Go to Database Directory || Go to Bibliography

Reproduced with the permission of Review of the Convention on Contracts for the International Sale of Goods (2002-2003) [2004] 1-18

Interest in Uniform Application -- How to Solve the UN Sales Law's Interest Rate Problem Under Article 78 CISG and Article 84 CISG

André Corterier [*]

  1. Introduction
  2. Interest under CISG Article 78
    1. Evolution of Article 78 CISG
    2. Interest in German National Courts
    3. Solutions in Literature
      a)   Autonomous Approaches
                aa)   Interest as Damages
                bb)   Interest as Restitution of Benefits
      b)   Solutions Based upon the Law of Conflicts
                aa)   Law of the Contract
                bb)   Law of the Creditor's Place of Business
                cc)   Law of the Debtor's Place of Business
                dd)   Law of Currency
      c)   Consequence of these solutions
    4. The Zapata Decision
  3. Finding the Interest Rate for CISG Article 78
    1. No General Principle
    2. Extension by Analogy
      a)   Analogy to CISG Article 84(1)
      b)   Analogy to CISG Article 76
  4. Interest Rate Determined According to CISG Art. 76
  5. Internationally Uniform Decisions
  6. Finding the Interest Rate for CISG Article 84(1)
    1. Restitution as Legally "in arrears"
    2. Restitution of the Benefit Value
  7. Summary Solution
    1. CISG Article 78
    2. CISG Article 84(1)
  8. Consequences of these Solutions
    1. Place of Payment
    2. Prime Borrower's Short Term Unsecured Rate
    3. Compound Interest?
    4. Interest under CISG Art. 78 AND 84(1)?
  9. Interest in the Future

I.  INTRODUCTION

Under the United Nations Convention on Contracts for the International Sale of Goods,[1] interest is due on overdue payments (CISG art. 78) and on payments which must be refunded (CISG Art. 84(1)). Both Articles give rise to a claim for interest, though neither provides for an interest rate. Under CISG Article 78, whenever a payment is not made timely, interest is due without regard to fault.[2] 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. The party will be able to point to CISG Article 78 to legitimate its title to interest, but will be unable to determine just how much interest it is entitled to. A similar problem is presented by CISG Article 84(1) in regard to situations in which a contract of sale has been avoided after the purchase price has been paid. In such cases, the seller must not only refund the purchase price (according to CISG Art 81(2)), but pay interest on it as well. Again, the text of the CISG does not mention a specific interest rate or a means by which to arrive at an interest rate. Courts and literature have been unable to deal with this problem in a uniform fashion. Neither of the approaches hitherto undertaken has led to uniformity in the application or the CISG Uniformity of the law, however, is the paramount goal of the CISG. This article proposes an extension by analogy of CISG Article 76, which not only provides the applicable interest rate, but also solves all other problems associated with interest. It also does [page 2] so from 'inside' the Convention, obviating all need for discussions of private international rules.

II.  INTEREST UNDER CISG ARTICLE 78

1. Evolution of CISG Article 78

CISG Article 78 represents a compromise reached to prevent a complete failure of the Diplomatic Conference.[3] Conflicting economical, political and religious views in the discussion of CISG Article 78 led to this provision. Some Arabic countries propagated the Islamic provision against the charging of interest.[4] It was also debated whether the interest rate should be governed by market rates or the relevant country's official discount rate -- as opposed to legal interest rates -- and whether the interest rate of the seller's country or that of the buyer's would be applicable.[5] 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. As a consequence, the provision remains incomplete and is applied with inconsistent results throughout the signatory States.[6]

2. Interest in German National Courts

German court decisions are not only familiar to the author, but they have had a disproportionately high impact on the early development of CISG jurisprudence due to the sheer number of early CISG cases reported in, e.g., the CLOUT database.[7] The German national courts work around the problem of the unmentioned interest rate by resorting to private international law.[8] Lacking explicit authority to the contrary in the applicable German law of conflicts, they do so by resorting, no matter what kind of payment is being dealt with, to the law hypothetically applicable to the contract in the absence of the CISG. Different explanations are used to justify this recourse to the law of conflicts. Some courts contend that the aim of CISG Article 78 is to provide a minimal compensation equal to the rate of interest under [page 3] the applicable national law,[9] though without any basis in the Convention or its travaux préparatoires. Some conclude from the history of CISG Article 78 that the CISG purposely does not regulate the rate of interest or provide a method of calculation and that recourse to national law is the only viable alternative.[10]

German courts aside, it appears that recourse to the national law of conflicts is the approach generally chosen by European courts.[11] The United States District Court for the Northern District of New York stayed even closer to home by applying national law proper rather than the national law of conflicts, to the interest rate.[12]

The previous arguments remain unconvincing in the face of CISG Article 7(2). It 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 ..."[13] 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."[14] 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. All this second alternative of CISG Article 7 does, therefore, is to explicitly legitimize the last available option when uniform law proves inadequate. However, the application of the law of conflicts undisputedly needs to remain ultima ratio.[15] Considering the purpose of the uniform law, which is meant to create a uniform body of rules, clear, understandable and equally applicable to everyone, this should be obvious This aim is not served by the law of [page 4] conflicts.[16] Therefore, the goal of the CISG demands that such questions be solved within the context of the CISG.[17]

3. Solutions in Literature

Much has been made of the difference between lacunae intra legem and lacunae praeter legem, or 'inside' and 'outside' gaps.[18] According to CISG Article 7(2), the distinction is that matters governed by the Convention, but not expressly settled by it, should be settled in conformity with the general principles on which the Convention is based, while matters which are not governed by the Convention at all are therefore subject to the international law of conflicts. Of course, the former are also subject to the law of conflicts inasmuch as they cannot be settled by way or general principles. For the following discussion, the attempts to solve the interest rate problem can be broken down into two categories: 1) Those that follow an autonomous approach in solving the matter by way of application of the Convention's general principles; and 2) Those that resort to the law of conflicts. Whether they do so based on a belief that the matter is governed by the Convention but cannot be solved via general principles, or based on a belief that the matter is not governed by the Convention at all, is immaterial for the purposes of this article.

a) 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.

aa) Interest as Damages

According to one point of view, the obligation to pay interest on a sum in arrears is a form of damages.[19] Effectively similar are those approaches which believe that the matter can be settled in accordance with a general principle of 'full compensation.'[20] 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 [page 5] a form of damage is correct, of course. Nevertheless, one must take into account that the counterpart to CISG Article 78 in the Hague Convention was located among the provisions concerning damages,[21] while CISG Article 78 was purposefully moved into its own subsection titled "interest." One undisputed consequence of this relocation is the inapplicability of claims for exemption under CISG Article 79.[22]

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

bb) Interest as Restitution of Benefits

According to another theory, the obligation to pay interest is understood primarily as a means to restitute benefits.[23] It should not be more profitable for the debtor to keep the money than it is to pay it back.[24] For this reason, interest should equal the market interest rate payable at the debtor's place of business for a similar amount. Promoters of this interpretation point to CISG Article 84(1), which obliges the seller to pay interest on the purchase price in case it is bound to refund it.

This function, however, should not be confused with that of CISG Article 78. CISG Article 78 deals with interest due on a late payment. CISG Article 84, 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. In conjunction with CISG Article 84(2), the reasoning behind this provision becomes clear: CISG Article 84(2) provides that the buyer, in case it derived benefits from the goods received, must account for such benefits to the seller. CISG Article 84 is located in Section V, entitled "Effects of Avoidance."[25] 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 [page 6] the other party, including benefits derived there from. Therefore, the purpose of CISG Article 84(1) is to provide a restitution of benefits CISG. Article 78 operates on a completely different basis. Take, for example, a seller who receives the contract price and later avoids the contract. He not only has to return the contract price, but also has to pay interest on it according to CISG Article 84. This interest is 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 does not immediately return the contract price after the contract is avoided, however, the sum is in arrears and, therefore, interest becomes due according to CISG Article 78 from the time the contract was avoided through the time the payment is returned. Thus, the function of CISG Article 84 is different from that of CISG Article 78, and therefore, CISG Article 84 is of no help in determining the applicable interest rate under CISG Article 78.

Given such difficulties, it is not surprising that these attempts to solve the problem based on a general principle of the Convention have had little success in swaying the opinion of arbitrators and judges.

b) Solutions based upon the Law of Conflicts

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

aa) 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.[26] Needless to say, the CISG was adopted by the relevant countries precisely to prevent the application of national law Moreover, the criticism leveled at this approach by proponents of other methods rings true: The hypothetical law of the contract neither considers which of the parties is the creditor and the debtor, nor considers arrangements the parties have made concerning place of payment and currency.

bb) Law of the Creditor's Place of Business

Another approach favors finding the applicable interest rate by resorting to the law of the creditor's place of business.[27] This approach is similar to the one claiming that interest is a form of damages. The fact that CISG Article 78 was taken out of [page 7] the section entitled "Damages,"[28] 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.

cc) Law of the Debtor's Place of Business

Hardly surprising, one can also find promoters of the opposite approach, under which the applicable interest rate is to be found by resorting to the law of the debtor's place of business. This approach is similar to the one claiming that interest is meant to restitute benefits. The criticism applied to the solution under bb) holds true here, as well.

Both approaches, under bb) and cc), relate to the payment in question rather than the underlying contract. Under the approach using the hypothetical law of the contract as guiding inquiry, a court would arrive at the same interest rate, no matter which party owed the money. As different payment obligations may become due under any contract, the approach which focuses on the specific payment obligation in question appears preferable. However, differing general interest rates in the relevant places of business remain a problem. 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 lend to avoid this by agreeing on a "hard" currency.

dd) Law of Currency

An approach taken by Schlechtriem and others takes this into accounts, stating that the legal interest rate of the country whose currency was agreed upon by the parties should be applied.[29] 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. However, this solution will not lead to a solution for a large amount of contracts, because the European currency union has taken effect. The same is true for contracts previously made specifying ECU as currency.[30] In such instances, the currency does not lead to the law of a single State whose legal interest rate might then be applied.

c) Consequences of these Solutions

There are two main differences between the approaches under uniform law and those under the law of conflicts. The first difference is that an approach based on general [page 8] principles of the 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 Additionally, a uniform legal interest rate for the CISG clearly does not and will not exist.

So far, none of the proposed uniform law approaches has found 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, the only exception being the method 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, legal interest rates vary widely.[31]

4. The 'Zapata' Decision

Recently, the United States District Court for the Northern District of Illinois, when faced with the problem of CISG Article 78, asked the jury to find the applicable interest rate based on a general principle of 'reasonableness.'[32] This approach is laudable in that it does not simply give up on the Convention's goal of uniform application. Much can and has been said about the general principles of the Convention, and there can be no doubt that reasonableness is one of them. Nor can it be denied that the interest rate applied in situations in which CISG Article 78 is applicable should be a reasonable one. But the analysis cannot end there, for it would be of little use, in the context of uniform application, if any reasonable interest rate may be applied. This approach also begs the (rhetorical) question of whether the same things are considered reasonable everywhere. In the end, having a jury (or a judge, depending upon jurisdiction) decide upon a reasonable interest rate on a case-by-case basis serves the needs of lawyers and business people across the world no better than a case-by-case decision based upon the law of conflicts. [page 9]

III.  FINDING THE INTEREST RATE FOR CISG ARTICLE 78

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 CISG Article 78 as either damages or restitution of benefits; and
(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" (or benefits), both approaches, as has been shown, encounter considerable difficulties when confronted with the problem of interest. As only two provisions regulate interest -- both with different purposes -- it is impossible to find a general principle concerning interest itself.

2. Extension by Analogy

In codified systems, a solution to a legal gap is often found using an analogy to an existing provision. Such a legal analogy is possible when there is a gap in a provision that is contrary to the system of the code and another provision of the code that has the same basic structure (principle). If such a provision can be found, it may 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 statutory law jurists.[33]

It is undisputed that the question of the interest rate is a gap within the Convention. Moreover, the gap undermines the CISG system 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 as a whole. 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 explicitly denied.[34] [page 10]

Therefore, closing the gap by means of extension by analogy is a viable approach if a provision can be found which can be extended to solve the problem. An attempt to locale a provision with a similar structure must begin by identifying the structure established by the language of CISG Article 78, which states, "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."[35] 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 regard to the omitted payment -- which indicates the sum on which interest must be paid and the currency.[36]

a) Analogy to CISG Article 84

One might first think of CISG Article 84, since this provision also contains an obligation to pay interest. However, this rule does not specify the interest rate or indicate a method for finding such a rate either. CISG 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 CISG Article 78, which relates to a payment being in arrears. CISG Article 84 specifies interest to be owed on a payment during a time in which it was not in arrears. This shows that CISG Article 84 relates only to cases of avoidance and lacks a structure parallel to CISG Article 78. Consequently, it cannot be used for an extension by analogy.

b) Analogy to CISG 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 CISG Article 74. CISG Article 76, in the section on damages, has the same basic structure as CISG Article 78:

-    CISG Article 78 refers to a payment which has not been made although it is due CISG. Article 76 refers to goods which have not been delivered although they were due.
-    CISG Article 78 awards a payment (of interest) to the deprived party regardless of whether interest has been incurred. CISG Article 76 awards a payment (of a hypothetical substitute purchase) to the deprived party regardless of whether such has been made.
-    CISG Article 78 allows further damages to be recovered according to CISG Article 74. CISG Article 76 allows further damages to be recovered according to CISG Article 74.
-    CISG Article 78 ties the interest to be paid to the sum, the late payment of which, [page 11] gives rise to the obligation to pay interest CISG. Article 76 ties the sum to be paid to the (non-)delivery which gives rise to the obligation to pay.

Under CISG Article 76, the 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. CISG Article 76 therefore awards the hypothetical cost of a substitute purchase.

As CISG Article 76 deals with goods not delivered and CISG Article 78 deals with money not paid, it is possible to extend the rule of CISG Article 76 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, one takes out a loan. The market price is the interest rate due for the loan. The time and place of delivery (under CISG Art 76), then corresponds to the time and place of payment under CISG Article 78.

Both in the case of goods not delivered and of money not paid, the receiving party may make a substitute transaction -- in the case of goods, a substitute purchase, in the case of money, a loan. Both CISG Article 76 and CISG Article 78 award the necessary sum whether such a transaction was actually undertaken or not.

IV.  INTEREST RATE DETERMINATION ACCORDING TO CISG ARTICLE 76

Therefore, in analogy to CISG Article 76, interest under CISG Article 78 should equal the market interest rate for the sum and currency owed at the time and place that the payment should have been made. The latter is either obvious from the contract or the result of CISG Article 57 ff. If for legal and/or religious reasons, no such market interest rate can be found, CISG Article 76(2) points to a substitute interest rate.

This solution can be applied to the interest rate problem because it utilizes an approach the Convention itself already takes when calculating the abstract value of certain goods in their relevant market. Even the nations opposed to any obligation to pay interest did not deny that CISG Article 76 established a fair and just regime for the abstract calculation of the market value of goods.[37] This solution does not even require the relevant market value to be expressed as interest. Where, like in certain Islamic countries, the value of borrowed money is expressed in 'credit costs' other than a flat interest rate, such costs which can generally also be expressed as an interest rate, would be applicable. Thus, if the Convention's drafters had the time required to thoroughly deal with this sensitive topic so fraught with religious baggage, it appears likely they would have agreed with this approach. Be that as it may, CISG [page 12] Article 78 requires a method to calculate the value of a sum of money owed, and CISG Article 76 provides just that. Thus, an extension of CISG Article 76 by analogy closes this gap.[38] It results in compensating the creditor for the value which possession of the owed amount would have had.[39]

V.  INTERNATIONALLY UNIFORM DECISIONS

This solution can easily be applied worldwide 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 CISG Article 78's separation from the other sections.

Perhaps more importantly, this solution goes along well with other attempts to unify commercial law the worldwide. The UNIDROIT Principles of International Commercial Contracts are of primary importance in the context of the CISG.[40] 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. UNIDROIT Principles Article 7.4.9(2) 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 CISG Article 76. 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,[41] meant to be a restatement of European codified law, provides for the same method of determining the applicable interest rate in PECL Article 4.509(1). Thus, judges and arbitrators, when applying CISG Article 76 by analogy, can uphold the Convention's principle of internal gap-filling confident that they are contributing to a truly internationally uniform application or interest provisions.

VI.  FINDING THE INTEREST RATE FOR CISG ARTICLE 84(1)

CISG Article 84(1) is similar to CISG Article 78 only in establishing a claim for an unknown interest rate. It differs in not tying this claim to a payment which is [page 13] overdue. Rather, interest is due for a payment which later turns out to be wrongfully received. In this instance, CISG Article 84(1) mandates interest for a period of time in which the debtor was legally not yet required to pay. The underlying purpose of CISG Article 84(1) is to force the seller to make restitution of the monetary value incurred by possession of the purchase price. This is evidenced by its position within CISG Article 84 CISG. Article 84(2) serves the same end by forcing the buyer to return any goods already received. Similarly, CISG Article 81(2) makes restitution for any benefits received from the possession of the goods. Thus, the guiding inquiry must be how the monetary value of the possession of the purchase price can be measured. It is possible to apply the CISG Article 76 method to solve this problem, though a shift in focus from the destination of the payment back towards its origin is necessary.

1. Restitution as 'Legally' in Arrears

The obvious transfer of the solution treats CISG Article 84(1) as considering the repayment obligation to have been due the moment the purchase price was received. One could then construe Article 84(1) as treating the repayment obligation of the seller as having arisen the moment the seller received the contract price. In effect, the repayment would then have been 'in arrears' from the day the purchase price was received and the interest obligation would be the same as under CISG Article 78.[42]

The flaw of this approach is that it effectively compensates the buyer, who paid the purchase price, for not having been in possession of it after payment. After all, the method illustrated above results in an interest payment equal to the monetary value of the possession of the money, However, CISG Article 84(1) is meant to convey to the buyer the monetary value that the possession of the money had for the seller.

2. Restitution of the Benefit Value

Thus one needs to find a way to measure the relevant market value of the sum in question. In the case of CISG Article 78, the analogous extension of CISG Article 76 does just that. It establishes the market value which the payment in question has for the creditor. If one wishes to bring the same method of interest rate determination [page 14] to bear upon the seller in CISG Article 84(1) cases, one would have to inverse CISG Article 76's direction, in order to find the market value which the payment in question had for the seller, namely the benefit gained by it.

Technically, this is affected by answering a theoretical question. If the buyer had not paid the purchase price and it was in arrears, which interest rate would apply based on the above extension of CISG Article 76? The resulting interest rate mirrors the net value which possession of that sum has at the place where it was received -- which is exactly the benefit the seller is supposed to account for under CISG Article 84. Thus, if one accepts that the purpose of the interest obligation of CISG Article 84(1) is the same as in the provision's subsequent paragraphs (i.e., to make restitution for the benefits gained from the possession of goods one ex post facto had no business possessing), then the (inverse) application of CISG Article 76 allows an accurate measurement of that benefit using a provision which the CISG itself uses in measuring such value.

VII.  SUMMARY SOLUTION

Thus, the Convention already contains a method which can be used to determine the relevant interest rates of both CISG Articles 78 and 84(1) -- a method which is both accurate and fair to both parties and which has been accepted as just and fair by the signatory States of the Convention as measuring the abstract worth of a breached obligation with a market value.

1. CISG Article 78

The applicable interest rate is to be found according to CISG Article 76 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 CISG Article 74. The defaulting party cannot claim exemption according to CISG Article 79 as far as the obligation to pay interest is concerned.[43] According to this solution, it is unnecessary to define interest under CISG Article 78 as either damages or restitution of benefits.

No party would receive an unreasonable advantage or be placed at a disadvantage by this method, because 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 of Islamic countries against charging interest leads to the payment of the local -- very similar -- credit costs.[44] If no local interest rate exists at the place of payment because credits in the contractual [page 15] currency cannot be attained at the creditor's place of business, the interest rate of the market in which a substitute loan would have to be effected would apply according to CISG Article 76(2).

2. CISG Article 84(1)

In the case of CISG Article 84(1), one identifies the interest rate which mirrors the benefit the seller has gained and must account for it by applying CISG Article 76's method to the payment made by the buyer, asking which interest rate the buyer would have had to pay if its payment had been in arrears. The result is the interest rate which should be applied to the repayment obligation of the seller under CISG Article 84(1).

VIII.  CONSEQUENCES OF THESE SOLUTIONS

1. Place of Payment

Both Articles tie the applicable interest rate to the place payment was made to (in the case of CISG Art. 84(1)) or should have been made to (in the case of CISG art. 78). In the case of CISG Article 84(1), the place of payment was either fixed by the parties or the result of CISG Article 57(1). The latter, CISG Article 57(1)(a), makes payment of the contract price payable at the seller's place of business, barring specific circumstances.

In the case of damages, it is unlikely that the parties will have stipulated where payment should be made to and the Convention does not specify a place of payment for damages. It appears reasonable to apply CISG Article 57 to such cases as well. Such a solution probably also best reflects the expectation of the parties, which expectation would even be protected against a change of location effected by a party after the conclusion of the contract. If such a change would result in a higher interest rate owed under either CISG Articles 78 or 84(1), CISG Article 57(2) would limit the obligation to what the other party would expect at the conclusion of the contract.

2. Prime Borrower's Short Term Unsecured Rate

Having thus ascertained the legal parameters of the interest obligation, there remains a factual uncertainty. The interest rate fixed by the banks depends largely on the duration of the loan, the financial standing of the borrower and whether the borrower is able to provide security and, if so, how well the security reduces the bank's risk. However, there is generally a standard rate which applies to short term loans to borrowers in good financial standing without security. That is the interest rate which the UNIDROIT Principles, for example, apply to interest obligations under Article 7.4.9(2). That rate should also be applied to interest obligations arising under the CISG. However, applying the UNIDROIT Principles to the CISG in this instance [page 16] does not seem necessary. CISG Article 76 points to the abstract value of the money and this standard interest rate reflects that value. The financial standing of the creditor as well as possible securities are matters of specific cases which cannot be reflected in a general, abstract calculation. They may, however, figure into a possible claim for damages under CISG Article 74.

3. Compound Interest?

There is no provision in the CISG which rules out compound interest.[45] If compound interest is to be applied, when and how often interest is in general compounded under CISG Article 78,[46] and whether it should be compounded under CISG Article 84(1) even before the date of avoidance in long periods between original payment and avoidance is probably best solved by applying the same methodology. If interest is compounded in the relevant market under the CISG Article 76 inquiry, then compounding interest in the same intervals properly reflects what the parties should pay.[47]

4. Interest Under CISG Article 78 and CISG Article 84(1)?

It should be noted that the article of the Convention under which an interest obligation for a single payment arises can and will change in the (not unlikely) event that a paid purchase price is not returned immediately upon the avoidance of the contract. In such a situation, a (re)payment obligation arises under CISG Article 81(2) at the moment of avoidance of the contract. This obligation has a net value of the paid part of the purchase price plus interest under CISG Article 84(1), figured from the date of payment through the date or avoidance. This payment obligation is due from avoidance of the contract, and thus is in arrears immediately thereafter if not immediately paid. Thus, from the date of avoidance on, interest is due on the (re)payment obligation under CISG Article 78. Interest due under CISG Article 84(1) should be compounded on the date the contract is avoided -- after all, the interest having run up to that date is part of the payment obligation which arises, and is in arrears starting at that point in time.[48]

However, the payment in question is never subject to interest accrual under both [page 17] CISG Article 78 and CISG Article 84(1) at the same time. Though one might argue that a purchase price not returned after avoidance both gives rise to unjust enrichment for the seller as well as being detrimental (lacking) for the buyer, such analysis is flawed. Any sum of money that does not reside with the party with which it should reside, is by necessity both wrongfully retained by the party in possession of it and lacking for the party which should be in possession of it. The guiding inquiry must therefore be which one or these effects one should more properly focus on, or rather, which one of these effects the Convention's provisions focus on. With CISG Article 84(1), the idea of the provision seems to be a restitution of benefits for the possession of money which in hindsight is found to have been unjustly possessed. In the case of CISG Article 78, the focus, as explained supra, is upon the recipient who lacks money that both parties in question know, at the time, to belong to the recipient. The interest rate provision applied to the payment in question should mirror this focus shift.

IX.  INTEREST IN THE FUTURE

Past experience shows that parties claiming an interest rate more beneficial to them than the one found according to CISG Article 76 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 will likely prove helpful in convincing judges and arbitrators. Additionally, promoting this approach may lead to a future in which all parties know which interest late applies -- a future more beneficial to all parties than the occasional windfall due to the vagaries of private international law. [page 18]


FOOTNOTES

* André Corterier studied Law at Bonn University in Germany, specializing in international commercial law and international commercial arbitration. He received an LL.M. degree in Comparative legal Studies from Pace University School of Law in 2000 and is currently working for Ashurst, Morris, Crisp, a London-based international law firm in their Frankfurt office.

1. United Nations Convention on Contracts for the International Sale of Goods, U.N. Doc. A/CONF.97/18 reprinted in [1980] XI UNCITRAL Yearbook 149, available at <http://www.cisg.law.pace.edu> [hereinafter CISG or Convention].

2. CISG art. 78 states: "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."

3. Peter Schlechtriem, in 22 JURISTEN ZEITUNG 1037 ff, 1047 (18 Nov. 1988); Cf. JOHN O. HONNOLD, UNIFORM LAW FOR INTERNATIONAL SALES UNDER THE 1980 UNITED NATIONS CONVENTION 465-66 (3d ed 1999); Barry Nicholas, Interest, in COMMENTARY ON THE INTERNATIONAL SALES LAW: THE 1980 VIENNA SALES CONVENTION art. 78, at 568 (C.M. Bianca & M.J. Bonell eds., 1987).

4. Alexander Lüderitz & Michael Dettmeier, in SOERGEL (CISG) art. 78, at 1 (2000).

5. Schlechtriem, supra note 3, at 1047.

6. Id.

7. See United Nations Commission on International Trade Law (UNCITRAL): Case Law on UNCITRAL, Texts (CLOUT), available at <http://www.uncitral.org/en-index.htm>.

8. OLGZ Hamm, PRAXIS DES INTERNATIONALEN PRIVAT- UND VERFAHRENSRECHTS 197 (1996); cf. URSULA KÖNIGER, DIE BESTIMMUNG DER GESETZLICHEN ZINSHÖHE NACH DEM DEUTSCHEN INTERNATIONALEN PRIVATRECHT 93 (1997).

9. OLGZ Frankfurt, NEUE JURISTSCHE WOCHENSCHRIFT [NJW], 48 (1991), 3102.

10. OLGZ Frankfurt, NEUE JURISTSCHE WOCHENSCHRIFT [NJW], 15 (1994), 1013; LG Hamburg, PRAXIS DES INTENATIONALEN PRIVAT- UND VERFAHRENSRECHTS 403 (1991).

11. Cf. Christian Thiele, Interest on Damages and Rate of Interest under Article 78 of the U.N. Convention on Contracts for the International Sale of Goods, 2 VINDOBONA J. INT'L COMM. L. & ARB. 3, 8 (1998), at <www.cisg.law.pace.edu/cisg/biblio/thiele.html>.

12. Delchi Carrier, S.p.A. v. Rotorex Corp, 1994 WI. 495787, at *7 (NDNY). This part of the decision was upheld on appeal, without further comment by the US Circuit Court of Appeals for the 2nd Circuit, 71 F3d 1024, 1031 (2d Cir. 1995).

13. See CISG, supra note 1, art. 7(2).

14. Id.

15. BERNARD AUDIT, LA VENTE INTERNATIONALE DE MARCHANDISES: CONVENTION DES NATIONS UNIES DU 11 AVRIL 1980 47 (1990); M.J. Bonell, General Provisions, in COMMENTARY ON THE INTERNATIONAL SALES LAW: THE 1980 VIENNA SALES CONVENTION 75 (C.M. Bianca & M.J. Bonell eds., 1987); Franco Ferrari, General Provisions, in KOMMENTAR ZUM EINHEITLICHEN UN-KAUFRECHT 123 (Schlechtriem ed., 3rd ed., 2000); Gyula Eörsi, General Provisions, in INTERNATIONAL SALES: THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS 2-3 (Nina M. Galston & Hans Smit eds., 1984); Ulrich Magnus, in RABELS ZEITUNG 121 (1989); Karl H. Neumayer, Offene Fragen zur Anwendung des Abkommens der Vereinten Nationen über den internationalen Warenkauf, in RECHT DER INTERNATIONALEN WIRTSCHAFT (RIW) 99-109 (1994); HONNOLD, supra note 3, at 108-11.

16. "[T]he rules [of private international law] ... are neither clear nor uniform." M.J. Bonell, General Provisions, in COMMENTARY ON THE INTERNATIONAL SALES LAW: THE 1980 VIENNA SALES CONVENTION 66-67 (C.M. Bianca & M.J. Bonell eds., 1987).

17. "[L]'esprit de la convention n'est pas de recourir aux conflits de lois" AUDIT, Supra note 15, at 171.

18. Cf. Franco Ferrari, Uniform Application and Interest Roles Under the 1980 Vienna Sales Convention, 24 GA J. INT'L & COMP. L. 467, 475 (1995); Thiele, supra note 11, at 3.

19. HONNOLD, supra note 3, at 467; Ulrich G. Magnus, Interest, in JULIUS VON STAUDINGER'S KOMMENTAR ZUM BÜRGERLICHEN GESETZDUCH MIT EINFUHRUNGSGESETZ UND NEDENGESETZEN: WIENER UN-KAUFRECHT (CISG) art. 78, at 1 (1994).

20. James J. Callaghan, UN Convention on Contracts for the International Sale of Goods Examining the Gap-Filling Role of CISG in Two French Decisions, 14 J.L. & COM. 183, 200 (1995); Joanne M. Darkly, A US Courts Interpretation of Damage Provisions Under the U.N. Convention on Contracts for the International Sale of Goods A Preliminary Step Towards an International Jurisprudence of the CISG or a Missed Opportunity?, 15 J.L. & COM. 139, 149 (1995); Phanesh Koneru, The International Interpretation of the U.N. Convention On Contracts for the International Sale of Goods An Approach Based on General Principles, 6 MINN J. GLOBAL TRADE 105, 125-26 (1997).

21. See Convention relating to a Uniform Law on the International Sale of Goods (ULIS) art. 83 For a match-up of the ULIS articles with their CISG counterparts, see the Pace Law School Institute of International Commercial Law website on the CISG, at <http://cisgw3.law.pace.edu/cisg/lext/matchup/matchup-u-83.html>.

22. VINCENT HEUZÉ, LA VENTE INTERNATIONALE DE MARCHANDISES: DROIT UNIFORME 339 (GLN Joly ed., 1992); PETER SCHLECHTRIEM, EINHEITLICHES UN-KAUFRECHT: DAS ÜBEREINKOMMEN DER VEREINTEN NATIONEN ÜBERINTERNATIONALE WARENKAUFVERTRAGE 93 et seq (Tübingen 2000); Heinz Strohbach, Zinsen, in FRITZ ENDERLEIN'S & DIETRICH MASKOW'S INTERNATIONALES KAUFRECHT: KAUFRECHTSKONVENTION, VERJÄHRUNGSKONVENTION, VERTRETUNGSKONVENTION, RECHTS-ANWENDUNGSKONVENTION 243 (1991).

23. See HEUZÉ, supra note 22, at 341; K.H. NEUMAYER & C. MING, CONVENTION DE VIENNE SUR LES CONTRATS DE VENTE INTERNATIONALE DE MARCHANDISES: COMMENTAIRE 512 (François Dessemontet ed., 1993).

24. Neumayer, supra note 15, at 99, 106.

25. See CISG, supra note 1.

26. Nicholas, supra note 3, art. 78, at 569-70; Klaus Bacher, Interest, in KOMMENTAR ZUM EINHEITUCHEN UN-KAUFRECHT art. 78, at 744 (Schlechtriem ed., 2000); Franco Ferrari, CISG: Specific Topics of the CISG in the Light of Judicial Application and Scholarly Writing, 15 J.L. & COM. 1, 7 (1995); Gert Reinhart, Fälligkeitszinszien und UN-Kaufrecht, in PRAXIS DES INTERNATIONALEN PRIVAT- UND VERFAHRENSRECHTS 376, 377 (1991). Cf. KÖNIGER, supra note 8, at 96.

27. See Hans Stoll, Inhalt und Grenzen der Schadensersapflicht, in EINHEITLICHES KAUFRECHT UND NATIONALES OBLIGATIONENRECHT 257, 260 (Schlechtriem ed., 1987).

28. See CISG, supra note 1.

29. Peter Schlechtriem, Anmerkung, in RECHT DER INTERNATIONALEN WIRTSCHAFT (RIW) 593 (1995); Bacher, supra note 26, at 750.

30. The European Currency Unit (ECU) was a regime of flexible, but lightly controlled currency exchange rates used by the administration of the European Economic Community for intergovernmental monetary exchanges. A number of non-governmental inter-European contracts availed themselves of this regime by expressing contractual amounts in ECU.

31. For an overview of legal interest rules, Cf. BURGHARD PILTZ, INTERNATIONALES KAUFRECHT 281-82 (1993).

32. Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Co., 2001 WL 1000927, at *3 (ND Ill). The relevant memorandum opinion and judgment order of July 18, 2001 is reproduced at <http://cisgw3.law.pace.edu/cases/010718ul.html>. This part of the decision was not addressed by The United States Circuit Court of Appeals. See 313 F 3d 385 (7th Cir. 2003).

33. Ferrari, supra note 13, art. 7, at 30; HONNOLD, supra note 3, at 108-11; Magnus, supra note 15, at 124.

34. UNITED NATIONS CONFERENCE ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS, OFFICIAL RECORDS, U.N. Doc. A/CONF.97/19 137 et seq (1981).

35. See CISG, supra note 1, art. 78.

36. Regarding further issues on currencies see Magnus, supra note 15, at 116.

37. Note that the system of measurement for the abstract calculation of damages under CISG art. 76 was never in dispute during the discussions of the 1980 Vienna Diplomatic Conference; e.g. Summary Records of Meetings of the First Committee, 37th Meeting, reproduced at <http://www.cisg.law.pace.edu/cisg/firstcommittee/Meeting37.html>.

38. In this vein already, see André Corterier, A New Approach to Solving the Interest Rate Problem Under Art. 78 CISG, 5 INT'L TRADE & BUS. LAW ANNUAL 33 (2000).

39. Which, according to some commentators, is the sole purpose of CISG art. 78 Cf. Magnus, supra note 19, art. 78, at 1.

40. International Institute for The Unification of Private Law, Principles of International Commercial Contracts, Rome 1994, available at <http://www.unidroit.org/english/principles/contents.html> [hereinafter UNIDROIT Principles].

41. THE COMMISSION ON EUROPEAN CONTRACT LAW, THE PRINCIPLES OF EUROPEAN CONTRACT LAW (Ole Lando & Hugh Beale eds., 1995) [hereinafter PECL].

42. One might interpret such an approach as being in line with, for example, the UNIDROIT Principles, the interest rate provision of which always focuses on the recipient of the payment obligation in question. However, the UNIDROIT Principles do not mandate a payment of interest for the time period between payment of the purchase price and avoidance of the contract Rather, under UNIDROIT Principles art. 7.3.6, they merely stipulate that a repayment obligation becomes due with the avoidance of the contract. Such a repayment obligation would, under the UNIDROIT Principles, be thereafter considered to be overdue and thus subject to interest under UNIDROIT Principles art. 7.4.9, exactly parallel to the approach this article promotes for the U.N. sales law convention under CISG art. 78.

43. Bacher, supra note 26, at 746; Strohbach, supra note 22, at 244; NEUMAYER & MING, supra note 23, at 511-15; HEUZÉ, supra note 22, at 33.

44.See Fritz-René Grabau, 89 ZEITSCHRIFT FÜR VERGLEICHENDE RECHTSWISSENSCHAFTEN 330, 349 (1990).

45. Accord, Lüderitz & Dettmeier, supra note 4, at 163.

46. Of course, the obligation to pay interest on a due amount becomes due at the same time that the capital amount becomes due. Obviously, no interest accrues on this obligation to pay interest. Cf. Bacher, supra note 26, at 752.

47. Cf. Magnus, supra note 19, art. 78, at 5. A contrary usage in international trade would not prevent a banking usage to that end from having effect, unless it was so understood by the parties as a part of the offer or acceptance under CISG art. 8(3); Cf. Strohbach, supra note 22, at 247 (who suggests that there is a usage in international trade against compound interest).

48. MARTIN KAROLLUS, UN-KAUFRECHT: EINE SYSTEMATISCHE DARSTELLUNG FÜR STUDIUM UNO PRAXIS 153 (1991). Against compounding interest having run up under CISG art. 84(1), and for interest accrual under CISG art. 78, see Magnus, supra note 19, art. 84, at 12.


Pace Law School Institute of International Commercial Law - Last updated June 13, 2006
Go to Database Directory || Go to Bibliography
Comments/Contributions