performance nor to avoidance.
When the debtor is hindered in performing in time by the party in breach, e.g. because of belated
communication of instructions for dispatch, the seller cannot dispatch the goods, the party in
breach will have to accept the late delivery without having the right to require any sanction. When
the party in breach has caused the non-conform or defective delivery, e.g. sub-supply of material
having non-apparent defects, he cannot require delivery of substitute goods or repair or reduction
of the price, etc. The acts by the creditor which cause the breach of contract will generally
represent themselves as breach of contract committed by the former so that the debtor being the
creditor of those acts can assert the respective claims. He will have the right to claim damages only
to the extent to which the party in breach cannot rely on impediments. Among the rest of the
claims, which are retained in any case, the right to avoid the contract is of special relevance. In
asserting that right, the fate of the blocked contract can be decided once and for all.[65]
Peter Schlechtriem confirms: "Article 80 releases a party from his obligations where the other
party has impaired his performance. [...] In such cases, an obligor will generally be excused from
liability on the basis of Article 79(1). But Article 80 reaches much further. Since Article 80
exempts all claims against the obligor, it gained importance when a proposal was rejected which
would have extinguished the right to demand specific performance in a case where Article 79
exempts a party for liability for damages. If the buyer frustrated performance, such as by not
providing drawings required for production or by not procuring an import permit, he can neither
demand specific performance nor declare an avoidance. He also may not reduce the price for
defects caused by mistakes in the drawings he provided. Of course, the obligor is excused only to
the extent of the hindrance caused by the obligee. The obligee need not be responsible -- in the sense of Article 79 -- for the impairment he caused."[66]
Although it is said that "the view prevailed that it [Art. 80 CISG] is more closely related to
exemptions and duty to cooperate in cases of impediments",[67] the Official Comment on Art. 7.1.2
UPICC stresses that, when the interference or contribution rule applies, the relevant conduct
doesn't become excused non-performance but loss the quality of non-performance altogether.[68]
14.4.3.2 Damages proportionately reduced due to partial contribution
As discussed above, the conduct of the aggrieved party or the external events as to which it bears
the risk may have made it absolutely impossible for the non-performing party to perform. In
addition, it is also contemplated there is the possibility of one party's interference acting only as
a partial impediment to performance by the other party and in such cases it will be necessary to
decide the extent to which non-performance was caused by the first party's interference and to
which it was caused by other factors.[69]
In application of the general principle established by Art. 7.1.2 UPICC (corresponding to the
solution adopted by Art. 80 CISG) which restricts the exercised of remedies where non-performance is in part due to the conduct of the aggrieved party, Art. 7.4.7 UPICC limits the right
to damages by providing that: "Where the harm is due in part to an act or omission of the
aggrieved party or to another event as to which that party bears the risk, the amount of damages
shall be reduced to the extent that these factors have contributed to the harm, having regard to
the conduct of each of the parties." This article, together with its Official Comment can therefore
be helpful in the interpretation of Art. 74 of the CISG read together with Arts. 77 and 80 in
establishing the extent to which the defaulting party is excused from liability for damages due to
the conduct of the aggrieved party.
Generally, it would indeed be unjust for an aggrieved party to obtain full compensation for harm
for which it has itself been partly responsible.[70] It would be contrary to good faith and fairness for
the creditor to have a remedy when it is responsible for the non-performance. The most obvious
situation is the so-called mora creditoris, where the creditor directly prevents performance (e.g.
access refused to a building site). But there are other cases where the creditor's behaviour has an
influence on the breach and its consequences. For example, when there is a duty to give
information to the other party, and the information given is wrong or incomplete, the contract is
imperfectly performed. In other cases where there is also a non-performance by the debtor, the
creditor may exercise the remedies for non-performance to a limited extent. When the loss is
caused both by the debtor - which has not performed - and the creditor - which has partially
caused the breach by its own behaviour - the creditor should not have the whole range of
remedies.[71] It is clear that in such a case the amount of damages ought to be reduced
proportionally. Such apportionment of damages will often involve a judicial discretion in weighing
the different facts contributing to the eventual damages suffered.[72] However, the determination of
each party's contribution to the harm may well prove to be difficult and will to a large degree
depend upon the exercise of judicial discretion. In order to give some guidance to the court this
article provides that the court shall have regard to the respective behaviour of the parties. The
more serious a party's failing, the greater will be its contribution to the harm.[73]
More specifically, Enderlein & Maskow present several principles which could, in their view, be
inferred from the regulation governing the most important case groups as follows: (a) When the
consequences of the different causes can be delimited from one another, every cause has to be
attributed to its legal remedy. A distinction will, however, have to be made of what caused the
breach of contract. (b) When a breach of contract by the debtor and an act or omission by the
creditor act in combination having the same effect, the act or omission of the creditor dominates.
But exemption will become effective only in regard to the conduct concerned. The party in breach
can, therefore, not claim a breach of contract because of the consequences of the act or omission
of the creditor. The result can be a stalemate in which the contract is neither performed nor can
it be avoided by any of the parties. (c) The last case to be considered here is the one where the
failures of the two parties are so closely interwoven that their effects cannot be delimited and
attributed to the breach of contract which is the result of that situation, such as when the buyer
provides drawings which cannot, in part, be realized, and the seller, without referring back to the
buyer, proceeds with modifications in the realization which do not meet the intentions of the buyer.
In their view, it is appropriate in these cases to reduce the legal consequences which would be the
result of a breach of contract where the causes of the breach are not taken into consideration. The
reduction can be merely quantitative as in the case of damages, insofar also grounds for exemption
on the part of the debtor would have to be, taken into account. But it may also take on a
qualitative character when the right to avoidance of the contract is turned into a claim for
damages, which might then be thwarted because of grounds for exemption, for it is assessed that
the breach of contract because of the act or omission of the creditor has passed the threshold
toward a fundamental breach. Or, the right to performance may be judged to have elapsed and the
part of the debtor in the breach of the contract is paid off because of a claim for damages by the
creditor.[74]
Finally, it must be noted that Art. 80 CISG covers only one aspect of the issue at stake, which
deals with the loss suffered by the aggrieved party which results from his own unreasonable
behavior. There is another situation where the loss resulting from the non-performance could
have been reduced or extinguished by appropriate steps in mitigation. This is clear from the
fact that the issue of contributory conduct is dealt with separately in the UNIDROIT Principles
in Art. 7.4.7, whereas the mitigation duty is dealt separately with in Art. 7.4.8 (respectively
dealt with in Art. 9:504 and Art. 9:505 PECL) which is to be focused below.
14.5.1 In General
The party who is true to the contract cannot sit and wait for the other party to breach the contract,
but must become active in order to minimize the loss or to prevent it at all.[75] In other words, even
where the aggrieved party has not contributed either to the non-performance or to its effects, it
cannot recover for loss it would have avoided if it had taken reasonable steps to do so.
In this respect, the mitigation doctrine, which is a generally admitted obligation in Common Law,
though "not so largely and clearly consecrated in Civil Law", deals with such an "obligation for
a creditor to minimise the damage he suffers because of the non-fulfilment by the debtor of his own
commitments."[76 ]Now, a number of international awards have applied it as a general principle of
international trade, not referring in particular to a Common Law system.[77] Indeed, it is said to
"constitute the lex mercatoria in its present form",[78] and is regarded as "[o]ne of the most well-established general principles in arbitral case law".[79] Further, the awards in support on mitigation
"rarely call up the lex mercatoria in so many words; they merely treat the principle as obvious."[80]
Mitigation has gained under the three instruments, it is regarded as one of the principles "capable
of general application" as expressed in provisions of the CISG.[81] Under the CISG, Art. 77 is of
particular relevance (the mitigation rule is also reflected in Arts. 85 and 86 concerning preservation
of the goods), which limits damages by placing an obligation to mitigate damages on the aggrieved
party: "A party who relies on a breach of contract must take such measures as are reasonable in
the circumstances to mitigate the loss, including loss of profit, resulting from the breach. If he
fails to take such measures, the party in breach may claim a reduction in the damages in the
amount by which the loss should have been mitigated." Art. 77 CISG adopts the same principle
as Art. 88 ULIS, but clarifies certain matters.[82]
In the Secretariat Commentary on Art. 73 of the 1978 Draft [draft counterpart of CISG Art. 77],[83]
it is stated that Art. 77 (together with Arts. 85-88) is one of several articles which states a duty
owed by the injured party to the party in breach.[84] However, "even if it is possible to refer to
mitigation using such terms as a 'duty' or an 'obligation', the nature of this 'duty' is substantially
different from other obligations under the CISG."[85] Because the first sentence of Art. 77 is worded
in terms of a duty to mitigate, courts may require such mitigation, and allow a set-off in favor of
the breaching party for failure of the non-breaching party to mitigate. The second sentence seems
to take the approach that CISG Art. 77 was not intended to place liability on the injured party for
failing to avoid damages but is meant to simply precluded an injured party from recovering
damages which could have reasonably been avoided.[86] A third interpretation of Art. 77 takes the
position that mitigation of loss can become a sword as well as a damages shield -- by drawing on
the "general principles" provision of the CISG, Art. 7(2) to create a duty of "loyalty to the other
party to the contract". Failure to mitigate damages may be a breach of this duty and result in
recoverable damages.[87] It appears that the parameters of the duty to mitigate under Art. 77 are not
clear. Presumbly it does not affect the aggrieved party's right to seek specific performance or his
right to avoid the contract where a fundamental breach has occurred. Presumably too the greater
particularity will have to be supplied in the light of the overall structure of the Convention, the
general principles on which it is based (Art. 7), and the duty of good faith.[88]
Nonetheless, the significance of the deliberations in Art. 77 CISG is of no doubt. This mitigation
duty has been adopted under the two Principles. In the UPICC, this principle is reflected in Art.
7.4.8 under the heading "Mitigation of Harm" and has been formulated as: "(1) The non-performing party is not liable for harm suffered by the aggrieved party to the extent that the harm
could have been reduced by the latter party's taking reasonable steps. (2) The aggrieved party
is entitled to recover any expenses reasonably incurred in attempting to reduce the harm."
Indeed, it has been stated that the provision of the UPICC on contribution to harm (supra. 14.4)
"must be read together in conjunction with the following article on mitigation of harm (Art. 7.4.8).
While the present article [Art. 7.4.7] is concerned with the conduct of the aggrieved party in
regard to the cause of the initial harm, Art. 7.4.8 relates to that party's conduct subsequent
thereto."[89] The purpose of this article is to avoid the aggrieved party passively sitting back and
waiting to be compensated for harm which it could have avoided or reduced. Any harm which the
aggrieved party could have avoided by taking reasonable steps will not be compensated. It would
be unreasonable from the economic standpoint to permit an increase in harm which could have
been reduced by the taking of reasonable steps.[90] And a rule concerning "Reduction of Loss" can
also be found in Art. 9:505 of the PECL, which resembles Art. 7.4.8 UPICC: "(1) The non-performing party is not liable for loss suffered by the aggrieved party to the extent that the
aggrieved party could have reduced the loss by taking reasonable steps. (2) The aggrieved party
is entitled to recover any expenses reasonably incurred in attempting to reduce the loss."
14.5.2 Reasonable Measures Taken
The idea underlying mitigation is that the aggrieved party cannot recover damages with respect
to loss which he could have reasonably avoided. However, no exceptional efforts are required
from that party; he only has to take such measures to mitigate loss as are reasonable in the
circumstances concerned. According to Art. 77 CISG, the aggrieved party must take measures "as
are reasonable in the circumstances". The type of measures that need to be undertaken depends
on the criterion of reasonableness. The latter, in turn, depends on and will be construed in the light
of the circumstances in question.[91] It is said that the duty to mitigate applies to an anticipatory
breach of contract as well as to a breach in respect of an obligation the performance of which is
currently due.[92] It follows that this provision refers the duty to mitigate to all kinds of loss.
However, different types of loss can practicably give rise to a great variety of situations.
Although not specifically defined, on the one hand, reasonableness is specifically mentioned in
thirty-seven provisions of the CISG and clearly alluded to elsewhere in the Uniform Sales Law.
Reasonableness is a general principle of the CISG. As a general principle of the CISG,
reasonableness has a strong bearing on the proper interpretation of all provisions of the CISG.[93]
On the other hand, the principle of "reasonableness" plays a dominant and recurrent role in almost
all of the provisions of the UPICC.[94] Although no blanket clause which defines the notion of
reasonableness is found either in the CISG or the UNIDROIT Principles, reasonableness is
generally defined in the PECL, which "also fits the manner in which this concept is used in the
CISG [as well as the UPICC]. This definition can help researchers apply reasonableness to the
CISG [as well as the UPICC] provisions in which it is specifically mentioned and as a general
principle of the CISG [as well as the UPICC]."[95]
In this respect, Art. 1:302 PECL specializes "Reasonableness" as: "Under these Principles
reasonableness is to be judged by what persons acting in good faith and in the same situation as
the parties would consider to be reasonable. In particular, in assessing what is reasonable the
nature and purpose of the contract, the circumstances of the case, and the usages and practices
of the trades or professions involved should be taken into account." Generally speaking,
reasonableness is to be judged by what parties acting in good faith and the same situation as the
parties would consider to be reasonable. In deciding what is reasonable all relevant factors should
be taken into consideration. Account should be taken of the nature and purpose of the contract.
The circumstances of the case will have to be considered. Furthermore, the usages and practices
of the trade or profession should be taken into account. These generally reflect the behaviour of
reasonable parties.[96] "In general, it has been said that a measure is reasonable 'if under the
particular circumstances, it could be expected to be taken by a person acting in good faith, or if
it is 'adequate' and preventive with respect to the loss. In the evaluation of the situation, regard
should be also had to the party's skills and position as a businessman, such as, for example,
'ingenuity, experience, and financial resources', etc. At that, relevant trade usage, if any, should
be taken into account as well. The aggrieved party is not, in any way, obliged to take measures,
which, in the circumstances concerned, are 'excessive' and entail unreasonably high expenses and
risks. If the party refrains from such measures, he will not be considered as not having complied
with Article 77."[97]
Although it does not seem possible to list every single measure which can be possibly implied in
Art. 77 CISG, some examples of such measures will be given in order to illustrate how wide a
range of possible mitigating measures can be. It is commented that such measures may frequently
include a cover purchase or sale. It can also include the possibility that the buyer himself remedies
defective goods delivered to the buyer. Although there is no obligation to avoid the contract even
if the other party has committed or is expected to commit a fundamental breach of contract (Arts.
49 and 64 CISG), avoidance of the contract may be one of the reasonable measures which help
to mitigate the losses of the injured party. If reasonable measures can be taken before an
impending breach of contract, they have to be taken by the party threatened by loss. Such
measures could include for instance suspension of performance under Art. 71.[98]
In sum, "[t]he steps to be taken by the aggrieved party may be directed either to limiting the extent
of the harm, above all when there is a risk of it lasting for a long time if such steps are not taken
(often they will consist in a replacement transaction: see Art. 7.4.5), or to avoiding any increase
in the initial harm."[99] Indeed, the creditor should attempt to undertake everything possible in order
to diminish the loss or at least to prevent its increase, and thus this rule may be regarded as just
and fair.[100] On the other hand, the failure to mitigate loss may arise either because the aggrieved
party incurs unnecessary or unreasonable expenditure or because it fails to take reasonable steps
which would result in reduction of loss or in offsetting gains. However, the aggrieved party will
not necessarily be expected to take steps to mitigate its loss immediately it learns of the breach;
it will depend on whether its actions are reasonable in the circumstances. The aggrieved party is
only expected to take action which is reasonable, or to refrain from action which is unreasonable,
in the circumstances. Thus it need not act in any way that will damage its commercial reputation
just to reduce the non-performing party's liability.[101] Evidently, a party who has already suffered
the consequences of non-performance of the contract cannot be required in addition to take time-consuming and costly measures.[102] However, the decision on how and in what way an injured party
should have mitigated his loss can be made only on the basis of careful examination of all
circumstances of a concrete situation, criterion of reasonableness, and the type of loss in
question.[103]
14.5.3 Effects of Failure to Mitigate
With regard to the legal effects of such failure, it follows from the wording of Art. 77 CISG "the
party in breach may claim a reduction in the damages" that, non-fulfillment of this obligation by
one party does not entail a claim for damages but rather leads to a situation where the party who
is true to the contract cannot claim full compensation for damages. Reference is made here only
to a party claiming damages. The rule of Art. 77 does not apply to other remedies."[104]Therefore,
the failure to mitigate will not affect the injured party's claim for other remedies. The only
exception is said to be the case where it was reasonable to expect the injured party to carry out
certain actions, for example, in the form of avoidance of the contract or of the conclusion of a
cover transaction, in order to mitigate the loss.[105] As regards the amount, it follows from Art. 77
CISG that if the aggrieved party fails to mitigate, the party in breach will have the right to claim
reduction in damages "in the amount by which the loss should have been mitigated". In this
respect, similar approaches can also be found in UPICC Art. 7.4.8(1) and PECL Art. 9:505(1).
On the other hand, frequently the aggrieved party will have to incur some further expenditure in
order to mitigate its loss. The problem is that mitigation itself can bring about certain forms of
loss. In other words, mitigation can often be the source of loss. In taking certain mitigating
measures, an injured party may have to incur a number of different expenses such as, for example,
the costs of storage, repair costs or brokerage costs. Both Art. 7.4.8(2) UPICC and Art. 9:505(2)
PECL allow the aggrieved party to recover expenses reasonably incurred in attempts to avoid or
mitigate the loss. Expenses are to be reimbursed even if they increased the total loss, provided they
were reasonable. Costs which the party threatened by loss incurs for the measures he takes to
mitigate his losses can also be claimed compensation for even when the, otherwise reasonable,
measures were taken in vain.[106] It is also argued that, the wording of Art. 77 CISG is broad
enough to require that losses out of a measure aimed at mitigation should be mitigated.[107]
One should note, however, despite any harm which the aggrieved party could have avoided by
taking reasonable steps will not be compensated, the reduction in damages to the extent that the
aggrieved party has failed to take the necessary steps to mitigate the harm must not however cause
loss to that party. The aggrieved party may therefore recover from the non-performing party the
expenses incurred by it in mitigating the harm, provided that those expenses were reasonable in
the circumstances.[108]
FOOTNOTES: Chapter 14
1. See Treitel, Remedies for Breach of Contract: A Comparative Account, (1988); p. 76. Treitel submits
that the full compensation of the expectation and reliance interests would operate either as too strong
a disincentive to the assumption of contractual obligations, or to an undue raising of charges to cover
such unlimited liability.
2. The theory of "adequate causation" holds that a wrongdoer is liable for a loss if his default appreciably
increased the objective possibility of loss of a kind that in fact occurred; on the other hand, he is under
no liability if his default was, according to the ordinary course of things, quite indifferent with regard
to the consequence which in fact occurred, and only became a condition of the occurrence of the loss
as a result of unusual or intervening events. (See Treitel, G.H. in "Remedies for Breach of Contract":
David/ von Mehren eds., International Encyclopedia of Comparative Law, Bd. VII, Tübingen (1976);
p. 66. Available online at: <http://tldb.uni-koeln.de/TLDB.html>; TLDB Document ID: 117200.)
3. See Djakhongir Saidov in "Methods of Limiting Damages under the Vienna Convention on the
International Sale of Goods". (2001) Available online at
<http://www.cisg.law.pace.edu/cisg/biblio/saidov.html>. Enderlein & Maskow also states that: "It is
above all the Anglo-American (e.g. 2-715, paragraph 2 UCC) and the French legal families (Article
1150 Code civil) which provide for a limitation of damages by way of foreseeability. Other legal
systems come to similar conclusions using the so-called theory of adequacy." (See Fritz Enderlein,
Dietrich Maskow, infra. note 8.)
4. See Tallon, Denis in "Damages, Exemption Clauses, and Penalties": 40 Am.J.Comp.L. (1992); pp.
678-679. TLDB Document ID: 129100. Tallon states in this point: Foreseeability of harm is an
interesting topic from a comparative point of view. Certain systems do not possess such a rule because
foreseeability is merged with the notion of causality: it is the case of German, Swiss or Dutch law (art.
6-98 NBW). Other systems refer to foreseeability but have a different approach to it, despite superficial
similarities. At common law, foreseeability is more or less a question of causality, and Section 2-715(2)(a) of the UCC speaks of "consequential damages." Moreover, according to the rules in Hadley
v. Baxendale, foreseeability is a test for remoteness: what was not foreseeable at the time of the
contract is a loss too remote to be compensated. And this is why foreseeability is also used in tortious
liability. In the civil law countries where foreseeability is one of the criteria, such as in article 1150 of
the French Civil Code and article 1125 of the Italian Civil Code, art. 1225 C.Civ. italien, the rule is
more refined: foreseeability is a limit to compensation for direct harm; it is an exception to the full
compensation principle in favor of the performing party when the latter acted in good faith. The limit
does not apply in case of deliberate or grossly negligent non-performance. This stems from the more
acute "moralist approach" of the civil law. But there is also an economic justification: a party may
estimate in advance the amount of damages to be paid (or for which insurance must be brought). The
rule is, by necessity, specific to breaches of contract.
5. See Peter Schlechtriem, Uniform Sales Law-The UN-Convention on Contracts for the International
Sale of Goods, Manz, Vienna (1986); p. 97. Available online at
<http://cisgw3.law.pace.edu/cisg/biblio/schlechtriem.html>.
6. Several other articles of the CISG further the goal of compensation. For example, Art. 75 stipulates
that, a party's substitute purchase or resale after the other's default must be reasonable. Under this rule,
a buyer cannot purchase more expensive goods after a breach and claim the difference between the
contract price and the substitute price if goods were available at the contract rate.
7. See Arthur G. Murphey, Jr. in "Consequential Damages in Contracts for the International Sale of
Goods and the Legacy of Hadley", 23 Geo. Wash. J. Int'l. L. & Econ. (1989); pp. 415-474. Available
online at <http://www.cisg.law.pace.edu/cisg/biblio/murphey.html>.
8. See Fritz Enderlein, Dietrich Maskow, International Sales Law: United Nations Convention on
Contracts for the International Sale of Goods, Oceana Publication (1992); p. 300. Available online
at <http://www.cisg.law.pace.edu/cisg/biblio/enderlein.html>.
9. See Djakhongir Saidov, supra. note 3.
11. See Stoll in "Commentary on the UN Convention on the International Sale of Goods (CISG)", Peter
Schlechtriem ed., (Second Edition, 1998); p. 568.
12. See Knapp, Commentary on the International Sales Law: The 1980 Vienna Sale Convention, Cesare
Massimo Bianca & Michael Joachim Bonell eds. (1987); p. 542.
16. See Treitel, supra. note 1, p. 160. The position is the same in Art. 7.4.4 of the UPICC and Art. 9:503
of the PECL. However, Murphey submits (supra. note 7): "Limiting effective notice to the time of the
contracting will not always discourage breaches. For instance, a party may discover at the time he or
she decides to breach that losses will be much greater than were 'foreseeable' at the time of
contracting. In such a case, a rule which focuses on the time of contracting will be less discouraging
than one which focuses on the time of breach. Nevertheless, if the notice time in the C.I.S.G., like the
rule in Hadley, discourages most intentional breaches, this author would argue that this is a good
result."
17. See P.D.V. Marsh, Comparative Contract Law: England, France, Germany, Gower Publishing
(1994); p. 314.
18. See Djakhongir Saidov, supra. note 3.
20. See Djakhongir Saidov, supra. note 3.
23. See Jeffrey S. Sutton in "Measuring Damages Under the United Nations Convention on the
International Sale of Goods": 50 Ohio State Law Journal (1989). Available online at
<http://www.cisg.law.pace.edu/cisg/biblio/sutton.html>.
24. See Djakhongir Saidov, supra. note 3.
26. See Djakhongir Saidov, supra. note 3.
27. See e.g., Bundesgerichtsh of 24 October 1979 where the German Supreme Court held that: "The Court
of Appeals was also correct that ULIS Article 82 requires a subjective and objective test, that the test
can conclusively be met by a showing of trade custom as to foreseeability, and that a survey of persons
in the trade is a proper means of determining those facts under Code of Civil Procedure, section 346."
Available online at <http://cisgw3.law.pace.edu/cases/791024g1.html>. (The case was decided on the
basis of Art. 82 ULIS, which contained the same rule of foreseeability as provided for in Art. 74
CISG.)
28. Art. 9 CISG states: "(1) The parties are bound by any usage to which they have agreed and by any
practices which they have established between themselves. (2) The parties are considered, unless
otherwise agreed, to have impliedly made applicable to their contract or its formation a usage of
which the parties knew or ought to have known and which in international trade is widely known to,
and regularly observed by, parties to contracts of the type involved in the particular trade
concerned."
29. See Djakhongir Saidov, supra. note 3.
33. See Djakhongir Saidov, supra. note 3.
34. Ibid. However, for the sake of practicing, as well as considering their explicit texts and the role played
by uniform law instruments in avoiding those confusions caused by so close an inter-connection of these
two concepts in different legal systems, one may advisably lay in international commercial disputes
everything on the foreseeability rule, unless the applicable law provides otherwise. Moreover, the
"international character" of the uniform law instruments such as CISG as well as the need to promote
uniformity in its application should prevent domestic courts from embedding a causation requirement
into an international dispute seeking damages. In fact, both Art. 74 CISG and Arts. 7.4.2, 7.4.4 UPICC
presuppose a sufficient causal link under foreseeability between the non-performance and the harm.
35. See Sieg Eiselen in "Remarks on the Manner in which the UNIDROIT Principles of International
Commercial Contracts May Be Used to Interpret or Supplement Article 74 of the CISG". Available
online at <http://www.cisg.law.pace.edu/cisg/principles/uni74.html>.
36. See Comment on Art. 7.4.4 UPICC.
37. See Comment and Notes to the PECL: Art. 9:503. Comment B. Available online at
<http://www.cisg.law.pace.edu/cisg/text/peclcomp74.html>.
38. Such a rule could at best be deduced from the underlying general principles of the CISG (Arts. 7(2);
40 and 43(2)).
43. See Alejandro M. Garro in "The Gap-Filling Role of the UNIDROIT Principles in International Sales
Law: Some Comments on the Interplay between the Principles and the CISG": Tulane Law Review,
(April 1995); p. 1188.
45. See Comment 1 on Art. 7.4.3 of UPICC.
46. See Comment 2 on Art. 7.4.3 of UPICC.
47. See Djakhongir Saidov, supra. note 3.
49. See Jacob S. Ziegel in "Report to the Uniform Law Conference of Canada on Convention on Contracts
for the International Sale of Goods". Available online at
<http://www.cisg.law.pace.edu/cisg/text/ziegel80.html>.
50. See Fouchard, Gaillard, Goldman, International Commercial Arbitration, Emmanuel Gaillard and
John Savage ed., The Hague (1999); p. 820. TLDB Document ID: 130600.
51. See ICC Award No. 6363, YCA 1992, p. 201; TLDB Document ID: 206363. For more on the
interpretation of estoppel, see Black, Henry Campell, Black's Law Dictionary, 6th ed., St. Paul (1990);
TLDB Document ID: 100700.
52. See English Court of Exchequer, Cave v. Mills (1862), Hurlstone & Norman, 913 at 927.
53. Principle No. I.7 of the TLDB List.
54. See ICJ North Sea Continental Shelf Case, Separate Opinion of Judge Fouad Ammoun, ICJ Rep.
(1969); pp. 120-121. TLDB Document ID: 300300.
56. This provision is based on a proposal by the German Democratic Republic. See A.Conf. 97/C.1/L.217
(O.R. 134). This provision resembles ULIS Art. 74 (3) which states: "The relief provided by this
Article for one of the parties shall not exclude the avoidance of the contract under some other
provision of the present Law or deprive the other party of any right which he has under the present
Law to reduce the price, unless the circumstances which entitled the first party to relief were caused
by the act of the other party or of some person for whose conduct he was responsible."
57. See Comments 1, 2 on Art. 7.1.2 UPICC.
58. See Comment 2 on Art. 7.4.7 UPICC.
59. See Comment and Notes to the PECL: Art. 1:305. Comment C. Available online at
<http://www.cisg.law.pace.edu/cisg/text/peclcomp80.html>.
60. See Comment and Notes to the PECL: Art. 9:504. Comment A. Available online at
<http://www.cisg.law.pace.edu/cisg/text/peclcomp74.html>.
62. See Comment and Notes to the PECL: Art. 8:101. Comment B(iii). Available online at
<http://www.cisg.law.pace.edu/cisg/text/peclcomp80.html>.
64. See Comment 3 on Art. 7.4.7 UPICC.
66. Supra. note 5, p. 105-106.
67. See Jelena Vilus in "Provisions Common to the Obligations of the Seller and the Buyer": Petar
Sarcevic & Paul Volken eds., International Sale of Goods: Dubrovnik Lectures, Oceana (1986); p. 256. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/vilus.html>.
68. See Comment 1 on Art. 7.1.2 UPICC.
70. See Comment 1 on Art. 7.4.7 UPICC.
74. Supra. note 8, pp. 338-339.
76. See Goldman, Berthold in "The Applicable Law: General Principles of Law - the Lex Mercatoria":
Lew ed., Contemporary Problems in International Arbitration, London (1986); p. 125. TLDB
Document ID: 112400.
77. See e.g. ICC Award, Case Nos .2103/72, 101 Clunet 902 (1974); 2748/74, 102 Clunet 905 (1975);
2291/75, 103 Clunet 989 (1976); 2520/75, 103 Clunet 992 (1976).
78. See Mustill, Michael in "The New Lex Mercatoria: The First Twenty-five Years": Arb.Int'l (1988);
p. 113. TLDB Document ID: 126900. Also Lowenfeld, Andreas F. in "Lex Mercatoria: An Arbitrator's
View": Arb.Int'l (1990); p. 148. TLDB Document ID: 126000.
79. See Fouchard, Gaillard, Goldman in "International Commercial Arbitration": Emmanuel Gaillard
& John Savage ed., The Hague (1999); p. 832. TLDB Document ID: 130600.
80. See Mustill, supra. note 78, n. 100.
81. See Rolf Herber in "English Commentary on the UN Convention on the International Sale of Goods
(CISG)": Comment on Art. 7, Peter Schlechtriem ed., Oxford (1998). TLDB Document ID: 117900.
82. First of all, it makes clear that the aggrieved party's duty to mitigate loss includes not only loss of
assets (damnum emergens) but also loss of profit (lucrum cessans). The phrase "loss resulting from
the breach" appears in the English versions of both the CISG and ULIS. However, a change in the
wording of the French versions (la perte . . . resultant de la contravention) (CISG) instead of (la perte
subie) (ULIS) is intended to indicate that the aggrieved party is obliged not only to take reasonable
measures to mitigate loss which has already occurred, but also to counteract imminent loss. Art. 77,
second sentence, clearly lays down that damages cannot be claimed in respect of loss which could have
been mitigated by the aggrieved party, while Art. 88 ULIS leaves open the extent to which damages
are to be reduced in the event of a failure to observe the requirement to mitigate loss. (Supra. note 11,
p. 585.) Art. 88 of the ULIS reads: "The party who relies on a breach of the contract shall adopt all
reasonable measures to mitigate the loss resulting from the breach. If he fails to adopt such
measures, the party in breach may claim a reduction in the damages."
83. Art. 73 of the 1978 Draft reads: "The party who relies on a breach of contract must take such
measures as are reasonable in the circumstances to mitigate the loss, including loss of profit,
resulting from the breach. If he fails to take such measures, the party in breach may claim a
reduction in the damages in the amount which should have been mitigated." The match-up "indicates
that article 73 of the 1978 Draft and CISG article 77 are substantively identical".97 "The only
modification to 1978 Draft article 73 were to substitute 'A' for 'The' at the outset and to revise the last
clause to read: damages in the amount 'by which the loss' should have been mitigated. The Secretariat
Commentary on 1978 Draft article 73 should therefore be relevant to the interpretation of CISG article
77." Thus, to the extent it is relevant to the Official Text, the Secretariat Commentary on Art. 73 of the
1978 Draft is perhaps the most authoritative source one can cite. "It is the closest counterpart to an
Official Commentary on the CISG." See the match-up available online at
<http://www.cisg.law.pace.edu/cisg/text/matchup/matchup-d-77.html>.
84. See Secretariat Commentary on Art. 73 of the 1978 Draft, Comment 2. Available online at
<http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-77.html>.
85. See Djakhongir Saidov, supra. note 3.
86. See Eric C. Schneider in "Measuring Damages under the CISG". Available online at
<http://www.cisg.law.pace.edu/cisg/text/cross/cross-74.html>.
87. See Peter Schlechtriem in "Recent Developments in International Sales Law": 18 Israel L.R. (1983);
pp. 320-321.
88. See Jacob S. Ziegel in "Report to the Uniform Law Conference of Canada on Convention on Contracts
for the International Sale of Goods". Available online at
<http://www.cisg.law.pace.edu/cisg/text/ziegel77.html>.
89. See Comment 4 on Art. 7.4.7 UPICC.
90. See Comment 1 on Art. 7.4.8 UPICC.
91. See Djakhongir Saidov, supra. note 3.
92. Supra. note 84, Comment 4.
93. See Overview Comments on Reasonableness by Albert H. Kritzer. Available online at:
<http://www.cisg.law.pace.edu/cisg/text/reason.html#view>.
94. E.g., UPICC Arts. 1.8(2), 3.8, 3.9, 3.16, 4.1(2), 4.8(2)(d), 5.4(2), 5.6, 5.7(2), 5.8, 6.1.1(c), 6.1.16,
6.1.17, 7.1.6, 7.1.7, 7.2.2, 7.2.5, 7.3.2, 7.4.6(2), 7.4.8, 7.4.13.
96. See Comment and Notes to the PECL: Art. 1:302. Comment B. Available online at
<http://www.cisg.law.pace.edu/cisg/text/reason.html>.
97. See Djakhongir Saidov, supra. note 3.
101. See Comment and Notes to the PECL: Art. 9:505. Comment A. Available online at
<http://www.cisg.law.pace.edu/cisg/text/peclcomp77.html>.
103. See Djakhongir Saidov, supra. note 3.
104. See Molineaux, Charles in "Moving Toward a Lex Mercatoria - A Lex Constructionis": 14 J. Int'l
Arb. (1997); No. 1, p. 65. TLDB Document ID: 126700.
105. See Djakhongir Saidov, supra. note 3.
107. See Djakhongir Saidov, supra. note 3.
108. See Comment 2 on Art. 7.4.8 UPICC.
CHAPTER 15. DAMAGES UPON TERMINATION
The rule adopted in most legal systems, and the Vienna Convention as well, is that, in
addition to avoidance, the party aggrieved by the breach may always claim damages to
compensate for the loss caused by avoidance.[1] The fact that, by virtue of termination, the contract
is brought to an end, does not deprive the aggrieved party of its right to claim damages for non-performance [...].[2]
Under the CISG, Arts. 75 and 76 provide two methods, representing specific applications of Art.
74, for measuring damages when a party avoids a contract due to a fundamental breach of the
contract by the other party.
When the contract is avoided, damages generally amount to the difference between the contract
price and the costs of a cover transaction (Art. 75); the cover transaction must, of course, be
undertaken within a reasonable time after avoidance. This coincides with the duty to mitigate
damages in Art. 77. Where the goods have a mark
15.2 Damages upon Substitute Transactions
15.2.1 Introduction
15.2.2 Presupposed Situations Calling for Concrete Calculation
15.2.3 Substitute Transaction must be Reasonable Substitute
15.3 Damages upon Current Price
15.3.1 Introduction
15.3.2 Presupposed Situations Calling for Abstract Calculation
15.3.3 Determination of "Current Price"
15.4 Further Damages