E. Allan Farnsworth Go to Database Directory || Go to Bibliography || Go to CISG Case Search Form

Reproduced with permission from 27 American Journal of Comparative Law (1979) 247-253

[This is a commentary on damages and specific relief, with primary attention directed to Article 70, Article 71, Article 72 and Article 73 of the 1978 Draft. Click on the articles identified above for match-ups with CISG Articles 74, 75, 76 and 77.]

Damages and Specific Relief

E. Allan Farnsworth

[INTRODUCTION]

No aspect of a system of contract law is more revealing of its underlying assumptions than is the law that prescribes the relief available for breach. In the following pages an attempt will be made to identify some of the underlying assumptions of the 1978 Draft Convention on Contracts for the International Sale of Goods through an examination of its provisions on damages and specific relief.[1] The perspective is admittedly that of one familiar with the legal system of the United States.

The assumptions of that legal system in this respect are relatively simply stated and differ relatively little from those held in most Common law countries. Of concern here are five basic tenets. First, the law of remedies for breach of contract is directed at relief to the promisee to redress breach rather than compulsion of the promisor to prevent breach. Second, relief to the promisee is to be measured by his expectation, sometimes called "the benefit of the bargain," and the attempt is therefore to put him in the position in which he would have been had the contract been performed. Third, this attempt should take the form of substitutional relief, an award of money, rather than specific relief, whenever substitutional relief is adequate. Fourth, the award of substitutional relief should not include compensation for loss that might reasonably have been avoided by the claimant. Fifth, the award of substitutional relief, should not include compensation for loss that could not reasonably have been foreseen by the party in breach at the time he made the contract.[2]

Taken as a whole, these tenets are designed to accord with the goal of economic efficiency in a free enterprise economy. For the good of society, its resources should be efficiently allocated at every point in time. It is therefore in society's interest that each economic unit reallocate its resources whenever this would lead to greater efficiency. Even if a party is bound by a contract to allocate his [page 247] resources in a particular way, the good of society requires that he break the contract and reallocate his resources whenever this makes him better off without making someone else worse off. Since reallocation through breach will not make the injured party worse off as long as his expectations are protected (the second tenet), and will, by hypothesis, make the party in breach better off, it is in society's interest that the contract be broken and the resources reallocated. This reasoning supports, for example, substitutional rather than specific relief (the third tenet), because such compulsion would discourage reallocation.

First Tenet: Relief

The tenet that the law of remedies for breach of contract is aimed at relief of the promisee rather than at compulsion of the promisor is admirably expressed by the Draft Convention in the first sentence of art. 71:

". . . if, in a reasonable manner and within a reasonable time after avoidance, the buyer has bought goods in replacement or the seller has resold the goods, the party claiming damages may recover the difference between the contract price and the price in the substitute transaction and any further damages recoverable. . . ."

The following article, which lays down the market price formula, makes it clear that no more than the aggrieved party's actual loss is recoverable. He cannot inflate his damages by using that formula if he has actually covered or resold.

Although the Draft Convention makes no provision for punitive damages, it is always open to the parties themselves to include an express provision for a penalty in the event of breach. There are polar views on the validity of such penalty clauses. Many legal systems find nothing inherently objectionable in them. Others, notably those based on the Common law, draw a distinction between a provision for a "penalty," which is not valid, and a provision for "liquidated damages," which is valid. Since this condemnation of penalty clauses is rooted in public policy, it is untouched by the Draft Convention which is not, according to art. 4(a), concerned with "the validity of the contract or of any of its provisions." An inquiry into the validity of a penalty clause will continue to involve an exercise in choice of law to ascertain the governing law whenever jurisdictions with these polar views are involved.[3] [page 248]

Second Tenet: Expectation

The second tenet is that relief to the promisee is to be measured by his expectation, that is, by "the benefit of the bargain," and is not limited to the extent of his reliance losses. Although this is nowhere stated in so many words, it seems implicit in a reference to the promisee's "loss, including loss of profit" in the first sentence of art.70. The word "loss" alone might be read narrowly to refer to out-of pocket reliance expenditures, but the mention of "loss of profit" makes it clear that this is not what is intended.[4]

Third Tenet: Substitutional Relief

The third tenet, that relief should be substitutional rather than specific, runs into heavy weather in the Draft Convention. This is scarcely surprising in view of the proposed preference of Civil law systems for specific relief on doctrinal grounds, buttressed, in the case of countries with planned economies that lack markets for substitute transactions, by a preference on economic grounds. What is more surprising is that it has not been possible to work out a compromise that would be satisfactory to countries with other legal traditions and different economies.

The rights of both buyer and seller are stated in absolute terms. Under art. 42, the buyer may not only "require performance by the seller of his obligations," but he may, in some instances where the goods do not conform, "require delivery of substitute goods." Under art. 58, the seller "may require the buyer to pay the price, take delivery or perform his other obligations." Articles 41(a) and 57(a) give the respective parties the power to "exercise the rights" so conferred.

Such "compromise" as there is appears in art. 26, which provides:

"If, in accordance with the provisions of this Convention, one party is entitled to require performance of any obligation by the other party, a court is not bound to enter a judgement for specific performance unless the court could do so under its own law in respect of similar contracts of sale not governed by this Convention."

To begin with, the words "judgement for specific performance" suggest that the provision does not apply to a suit in which the seller tenders the goods to the recalcitrant buyer and claims the price. Such a suit, traditionally one at law rather than in equity, is not [page 249] commonly thought of as one for "specific performance," even though it gives the seller relief that might accurately be described as "specific." Furthermore, even as to a buyer's suit against the seller for what is unmistakably "specific performance," a Common law court is not relieved of the obligation to render such a judgment if it "could do so under its own law in respect to similar contracts of sale." This is a very different test from that permitted under a reservation of ULIS (art. VII) which relieves a court from the obligation to render such a judgment "except in cases in which it would do so under its own law in respect of similar contracts of sale." The law relating to equitable relief in any Common law system is sufficiently discretionary that, given appropriate facts, a court could render a judgment of specific performance in respect of many types of contracts although it would render such a judgment in respect of very few. The rewording of the language has produced at best a sham compromise.[5]

[Editor's note: The drafters of CISG Article 28 (the successor to Article 26 of the 1978 Draft) reverted to the cited ULIS language: the word could was deleted; would was substituted therefore.]

In addition, two significant omissions in the Draft Convention destroy a delicate compromise worked out in ULIS. Art. 25 of ULIS provides:

"The buyer shall not be entitled to require performance of the contract by the seller, if it is in conformity with usage and reasonably possible for the buyer to purchase goods to replace those to which the contract relates. . . ."

Art. 61(2) contains a similar qualification on the seller's action for the price:

"The seller shall not be entitled to require payment of the price by the buyer if it is in conformity with usage and reasonably possible for the seller to resell the goods. . . ."

Both these provisions have been dropped. Were it not for this background, one might venture to argue that art. 73, which requires a party to "take such measures as are reasonable in the circumstances to mitigate the loss," requires an effort at cover or resale as a condition of specific relief. But that is scarcely a tenable position in the light of history.

The conclusion is inescapable that, under the current version, neither seller nor buyer is free to reallocate its resources even if the other party has a ready market on which it can cover or resell as the [page 250] case may be and even if that party is fully compensated for any resulting loss. This would not, perhaps, be a significant matter if it offended only the sense of pride of those Common law countries whose history dictates a contrary rule. Its importance lies in its disregard of fundamental notions of economics. It may be that both buyers and sellers will choose to ignore their rights to specific relief and seek damages based on cover or resale. Should that be so however, it will be in spite of the Draft Convention and not because of it.

Fourth Tenet: Avoidability

The requirement of avoidability is stated in art. 73:

"The party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach. If he fails to take such measures, the party in breach may claim a reduction in the damages in the amount which should have been mitigated."

Its purpose is the same as that of Restatement of Contracts § 336, which denies recovery for "harm that the plaintiff should have for seen and could have avoided by reasonable effort without undue risk, expense or humiliation" and of UCC 2-715(2) (a), which denies recovery to the buyer for loss that "could reasonably be prevented by cover or otherwise."

The most common step to be taken in avoidance of loss under a contract for the sale of goods is a substitute sale or "resale" to an other buyer in the case of breach by the buyer and a substitute purchase or "cover" from another seller in the case of breach by the seller. The rule that results from applying the general rule on avoidance to these situations is the market price formula stated in art. 72(1):

"If the contract is avoided and there is a current price for the goods, the party claiming damages may, if he has not made a purchase or resale under article 71, recover the difference between the price fixed by the contract and the current price at the time he first had the right to declare the contract avoided and any further damages recoverable under the provisions of article 70."

This provision parallels UCC 2-713(1), which ties buyer's damages to "the market place at the time when the buyer learned of the breach." It departs from UCC 2-708, which ties seller's damages to "the market price at the time . . . for tender." The Draft Convention proceeds on the assumption that the aggrieved party, whether buyer or seller, can be expected to protect himself by a substitute transaction as soon as he has the right to free himself of the original contract. [page 251] This seems unexceptionable and, as to anticipatory repudiation, accords with UCC 2-723(1), which ties both buyer's and seller's damages to "the time when the aggrieved party learned of the repudiation." Under art. 72(2), "the current price is that prevailing at the place where delivery of the goods should have been made." There is no counterpart of UCC 2-713(2), which allows the buyer to base damages on the market at the place of arrival where the goods have already reached their destination before the buyer's failure to take or keep them.

The Draft Convention contains no direct counterpart of UCC 2-708(2), which allows a seller damages based on "the profit (including reasonable overhead) which the seller would have made from full performance by the buyer" in cases where the market price formula is "inadequate to put the seller in as good a position as performance would have done." This provision is available to the "lost volume" seller, who claims that his supply of goods exceeds his demand and that the breach by the buyer "cost" him a sale and its resultant net profit. It has produced as much controversy over its application as any of the Code's remedy sections. Despite the lack of a specific provision designed for the "lost volume" seller, art. 72 of the Draft Convention says only that the aggrieved party "may" use the market price formula, and the general rule of the first sentence of art. 70 seems broad enough in its reference to "loss or profit" to afford compensation to the seller who can make out a case of "lost volume."[6]

Nor does the Draft Convention contain specific language corresponding to that of UCC 2-704(2), which applies when seller "in the exercise of reasonable commercial judgment" finishes goods in process of manufacture after repudiation by the buyer. The UCC allows the seller to base his damages on the cost of completing manufacture, even though hindsight might show that he would have avoided loss if he had stopped manufacture and disposed of the unfinished goods as scrap. The general language of art. 73, however, may bear a reading under which stopping manufacture would not be "reasonable in the circumstances" if the seller reasonably believed that finishing manufacture would cut the loss but hindsight proved him wrong. This is an instance where the more laconic style of the current UNCITRAL Text leaves uncertainty that is allayed by the Code's greater detail.

Fifth Tenet: Foreseeability

The requirement of foreseeability, known throughout the [page 252] Common law world as "the rule of Hadley v. Baxendale,"[7] appears as the second sentence of art. 70:

"Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters which he then knew or ought to have known, as a possible consequence of the breach of contract."

Any such formula is inevitably imprecise. It comes close to blending Restatement of Contracts § 330, which allows recovery for "injuries that the defendant had reason to foresee as a probable result of his breach when the contract was made, and UCC 2-715(2)(a), which allows the buyer recovery for "any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know." Although the use in art. 70 of "possible consequence" may seem at first to cast a wider net than the Restatement's "probable result," the preceding clause ("in the light of the facts . . .") cuts this back at least to the scope of the Code language.

A more significant difference goes to damages for breach of warranty. In the case of injury to person or property, UCC 2-715(2) (a) has a separate formula for damages allowing recovery for injury "proximately resulting from any breach of warranty." It thus applies to such claims the more generous measure of damages for tort rather than the less generous one of damages for breach of contract. The Draft Convention has no such separate formula to claims for breach of warranty, which are governed by the less generous contract formula of art. 70. If the difference reflects the relatively favored status of the personal injury claimant in the United States, it is impractical to hope that the result of the world could be brought to accept the broader separate formula of the Code.

Conclusion

Of the five tenets listed at the outset of this article that are the basis for the law of relief for breach of contract in the United States, four are adequately reflected in the Draft Convention. Only the tenet that relief should be generally substitutional rather than specific is disregarded. That deficiency can be remedied by relatively simple drafting changes. It is to be hoped that this will be done at the forthcoming diplomatic conference. [page 253]


FOOTNOTES

1. No attempt is made here to plumb the depths of art. 46 on reduction of price, which is separately treated by Bergsten and Miller, "The Remedy of Reduction of Price," infra at II-d.

2. See Farnsworth, "Legal Remedies for Breach of Contract," 70 Colum. L. Rev. 1145 (1970).

3. The same appears to be true of the question whether a down payment made by a buyer is forfeit in the event of his default.

4. The commentary to an earlier version of the text confirmed this by stating, "This makes it clear that the basic philosophy of the action for damages is to place the injured party in the same economic position he would have been in if the contract had been performed." A/CN.9/116, Annex II [hereafter "Comments"] at 93.

5. Although the Comments (at 17) say that "States could not be expected to alter fundamental principles of their procedure in order to bring this Convention into force," they explain that this article limits the application of the provision of specific relief "only if a court could not under any circumstances order such a form of specific performance." Thus the Draft Convention has "the effect of changing the remedy of obtaining an order by a court that a party perform a contract from a limited remedy, which in many circumstances is available only at the discretion of the court, to a remedy available at the discretion of the other party."

6. The notion of "lost volume" is suggested in the Comments at 94.

7. 9 Ex. 341, 156 Eng. Rep. 145 (1854).


Pace Law School Institute of International Commercial Law - Last updated October 9, 2008
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