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Reproduced with the permission of Oceana Publications

excerpt from

INTERNATIONAL SALES LAW

United Nations Convention on Contracts for the International Sale of Goods

Convention on the Limitation Period in the International Sale of Goods

Commentary by
Prof. Dr. jur. Dr. sc. oec. Fritz Enderlein
Prof. Dr. jur. Dr. sc. oec. Dietrich Maskow

Oceana Publications, 1992

Article 74 [General rule for calculation of damages]

[TEXT OF THE UNIFORM LAW]

Damages for breach of contract [1] by one party consist [6] of a sum equal to the loss [4], including loss of profit [5], suffered by the other party [2] as a consequence [3] of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen [8] at the time of the conclusion of the contract [7], in the light [9] of the facts and matters of which he then knew or ought to have known [10], as a possible consequence of the breach of contract.

[WORDS AND PHRASES, CONCEPTS

1. right to claim damages for breach of contract
2. damages suffered by the other party
3. as a consequence of the breach
4. damages of a sum equal to the loss
5. including loss of profit
6. damages for breach of contract by one party consist of
7. foreseeability at the time of the conclusion of the contract
8. meaning of foresaw or ought to have foreseen
9. in the light of the facts and matters
10. of which he then knew or ought to have known, as a possible consequence of the breach of contract ]

[COMMENTARY]

[1] [right to claim damages for breach of contract]

Irrespective of which obligation was not performed, any breach of contract by one party who causes damage to the other party, under Articles 45 and/or 61 (c. note 6), entails the right for the latter to claim damages. Damages mostly are caused by delay in delivery, non-delivery, or delivery of non-conforming goods. They are not so often caused by the buyer's refusal to take delivery. Damages caused by delayed payment or non-payment of the price are in general cured by the entitlement to interest under Article 78 (Honnold, 409). As an exception, compensation for damages is granted in the case of breaches of contract which have not been committed but are expected to occur m the future, and which, for the purposes of Article 74, have to be interpreted as committed (Article 72; Stoll/Freiburg, 258). Damages may also be claimed in the case of violations of auxiliary obligations, i.e. non-provision of information under Article 32, paragraph 3, or failure to give notice under Article 32, paragraph 1 (differently Stoll/Freiburg, 260). Some of the acts described to be obligations under the CISG are, however, 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 [page 297] goods and the buyer's obligation to give notice under Articles 38 and 39, Stoll/Freiburg, 260).

Unlike in ULIS in regard to the claiming of damages, it does not matter under the CISG whether or not the contract has been declared avoided. The CISG, nonetheless, in Articles 75 and 76 contains specific rules to be applied to the measurement of damages after the contract has been avoided. In contrast, Article 74 provides the more general rule which is applied whenever Articles 75 and 76 cannot be invoked, irrespective of whether or not the contract has been avoided (Knapp/BB, 539).

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. Compensation for damages is, however, limited by the foreseeability of the loss (note 8), on the one hand, and by the exemptions provided for in Articles 79 and 80, on the other (Knapp/BB, 540).

[2] [damages suffered by the other party]

Third parties cannot deduce claims from the CISG. Claims outside the contract that are asserted against the parties of the international sales contract have to be invoked pursuant to the applicable domestic law. If a third party has suffered a loss which the other party would have to compensate, such loss could be cured by recourse when it was the result of a breach of contract.

[3] [ as a consequence of the breach ]

Apart from the breach of contract and the damages suffered is the relationship between them, the causality of the damage, which is the third condition for damages to be claimed. The CISG does not give a direct answer to the question of whether compensation is to be made only in regard to the losses suffered directly as a result of the breach of contract or whether it extends to losses that are the result of that causality. It can be deduced from the context that also indirect losses are to be compensated, provided that they were foreseeable by the party in breach (Knapp/BB, 540).

[4] [damages of a sum equal to the loss]

It is the entire loss suffered as a result of the breach of contract (excluding the non-foreseeable, c. note 8) which has to be compensated, including possible losses that are the result of defects. Article 74 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 buyer himself or a third person is involved (c. Article 5). Injuries to persons cannot be claimed, not even by recourse (Stoll/Freiburg, 291 in response to Basedow/Freiburg, 289). [page 298]

The CISG only knows of compensation in money; restitution in kind as foreseen in some legal systems (e.g. 249 German BGB) is excluded. (See, however, the possibilities for the cure of defects prior to (Article 37) and after the period for delivery (Article 48). Possible losses are not compensated in this way, the right to claim damages persists.)

The principle of full compensation includes both the effective loss, i.e. a reduction in the fortune of the party in loss (damnum emergens), and the loss in profit (lucrum cessans).

Article 74 does not provide for multiple claims for damages as it is given, e.g. as punitive damage, in American law. The CISG does, however, not exclude relevant contractual agreements.

The calculation of the damage in detail may cause manifold problems, not only when the buyer suffers a loss because the delivered machines do not function properly; the delivered materials cannot be used as planned; there is a delay in repairs or in the delivery of spare parts and repairs have to be effected by the buyer himself; but also when the seller having been notified by the buyer that he would not take delivery of the goods purchased, discontinues production of the same goods (for examples see the Secretariat's Commentary, O.R., 59; and Knapp/BB, 545 fol).

It is disputed to what extent damage can be claimed for losses suffered in connection with the decline of exchange rates (J. Hellner, "The Limits of Contractual Damages in the Scandinavian Law of Sales", 10 Scandinavian Studies, p. 60). While Basedow (Freiburg, 288) is against it, Stoll (Freiburg, 266) believes that an abstract calculation should not be permitted, but that concrete proof of damages should be possible where there was a decline in the exchange rate or the purchasing power of the buyer's money during the delay in payment.

[5] [ including loss of profit]

As to the loss of profit, there are several possibilities. It may be questioned whether the injured party is entitled to recover the loss of profit he actually suffered, the exact profit he could have expected, or an average profit to be expected at a certain time in a certain place. It is unclear also for which period of time the loss of profit can be measured. In this context, however, the obligation to mitigate losses under Article 77 is to be taken into account. [page 299]

Honnold (416) holds that; what matters is the loss which the injured party in fact suffered. The seller would suffer no loss if he could sell the goods not taken by the buyer elsewhere in times of great demand. The buyer would suffer no loss if he could continue production by purchasing substitute goods meeting his needs. According to Knapp (BB, 544), one should proceed from the loss which the injured party suffered in fact or from the profit that could have been expected, setting no time limit but only the condition that the loss was foreseeable. He rejects a calculation of future profit by a lump-sum. He does not exclude, however, that the injured party may repeatedly be adjudicated the loss of profit by the courts if the conditions of Article 74 apply.

A loss of profit is, therefore, not a category which can be calculated only for the sale or resale of goods; it also includes the loss incurred because of interruptions of production as a consequence of the delivery of defective machinery (von Hoffmann/Freiburg, 302).

[6] [damages for breach of contract by one party consist of ]

Article 74 itself does not stipulate a claim for damages, but is applied when a party under Article 45 or 61 is entitled to claim damages. In compensating the loss suffered, the injured party shall be placed in the same economic position he would have been had there been no breach of contract by the other party (Honnold, 408; Knapp/BB, 543). Insofar as the contract is avoided, the specific provisions of Articles 75 and 76 are to bring about the same result (losses which cannot be compensated invoking the two Articles, can be so compensated under the broader rule of Article 74).

The party who claims damages has to provide evidence of the damage and must, at the same time, prove the causality between the breach of contract and the loss suffered.

[7] [foreseeability at the time of the conclusion of the contract]

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 (c. also Article 35, paragraph 2, subpara. (b); and Article 42, paragraph 1, subpara. (a)).

[8] [meaning of foresaw or ought to have foreseen]

What is meant here is to foresee subjectively (Vilus/Dubrovnik, 247), 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 (note 10). However, it is not quite exact to state that the subjective foreseeability does not matter (so Stoll/Freiburg, 260). Subjective foreseeability plays a role when the resulting loss is [page 300] above what would have been regarded as the normal measure by any reasonable person, but actually was foreseen by the party in breach.

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 (Knapp/BB, 541).

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.

In some legal systems, the limitation of damages by foreseeability as such is restricted when the breach of contract was committed intentionally. No such rule exists in the CISG (O.R., 60). Such a rule could at best be deduced from the underlying general principles of the Convention (Article 7, paragraph 2; Article 40 and Article 43, paragraph 2).

[9] [ in the light of the facts and matters ]

The facts and matters must have existed at the time of the conclusion of the contract and/or must be foreseeable at the conclusion of the contract, like seasonal market fluctuations, difficulties in transport caused by bad weather, etc. They may, however, also result from the specific purpose of the goods which the buyer has made known to the seller. In the leading English decision, Hadley v. Baxendale (1854, 9 Exch. 341; explained in detail in Cheshire/Fifoot, The Law of Contract, 1969, p. 546 fol), the defendant did not know the purpose and the facts and matters, the essential condition for the use of the goods. (A carter was supposed to carry a broken crankshaft for a miller from Gloucester to Greenwich where it was to serve as a model for a new one. Since the carter was late in transport, the mill was inoperative longer than it would have been without the committed breach of contract.) To what extent the party in breach is capable of taking the circumstances into consideration also depends on his position (e.g. manufacturer or trader, c. Article 35, note 8).

[10] [ of which he then knew our ought to have known, as a possible consequence of the breach of contract]

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. [page 301]

A party in breach can thus not be freed from his obligation to pay damages by proving that he did not foresee the damage. Knapp (BB, 541) mentions that the party claiming damages need not prove that the party in breach really foresaw the loss; rather it will be enough if he proves that the party in breach was objectively in a position to foresee it. We believe that the party who claims damages need not prove one nor the other. It will be sufficient for him to prove the breach of contract, the damage and the causality between them (note 6).

It is up to the party in breach to object that the damage could not be foreseen. He would have to prove that the loss could not be foreseen by him.

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. 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 Article 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.

(In this context see Schlechtriem, Kaufrecht, p. 51 fol; and Schlechtriem/Magnus, 410 fol.) [page 302]

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Pace Law School Institute of International Commercial Law - Last updated September 25, 2002
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