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Reproduced with permission of 5 International Trade and Business Law Annual (2000) 33-42

A New Approach to Solving the Problem of the Interest Rate Under Article 78 CISG

André Corterier [*]

I.      The Problem
II.     Evolution of Article 78 CISG
III.    "Solution" of German National Courts
IV.    Solutions in Literature
1. Autonomous approaches
     a) Interest as damages
     b) Interest as restitution of benefits
2. Solutions based on the law of conflicts
     a) Law of the contract
     b) Law of the creditor's place of business
     c) Law of the debtor's place of business
     d) Law of currency
3. Consequences of these solutions
V.     Finding a Solution
1. No general principle
2. Extension by analogy
     a) Analogy to Article 84 CISG
     b) Analogy to Article 76 CISG
VI.    Internationally Uniform Decisions
VII.   Consequences of this Solution
VIII.  Interest in the Future

I. The Problem

Article 78 of the United Nations Convention on Contracts for the International Sale of Goods (CISG)[1] provides for interest any time a payment is not made on time, but does not specify a specific interest rate or method to determine such an interest rate. This is especially aggravating, because Article 78 CISG mandates an obligation to pay interest every time a payment is in arrears, without regard to fault.

For this reason, a party will demand interest in addition to its demand for price, reduction of the price or damages almost every time a suit is brought under the CISG. It will be able to point to Article 78 CISG to legitimate its title to interest, but the legitimacy of the claimed rate of interest remains in doubt.

II. Evolution of Article 78 CISG

Conflicting contradictory economical, political and religious views in the discussion of Article 78 CISG led to this provision. Some Arabic countries propagated the Islamic provision against the charging of interest. Others debated whether the interest rate should be governed by market rates or the relevant country's official discount rate and whether the interest rate of the seller's country or that of the buyer's would be applicable. Some contended that a provision dealing with interest would have to address the problem of currencies being devalued. If a party had to borrow money in a foreign country with higher interest rates, that higher interest rate should be applied. In sum, Article 78 CISG represents a compromise reached to prevent a complete failure of the Diplomatic Conference[2]. [page 34]

III. "Solution" of German National Courts

The German national courts, when applying the CISG, avoid this problem by resorting to private international law[3]. Different explanations are used to justify this recourse. Some courts contend that the aim of Article 78 CISG is to provide a minimal compensation equal to the rate of interest under the applicable national law[4]. Some conclude from the history of Article 78 CISG that the CISG purposely does not regulate the rate of interest and does not provide a method of calculation and that therefore recourse to national law is the only viable alternative[5].

IV. Solutions in Literature

Article 7(2) CISG provides that "Questions concerning matters governed by this convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based..."[6]. Only in the absence of such principles are the consequences of an incomplete provision to be settled "... in conformity with the law applicable by virtue of the rules of private international law"[7]. When the CISG was created because its predecessor, the Hague Convention, did not meet with as much international approval as had been hoped for, this alternative was included although the Hague Convention contained no such provision. However, this recourse to private international law had been sought in respect to the Hague Convention as well, when no solution to a problem could be found. This second alternative of Article 7 CISG therefore only legitimizes the last available option when uniform law proves inadequate. It is undisputed that the application of the law of conflicts needs to remain ultima ratio[8]. This should be obvious when considering the spirit of the uniform law: It is meant to create a uniform body of rules, clear, understandable and equally [page 35] applicable to everyone. This aim is not served by the law of conflicts[9]. The spirit of the CISG therefore demands that such questions are solved within the context of the CISG[10].

1. Autonomous Approaches

So far, two major approaches to solving the problem of interest in the CISG without recourse to private international law have been made in literature. Their differences are based on opposing views of the legal nature of interest.

a) Interest as Damages

According to one viewpoint the obligation to pay interest on a sum in arrears is a form of damages[11]. Therefore, the creditor should receive the market interest rate due for additional credit at its place of business. The basic assumption that "missing" money is a form of damages is correct, of course. Nevertheless, one must take into account that Article 78 CISG's counterpart in the Hague Convention was located among the provisions concerning damages[12], while Article 78 CISG was purposefully moved into its own subsection titled "interest". One undisputed consequence of this relocation is the inapplicability of claims for exemption under Article 79 CISG[13].

The conscious separation of Article 78 CISG from provisions regarding damages appears a strong argument against considering interest to be damages as such. Article 78 CISG provides for interest in case a payment which is due is not made, but also points to Article 74 CISG[14] for actual damages. Article 78 CISG therefore appears related to damages, but not to represent damages as such.

b) Interest as Restitution of Benefits

According to another theory the obligation to pay interest is understood primarily as a means to restitute benefits[15]. It should not be more profitable for the debtor to keep the money than it is to pay it. For this reason, interest should equal the interest rate payable at the debtor's place of business [page 36] for a similar amount. Promoters of this viewpoint point to Article 84(1) CISG[16], which obliges the seller to pay interest on the purchase price in case it is bound to refund it.

Article 84(1) CISG certainly differs from Article 78 CISG in requiring interest to be paid from the time the payment was received. In conjunction with Article 84(2) CISG[17], however, the reasoning behind this stipulation becomes clear: Article 84(2) CISG provides that the buyer, in case it derived benefits from the goods received, must account for such benefits to the seller. Article 84 CISG is located in Section V, "Effects of avoidance". These two paragraphs of the same provision are two sides of the same coin - if a contract is avoided, the parties to the contract should restitute everything in their possession which rightfully belongs to the other party, including benefits derived therefrom. The purpose of Article 84(1) CISG is therefore to provide a restitution of benefits.

This function, however, should not be confused with that of Article 78 CISG. Article 78 CISG deals with interest due on a late payment. Article 84 CISG on the other hand, deals with the restitution of benefits occurring in conjunction with the avoidance of a contract, without the sum in question being in arrears. Article 78 CISG operates on a completely different basis. Take, for example, a seller who receives the contract price and later avoids the contract. It would not only have to return the contract price, but would also have to pay interest on it according to Article 84 CISG. This interest would be due from the time the payment was received to the time the contract was avoided, without the payment having been "in arrears" at all. If the seller did not immediately return the contract price after the contract was avoided, however, the sum would be in arrears and, therefore, interest would be due according to Article 78 CISG from the time the contract was avoided to the time the payment is returned. Thus, the function of Article 84 CISG is different from that of Article 78 CISG and therefore Article 84 CISG is of no help in determining the applicable interest rate under Article 78 CISG.

The prevailing attempts to solve these problems from inside the convention are therefore tenuous at best.

2. Solutions based upon the Law of Conflicts

Other attempts to solve the problem in question have therefore abandoned the uniform law approach and attempt to find an interest rate by defining an adequate approach under the law of conflicts. [page 37]

a) Law of the Contract

The primary method which courts and literature use to arrive at an applicable law focuses on the law hypothetically applying to the contract in question if the CISG did not exist[18]. Needless to say, the CISG was adopted by the relevant countries precisely to prevent the application of national law.

b) Law of the Creditor's Place of Business

This approach is similar to the one claiming that interest is a form of damages[19]. The fact that Article 78 CISG was taken out of the section titled "Damages" does not discredit this solution, as this approach does not attempt to define interest under the context of the CISG. Nevertheless, it also takes a decidedly one-sided approach to solving the problem, which is unlikely to attract a large following.

c) Law of the Debtor's Place of Business

This approach is similar to the one claiming that interest is meant to restitute benefits. What is true for the solution under b) holds true here, as well.

Both approaches relate to the payment in question rather than the underlying contract. As different payment obligations may become due under any contract, this approach appears preferable. Differing interest rates in the relevant places of business remain a problem, however. They might give rise to unjust enrichment or its opposite when one party has its place of business in a country with high inflation, even though the parties to a contract tend to avoid this by agreeing on a "hard" currency.

d) Law of Currency

Schlechtriem's approach takes this into account: It states that the legal interest rate of the country whose currency was agreed upon by the parties should be applied[20]. Since the classification of interest under the CISG as either damages or restitution of benefits is thereby unnecessary, this approach seems advantageous. The interest rate is decided by the parties instead. This solution can no longer lead to satisfactory solutions for a large amount of contracts, however, once the European currency union takes effect. The same is true for contracts already made specifying ECU as currency. In such [page 38] instances, the currency no longer leads to the law of a single state, whose legal interest rate might then be applied.

3. Consequences of these solutions

There are two main differences between the approaches under uniform law and those under the law of conflicts. The first one, of course, is that an approach under uniform law should lead to a uniform solution. As the CISG is uniform law in all states party to the convention, decisions on interest rates would be made the same way in all such states. The approaches under the law of conflicts must give up on this goal, as different states with different private international laws will invariably come to different results. Less obvious, but perhaps more interesting is the fact that all uniform law approaches arrive at a market interest rate, while approaches under private international law come to legal interest rates. The goals of the convention are probably best served by the application of market interest rates, as these best reflect the needs of the parties. The market, after all, is the domain of commercial traders. Also, a uniform legal interest rate for the CISG clearly does not and will not exist.

So far, none of the proposed uniform law approaches could find widespread acceptance. Because of the problems and inconsistencies associated with them, this is unlikely to change in the near future.

This is particularly despairing as a uniform application of the CISG could be achieved using any one of the proposed methods, provided all courts abided by it. Any method, that is, except the one apparently favored by national courts the world over: By resorting to national law of conflicts, the question of interest enters a maze of different legislations, viewpoints and currencies. Within the European Union, for example, soon to have one currency, legal interest rates vary between 5% and 15%[21].

V. Finding a Solution

Thus, it is readily apparent that the need for a uniform solution for this problem persists. Ideally, such a solution should meet the following requirements:

  1. it should lead to a clearly and easily identifiable interest rate;
  2. it should avoid leading to unjust advantages or disadvantages when confronted with currency fluctuations;
  3. it should be rooted firmly in the provisions of the CISG, preferably without classifying interest under Article 78 CISG as either damages or restitution of benefits; and [page 39]
  4. it should derive its interest rate from considering the payment in question rather than the contract from which it was derived.

1. No General Principle

While some believe that the CISG contains a general principle mandating either "full compensation" (for damages) or "full restitution" (of benefits), both approaches, as has been shown, encounter considerable difficulties when confronted with the problem of interest. As only two provisions regulate interest - with different purposes - it is impossible to find a general principle concerning interest itself.

2. Extension by analogy

In codified systems, a solution to legal gaps is often found in an analogy to an existing provision. Such a legal analogy is applicable when there is a gap in a provision, that gap is contrary to the system of the code and there is another provision which has the same basic structure (principle) to it. If such a provision can be found, it can be used to close the gap. The possibility of an extension by analogy in the system of the CISG is recognized both by Common Law and Statute Law jurists[22].

It is undisputed that the question of the interest rate is a gap in the CISG. Moreover, the gap is a flaw in the system of the CISG, because a rule providing for interest without an interest rate cannot be applied - 0% interest, after all, is no interest. The fact that the interest rate was intentionally not specified also does not make this gap an external one (mandating the application of conflict-law). The specification of an interest rate was omitted in order to prevent the failure of the convention. One cannot equate the non-regulation of the interest rate with the intention to place all questions regarding interest rates in the domain of private international law. On the contrary: a motion by the representatives of Great Britain to that effect was denied[23].

Therefore, closing the gap by means of extension by analogy is a viable approach. In looking for a provision with a similar structure, it is helpful to look at the basic components of Article 78: "If a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it, without prejudice to any claim for damages recoverable under article 74."[24] Thus, interest is due for sums in arrears, so they begin to accrue from the time they are due. They are granted without regard for the costs actually accrued and measured in [page 40] regard to the omitted payment - which indicates the sum on which interest must be paid and the currency[25].

a) Analogy to Article 84 CISG

One might first think of Article 84 CISG, since this provision also contains an obligation to pay interest. This rule, however, does not specify the interest rate or indicate a method for finding such a rate. Article 84(2) might prove helpful on this point, indicating that benefits gained are to be returned. While this analogy would take the specific payment into account, its structure is different from Article 78 CISG which relates to a payment being in arrears. Article 84 CISG specifies interest to be owed on a payment during a time in which it was not in arrears. This shows that Article 84 CISG relates only to cases of avoidance and lacks a structure parallel to Article 78 CISG. Consequently, it cannot be used for an extension by analogy.

b) Analogy to Article 76 CISG

The Convention does, however, contain a method to calculate a monetary obligation resulting from a deadline not met and independent of actual damages under Article 74 CISG. Article 76 CISG in the section on damages has the same basic structure as Article 78 CISG: Where Article 78 CISG refers to a payment not made, Article 76 CISG refers to goods not delivered. Both articles award a payment to the deprived party with further damages recoverable under Article 74 CISG.

Under Article 76 CISG, this payment is calculated by comparing the contract price of the goods with the current market price of the goods at the time and place of delivery. Article 76 CISG therefore awards the hypothetical cost of a substitute purchase.

As Article 76 CISG deals with goods not delivered and Article 78 CISG deals with money not paid, it is possible to extend the rule of Article 76 CISG by thinking of money as "goods". On the global financial market, money is a commodity much like other goods. It is traded and has a market price. When "buying" money, the market price is the interest rate due for the loan. The time and place of delivery, then, is the time and place of payment, which is either obvious from the contract or the result of Article 57 et seq. CISG[26]. Both in the case of goods not delivered and of money not paid, the receiving party may be forced to make a substitute transaction - in the case of goods, a substitute purchase, in the case of money, a loan. Both Article 76 CISG and Article 78 CISG award such a sum whether such damages actually occurred or not.

Therefore, in analogy to Article 76 CISG, interest under Article 78 CISG should equal the market interest rate for the sum and currency owed at the time and [page 41] place the payment should have been made. If for legal and/or religious reasons no such market interest rate can be found, Article 76 (2) CISG points to a substitute interest rate.

VI. Internationally Uniform Decisions

This solution can easily be applied the world over as it leads to an easily identifiable interest rate. It takes a middle route between interest as damages and restitution of benefits, without necessarily defining interest as either, thereby fitting into Article 78 CISG's separation from the other sections.

Perhaps more importantly, this solution goes along well with other attempts to unify commercial law the world over. The UNIDROIT Principles of International Commercial Contracts are of primary importance in the context of the CISG. These principles are meant to provide a body of rules which private parties can stipulate as binding for their contract. Moreover, they are meant to provide assistance in interpreting uniform law to the point of being subsidiarily applicable. Article 7.4.9(2) UNIDROIT specifies interest on sums in arrears to be due at a rate which is found exactly the same way as provided by application of the principle of Article 76 CISG. This analogy leads to a result which has already found widespread international acceptance. Interestingly enough, the UNIDROIT principles do not represent the only attempt to create uniform law meant to regulate interest in this fashion. The Principles of European Contract Law, meant to be a restatement of European codified law, provides for the same method of determining the applicable interest rate in its Article 4:509(1).

VII. Consequences of this Solution

According to this solution it is unnecessary to define interest under Article 78 CISG as either damages or restitution of benefits. The applicable interest rate is to be found according to Article 76 CISG, with the payment not made substituted for the goods not delivered. Interest is to be paid according to the market interest rate for the currency of the payment at the time and place at which the payment should have been made. Nothing else changes, so the receiving party may still claim damages under Article 74 CISG. The defaulting party cannot claim exemption according to Article 79 CISG as far as the obligation to pay interest is concerned.

No party would receive an unreasonable advantage or be placed at a disadvantage by this method, as the solution is oriented along parameters defined by the parties. Possible fluctuations in currency values are taken into account by referring to current market interest rates. The religious prohibition against charging interest of Islamic countries leads to the payment of the local [page 42] - very similar - credit costs[27]. If a company had to resort to borrowing money in a foreign country because credits in the contractual currency cannot be attained at their place of business, the interest rate of that foreign loan would apply according to Article 76(2) CISG.

VIII. Interest in the Future

Past experience shows that parties claiming an interest rate more beneficial to them than the one found according to Article 76 CISG cannot easily refute the logic of this approach. The fact that the question of interest is highly disputed should not allow a party to claim any available interest rate. On the contrary - as the opposing party in any proceeding will no doubt have its own ideas concerning the applicable interest rate, a sound approach is very helpful in convincing judges and arbitrators. Additionally, promoting this approach may lead to a future in which all parties know which interest rate applies - a future more beneficial to all parties than the occasional windfall due to the vagaries of private international law.


FOOTNOTES

* Germany. LL.M. Pace University School of Law (2000); Associate, Ashurst, Morris, Crisp (Frankfurt, Germany); Associate, Pace Institute of International Commercial Law.

1. 19 ILM 671, 689 (1980). Article 78 CISG provides: "If a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it, without prejudice to any claim for damages recoverable under article 74."

2. Schlechtriem, in: Juristen-Zeitung 1988, p. 1037 ff., 1047.

3. Oberlandesgericht Hamm, in: Praxis des Internationalen Privat- und Verfahrensrechts 1996, p. 197 f.; compare the comprehensive overview by Königer, Die Bestimmung der gesetzlichen Zinshöhe nach dem deutschen internationalen Privatrecht, p. 93.

4. Oberlandesgericht Frankfurt, in: Neue Juristische Wochenschrift 1991, p. 3102.

5. Oberlandesgericht Frankfurt, in: Neue Juristische Wochenschrift 1994, p. 1013; Landgericht Hamburg, in: Praxis des Internationalen Privat- und Verfahrensrechts, p. 403.

6. 19 ILM 671, 673.

7. Ibid.

8. Audit, La vente internationale de marchandises, Paris (1990), p. 47; Bianca/Bonell-Bonell, Commentary on the International Sales Law, Mailand (1987), Article 7 at 2.3; v. Caemmerer/Schlechtriem-Herber Article 7 at 8; Eörsi, in: International Sales:The United Nations Convention on Contracts for the International Sale of Goods (1984) 2-3; Magnus, in: Rabels Zeitung vol. 53 (1989), p. 121; Neumayer, in: Recht der Internationalen Wirtschaft 1994, p. 99f.; Honnold, Commentary on the Uniform Law for International Sales under the 1980 United Nations Convention, 2nd Ed., Deventer (1991),  96.

9. [T]he rules [of private international law]... are neither clear nor uniform": Honnold, 96; Bianca/Bonell-Bonell, Article 7 Rdnr. 1.3.

10. "...[L]'esprit de la convention n'est pas de recourir aux conflits de lois", Audit, p. 171.

11. Honnold, at 421; Magnus, in: Staudinger, Article 78, 1.

12. Article 83 ULIS.

13. 19 ILM 671, 689-690. Heuzé, La vente internationale de marchadises - Droit uniforme, Paris (1992), at 448; Schlechtriem, in: Einheitliches UN-Kaufrecht. Das Übereinkommen der Vereinten Nationen über internationale Warenkaufverträge, p. 93 f.; Strohbach, in: Enderlein/Maskow, Internationales Kaufrecht (1991), Article 78, 1.

14. 19 ILM 671, 688.

15. Heuzé, at 449; Neumayer/Ming, Convention de Vienne sur les contrats de vente internationale de marchandises, Commentaire, Lausanne (1993), Article 78, 2.

16. 19 ILM 671, 691.

17. Ibid.

18. Nicholas, in: Bianca/Bonell Article 78, 1.4.; Eberstein/Bacher, in: v. Caemmerer/Schlechtriem Article 78, 3; Compare the comprehensive overview by Königer, p. 96.

19. Stoll, Inhalt und Grenzen der Schadensersatzpflicht, in: Schlechtriem (Ed.), Einheitliches Kaufrecht und nationales Obligationenrecht, Baden-Baden 1987.

20. Schlechtriem, in: Recht der Internationalen Wirtschaft 1995, p. 593.

21. Eberstein/Bacher, in: v. Caemmerer/Schlechtriem, Article 78, 33.

22. Herber, in: v. Caemmerer/Schlechtriem Article 7, 30; Honnold, at 102; Magnus, in: Rabels Zeitung vol. 53 (1989), p. 124.

23. Leser, in: v. Caemmerer/Schlechtriem, Article 84, 4; Nicholas, in: Bianca/Bonell Article 78, 1.4.

24. 19 ILM 671, 689.

25. Regarding currencies see Magnus in: RabelsZ 53 (1989), p. 116 ff.

26. 19 ILM 671, 684.

27. See Grabau, Zeitung für vergleichende Rechtswissenschaften vol. 89 (1990), p. 345 ff.


Pace Law School Institute of International Commercial Law - Last updated June 18, 2003
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