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Published in 37 Georgetown Journal of International Law (Fall 2005) 95-140. Reproduced with permission of the author.

Awarding Damages under the United Nations Convention on
the International Sale of Goods: A Matter of Interpretation

John Y. Gotanda [*]

  1. Introduction
  2. Overview of Damages and Interest under the Convention
  3. Uncertainty in Awarding Damages and Interest
    1. Level of Proof
    2. Attorneys' Fees and Costs
    3. Calculating Interest
  4. Interpreting the Convention
    1. Discarding the Substance/Procedure Distinction
    2. The Interpretive Approach: Looking to Other Provisions and the Convention as a Whole to Resolve Gaps
    3. Applying the Interpretive Approach
      1. Level of Proof
      2. Attorneys' Fees and Costs
      3. Interest
  5. Conclusion

I. INTRODUCTION

One of the great aspirations of international law is for all countries to adopt a uniform set of rules governing trade so that commercial transactions can proceed with the greatest efficiency.[1] To this end the United Nations promulgated the Convention on the International Sale of Goods,[2] which has been adopted by sixty-five countries.[3]

Although the Convention has proved successful in many areas, it has failed in the area most important to parties in a dispute: damages for breach of contract. Indeed, of all the articles in the Convention, the articles on damages and payment of interest are the most litigated and written about.[4] The lack of uniform rules in this area is particularly problematic. It can lead to similarly situated parties receiving vastly different results, a situation which undermines the purposes and usefulness of the Convention. To the extent that the rules are unpredictable [page 95] and seem unfair, parties may ultimately choose to apply a sales law other than the Convention.[5]

The problems associated with remedies under the Convention arise because the provisions concerning the payment of damages and interest set forth only very general rules.[6] In such situations, the Convention states that, in interpreting the Convention, "regard is to be had to its international character and to the need to promote uniformity in its application and observance of good faith in international trade."[7] It further states:

"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 or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law."[8]

Despite these provisions, many courts and tribunals simply apply domestic rules to fill gaps in the Convention.[9] This is especially true where it has been unclear whether the matter is governed by substantive law or procedural law. According to some authorities, the Convention governs only substantive, not procedural, law.[10] By declaring an issue to be procedural, a court or tribunal can fall back on applying domestic law which, by definition, is not internationally uniform and was not designed to deal with international disputes, much less to promote principles of private international law.[11] [page 96]

Three issues have generated the most debate and confusion: (1) what level of proof is required in order to recover damages; (2) whether attorneys' fees and costs may be recovered as damages under the Convention; and (3) at what rate interest should accrue on sums in arrears, including damages. Because the Convention does not explicitly address these issues, some courts have resolved them by applying domestic law, while others have looked to general principles of the law or have fashioned a solution based on the principles underlying the Convention.[12]

Unsurprisingly, the results have been anything but uniform. With respect to the level of proof required to recover damages under the Convention, some courts have denied claims for damages on the grounds that they were not proved with mathematical precision, while others have allowed recovery if they were proved with reasonable or sufficient certainty.[13] The issue of whether attorneys' fees and costs may be recovered under the Convention has also divided courts and commentators. For example, the United States Court of Appeals for the Seventh Circuit ruled that a claim for attorneys' fees and costs was governed by procedural law and not the Convention and, as a result, such expenses could not be awarded based on the American rule.[14] By contrast, courts and tribunals in Germany and China have allowed the recovery of litigation expenses under the Convention.[15] The issue of the rate at which interest accrues is perhaps the most litigated issue of [page 97] the Convention.[16] Some courts have applied statutory interest rates in accordance with local law, while others have applied an internationally used rate.[17] The problems with these varied approaches are that similarly situated parties are receiving different results under the Convention. This undermines predictability and, ultimately, the primary purpose of the Convention.

This Article examines the awarding of damages under the Convention. Part II analyzes the various articles addressing the calculation of damages and interest and finds that the Convention provides only a very basic framework for awarding them.

Part III examines three issues concerning the calculation of damages and interest that the Convention does not specifically address, and which have caused much controversy: (1) what level of proof is required in order to recover damages; (2) whether attorneys' fees and costs may be recovered as damages under the Convention; and (3) at what rate interest should accrue on sums in arrears, including damages. With each of these issues, the determination most frequently turns on whether the court or tribunal views the issue as one of substantive law, governed by the Convention, or procedural law, governed by domestic rules. The lack of agreement among decision makers has resulted in damage awards that seem inconsistent or arbitrary.

Part IV proposes that courts and tribunals discard the substance/procedure distinction in choosing a rule to fill a gap in the Convention. Instead, they should find a solution within the Convention itself, through an analogical application of specific provisions or on the basis of principles underlying the Convention as a whole. Applying this interpretative approach to the issue of the level of proof needed to recover damages would require showing with reasonable certainty that the aggrieved party has suffered damage as a result of the breach of contract. As to whether attorneys' fees and costs may be recovered as damages, this interpretative approach would not permit the aggrieved party to recover legal expenses associated with litigation as damages. However, it would permit the recovery of legal expenses incurred in connection with extra-judicial attempts to assert rights under the [page 98] Convention before avoidance of the contract. Finally, in the case of the calculation of interest, the interpretative approach would call for interest to accrue at a rate corresponding to that of a commonly used savings vehicle in the country in which payment is to be made and to be compounded quarterly. Using the interpretative approach would lead to more consistent awards of damages and would promote the goal of the Convention to create an internationally uniform law on the sale of goods.

II. OVERVIEW OF DAMAGES AND INTEREST UNDER THE CONVENTION

The United Nations Convention on the International Sale of Goods applies "to contracts of sale of goods between parties whose places of business are in different countries: (a) when the States are Contracting States; or (b) when the rules of private international law lead to the application of the law of a Contracting State."[18] Under the Convention, if a party fails to perform its contractual obligations, the injured party, depending on whether it is a buyer or seller, has various remedies, including damages.[19] Specific performance is also more readily available to a buyer or seller than under common law.[20]

The Convention's damages provisions seek to give an aggrieved party its expectation interest.[21] Article 74 provides that a claimant may recover, for breach of contract, "a sum equal to the loss, including loss of profit, suffered ... as a consequence of the breach."[22] The goal of this provision is to place the claimant in the same economic position they would have been in if the breach had [page 99] not occurred. In other words, it is designed to give the claimant the benefit of the bargain.

Article 74 provides the basic principle for the recovery of damages under the Convention, although it does not provide specific guidelines for the calculation of damages.[23] In particular, it does not contain a separate provision for the calculation of damages for breach of warranty. Instead, article 74 grants a tribunal the authority to determine the claimant's "loss ... suffered ... as a consequence of the breach" based on the circumstances of the particular case.[24] It also explicitly provides that damages for breach of contract include lost profits.[25] The Commentary to the Convention explains that the specific reference to loss of profit was included "because in some legal systems the concept of loss' standing alone does not include loss of profit." [26]

The Commentary provides the following illustrations of appropriate damages under article 74: [page 100]

"Example [A]: The contract provided for the sale for $50,000 FOB of 100 machine tools which were to be manufactured by the seller. Buyer repudiated the contract prior to the commencement of manufacture of the tools. If the contract had been performed, Seller would have had total costs of $45,000 of which $40,000 would have represented costs incurred only because of the existence of this contract (e.g., materials, energy, labour hired for the contract or paid by the unit of production) and $5,000 would have represented an allocation to this contract of the overhead of the firm (cost of borrowed capital, general administrative expense, depreciation of plant and equipment). Because Buyer repudiated to [the] contract, Seller did not expend the $40,000 in costs which would have been incurred by reason of the existence of this contract. However, the $5,000 of overhead which were allocated to this contract were for expenses of the business which were not dependent on the existence of the contract. Therefore, those expenses could not be reduced and, unless the Seller has made other contracts which have used his entire productive capacity during the period of time in question, as a result of Buyer's breach Seller has lost the allocation of $5,000 to overhead which he would have received if the contract had been performed. Thus, the loss for which Buyer is liable in this example is $10,000.

"Contract price $50,000 [less] expenses of performance which could be saved $40,000 [equals] loss arising out of breach $10,000.

"Example [B]: If, prior to Buyer's repudiation of the contract in Example [A], Seller had already incurred $15,000 in non-recoverable expenses in part performance of the contract, the total damages would equal $25,000.

"Example [C]: If the product of the part performance in Example [B] could be sold as salvage to a third party for $5,000, Seller's loss would be reduced to $20,000."[27]

Articles 75 and 76 set forth guidelines on how damages are to be calculated in instances where the basic measure of damages under article 74 may not adequately compensate the injured party. Article 75 provides a method for calculating damages when the contract has been avoided and the "buyer has bought goods in replacement or the seller [page 101] has resold the goods."[28] Here, the claimant "may recover the difference between the contract price and the price in the substitute transaction as well as any further damages recoverable under article 74."[29] However, a claimant may use this method only if the resale or cover purchase was made "in a reasonable manner and within a reasonable time after avoidance[.]"[30] The purpose of these requirements is to prevent the unfairness of having a party pay for loss which the other party caused through hasty or malicious conduct.[31]

Article 76 provides a different method for calculating damages if the contract has been avoided but the claimant has not bought goods in replacement or resold the goods under article 75.[32] It provides that:

"If ... there is a current price for the goods, the party claiming damages may ... recover the difference between the price fixed by the contract and the current price at the time of avoidance as well as any further damages recoverable under article 74. If, however, the party claiming damages has avoided the contract after taking over the goods, the current price at the time of such taking over shall be applied instead of the current price at the time of avoidance."[33]

The price to be used in determining damages under this article is "the price prevailing at the place where delivery of the goods should have been made or, if there is no current price at that place, the price at such other place as serves as a reasonable substitute, making due allowance for differences in the cost of transporting the goods."[34] This method of measuring damages is called the "market-price-rule." It allows the claimant to calculate its damages independently from any cover transaction.[35] If the contract does not fix a price and there is no current price within the meaning of article 76, damages may be calculated under article 74.[36] [page 102]

Unlike in some civil law countries, the Convention does not limit damages to those situations involving a negligent or willful breach.[37] However, it excludes damages for death or personal injury caused by goods to any person.[38]

The Convention, like many common law and civil law countries, limits the recovery of damages through the doctrines of causation, foreseeability, and avoidability.

In order to recover damages, a causal link must exist between the breach and the loss suffered.[39] Article 74 limits damages for breach of contract to those that were "foreseeable."[40] The Convention employs both an objective and subjective test by stating that:

"Damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract."[41]

The latter (the objective test) asks whether a reasonable party in the same situation could expect the loss from its non-performance.[42]

The relevant time to determine whether the loss was foreseeable is at the time the contract was concluded. That is, "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 ... ."[43]

It is also important to note that article 74 "gauges foreseeability in terms of possible consequences."[44] Thus, a claimant need not show awareness [page 103] that the loss was a "probable result" or a substantial probability,[45] only that it was a possible result of the breach.[46]

The Convention also embraces the concept of avoidability. Article 77 provides:

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

The Convention thus provides that a party must undertake reasonable steps to minimize its loss. The mitigation requirement "applies to an anticipatory breach of contract ... as well as to a breach in respect of an obligation the performance of which is currently due."[47] The Commentary explains,

"If it is clear that one party will commit a fundamental breach of the contract, the other party cannot await the contract date of performance before he declares the contract avoided and take measures to reduce the loss arising out of the breach by making a cover purchase, reselling the goods or otherwise."[48]

As in both common and civil law countries, the failure of a party to mitigate its losses does not preclude any recovery. Rather, the failure to mitigate results in the claimant's damages being reduced by the amount which should have been mitigated.[49] [page 104]

The tribunal's decision in ICC Arbitration Award in Case No. 8786 of January 1997 illustrates the awarding of damages under the Convention.[50] There, hours after being notified that the seller, a clothing manufacturer, would not be able to deliver certain seasonal goods to the buyer, a retail store, the buyer terminated the contract.[51] The arbitrator determined that the seller's actions amounted to a fundamental breach and that the buyer validly terminated the agreement. With respect to damages, the arbitrator noted that the Convention provided that "damages for breach of contract by one party consists of a sum equal to the loss of profit suffered by the other party as a consequence of the breach."[52] Based on this provision, the arbitrator ruled that the buyer was entitled to lost profits, indirect loss of profits, as well as expenses incurred as a result of the breach (such as travel costs). The arbitrator then noted that these damages were foreseeable. The arbitrator explained that, with respect to lost profits, the seller

"Should have known that the goods were to be sold in the [buyer's] retail store and also that the goods were seasonable in nature. Accordingly, late delivery would mean that the goods could only be sold for a reduced price once they were out of season and therefore profits would be lost."[53]

The seller had argued that the buyer was not entitled to damages because it failed to take reasonable mitigation measures as required by article 77. The arbitrator rejected that claim, noting that the seller bore the burden of proof on the issue and it had failed to offer any evidence that the buyer did not take appropriate measures to mitigate its loss.[54]

The Convention also provides for the payment of interest to compensate an aggrieved party for the loss of the use of money. The basic rule on interest is set forth in article 78. It simply provides: "If either 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 [page 105] recoverable under Article 74."[55] Because article 78 is silent on how an award of interest should be calculated, it has been the subject of much litigation and controversy.[56]

Article 78 came about because the attempts to agree upon a more detailed provision for the payment of interest failed.[57] The problem arose because there were many different views on the payment of interest. Delegates from some Islamic countries, where interest is prohibited, were opposed to awards of interest. Delegates from countries with western-influenced legal systems were unwilling to enter into contracts without the protection of interest. Additionally, many of these delegates wanted an interest remedy to "protect against parties purposely delaying payment so as to take advantage of the other party and the availability of either high interest rates or cheap credit."[58] Furthermore, delegates disagreed over when interest should be due and what interest rate would be applied in those situations.[59] In fact, the different political, economic and religious views of the drafters nearly derailed the Convention.[60]

Article 78 thus reflects a compromise among delegates to allow for interest to be awarded when a buyer fails to pay the price or when a party fails to pay any other sum that is in arrears, even if applicable domestic law makes no provision for its payment. This approach is in [page 106] accord with the accepted international legal principle that an aggrieved party is entitled to an award of interest as compensation for the use or detention of money.[61]

Interest is due under article 78 regardless of proof of loss. Interest can be claimed pursuant to article 78 independently from the damages caused by the payment in arrears and therefore does not affect damage recoveries under article 74.[62] However, it also allows parties the option of claiming interest as damages under article 74 instead of article 78. This would most commonly occur when the breach has caused the aggrieved party to borrow money from a financial institution that charges interest. In that circumstance, the claim for interest could be concretely established under article 74.[63]

Article 78 applies to the purchase price and to "any other sum in arrears."[64] This has been interpreted to include such sums as expenses one party incurred on behalf of another and reimbursements when the purchase price is reduced. It does not, however, apply to interest payments on the refund of the purchase price if the purchase contract is avoided because that is covered in article 84.[65] Whether article 78 applies to interest on damages has been the subject of some controversy. Most courts and tribunals have held that "any other sum that is [page 107] arrears" includes damages.[66] There is no dispute as to the right to interest on damages if the sum in question is liquidated. However, there has been some disagreement over whether interest may be recovered on an unliquidated sum.[67]

Article 78 is silent on how interest is to be calculated. Most importantly, it does not address the rate at which interest should accrue on sums in arrears, including damages.

In sum, the Convention provides only a basic framework for the awarding of damages and interest. As one commentator noted: "Breach of contract can occur in an almost infinite variety of circumstances; no statute can specify detailed rules for measuring damages in all possible cases. All that can be done, and all that is needed, is to state basic principles to govern compensation for breach of contract."[68]

III. UNCERTAINTY IN AWARDING DAMAGES AND INTEREST

Because the Convention provides only general guidelines for the calculation of damages and interest, there has been much controversy over how to apply these provisions. Three issues have generated the most conflicting decisions and significant scholarly debate: (1) what level of proof is needed in order to recover damages under the Convention; (2) whether a successful claimant may recover attorneys' fees and costs under the Convention; and (3) how interest is to be calculated under the Convention. Significantly, courts and tribunals have differed over whether the issues should be resolved by applying domestic law or the Convention itself.

A. Level of Proof

The Convention does not explicitly address the level of proof necessary to recover damages under article 74. [69] As a result, it is unclear whether this issue is implicitly addressed by the Convention or whether [page 108] it is a procedural matter to be resolved according to domestic law. Some courts and tribunals have held that the issue is a procedural matter beyond the scope of the Convention and should be governed by the law of the forum.[70] For example, in Delchi Carrier S.p.A. v. Rotorex Corp., a case involving a contract governed by the Convention, a U.S. court, applying local law, ruled that damages had to be proved with reasonable certainty.[71]

Applying national laws to determine the level of proof needed to recover damages under article 74 can lead to differential treatment of similarly situated parties. This is because national laws differ not only on the level of proof needed to recover damages, but also on whether the matter is governed by substantive or procedural law.

In common law countries, the requisite level of proof requires that the claimant prove "certainty of damages." Typically, this means that claimants must prove damages with reasonable certainty.[72] For example, under Indian law, one tribunal explained, "an injured claimant is not required to prove the amount of damages with absolute certainty, where such certainty is not possible, as is the case with lost profits. Instead, Indian law requires a reasonable estimate of the loss, based on such elements as are available."[73] Furthermore, the certainty requirement often applies only to the fact of whether a loss was sustained or [page 109] will be sustained, and not to the amount of the loss.[74]

In many civil law countries, the level of proof required to recover damages varies. In Switzerland, a claimant "has to prove the damage."[75] One commentator noted that while Swiss law allows for the recovery of lost profits in the event of a breach of contract, it is actually fairly difficult for a claimant to obtain them because there is a high standard of proof for their recovery.[76] By contrast, other countries require that damages be certain in their existence, but not in amount.[77] In Italy, if damages cannot be proven in their exact amount, they may be equitably liquidated by the judge.[78]

Whether a matter is considered substantive or procedural may vary from jurisdiction to jurisdiction and may depend on the circumstances of a particular case.[79] For example, in Italy, the Civil Code sets forth the [page 110] level of proof needed in order to recover damages for a breach of contract.[80] By contrast, courts in Switzerland and Germany regard the level of proof as a procedural issue.[81]

The standard of proof that has been employed by courts and tribunals deciding damages claims under the Convention has varied significantly. Some courts and tribunals have required a specific ascertainment of damages.[82] Others have required that they be reasonably proved.[83] Still others have required sufficient proof of damages.[84]

The existence of differing rules concerning the level of proof that a claimant must show can lead to differential treatment of similarly situated parties. For example, buyers attempting to prove future losses often rely on assumptions about market prices and the amount of future sales. If a seller wrongfully refuses to deliver a new product or a product that the buyer had not previously been in the business of selling, there may be little concrete evidence on which the aggrieved buyer can base its damages claim, which would mainly consist of lost profits.[85] In such a case, countries that impose a high level of proof [page 111] upon the aggrieved party, or do not allow an estimation of damage, would likely not allow the recovery of lost profits under article 74. However, in countries that have a more relaxed level of proof, the aggrieved party may be able to recover such damages under article 74. Such results are unfair and undermine the goal of the Convention to provide a uniform law on the sale of goods. In addition, the former approach would be contrary to the principle of full compensation, which underlies article 74. It also could provide an incentive for a party to breach its contractual obligations. As one arbitral tribunal explained in a non-CISG case:

"If recovery were limited to what a claimant has spent in reliance on a contract which has been breached, an incentive would be created which is contrary to the contractual morality: obligors would generally find it in their interest to breach contracts which turn out to be valuable to their co-contractant. Parties do not enter into contracts involving risk in order to be repaid their costs. To limit the recovery of the victim of a breach to its actual expenditures is to transform it into a lender, which is intolerable when that party was at full risk for the amount of the investments made on the strength of the contract."[86]

B. Attorneys' Fees and Costs

Article 74 also does not address the payment of attorneys' fees and costs incurred by an aggrieved party in connection with seeking relief for the breach of contract from a third party, such as a court or arbitration tribunal ("litigation expenses"). Courts and commentators have differed over whether such expenses may be recoverable under the Convention.[87] [page 112]

As noted, article 74 states that "damages for breach of contract by one party consist of a sum equal to the loss ... suffered by the other party as a consequence of the breach"[88] and that the purpose of awarding damages is to place the aggrieved party in the same economic position it would have been in had the breach not occurred and had the contract been performed.[89] Based on article 74, a number of courts [page 113] have awarded successful claimants their litigation expenses.[90] They reason that litigation expenses incurred in enforcing contractual rights are incidental damages that must be recoverable under article 74 in order to make aggrieved parties whole.[91]

By contrast, some courts and commentators believe that the recovery of litigation expenses is a procedural matter that is outside the scope of the Convention's substantive damages provisions.[92] As a matter of procedural law, the recovery of litigation expenses is determined by reference to domestic law or applicable rules for resolving the dispute.[93]

The decision of the United States Court of Appeals for the Seventh Circuit in Zapata Hermanos Sucesores v. Hearthside Baking illustrates this position. In that case, the district court judge ruled that, under the Convention, the seller was entitled to attorneys' fees from the buyer, who breached the contract for the sale of cookie tins.[94] The Seventh Circuit reversed. Writing for the court, Judge Richard Posner noted that the Convention was about contracts and not procedure, and that rules governing the awarding of attorneys' fees and costs were procedural as they apply to all areas of litigation.[95] Having determined that the issue was governed by procedural law, not the Convention, the Seventh Circuit applied the American rule, requiring each party to bear its own fees and expenses.[96]

In denying the seller's request for attorneys' fees and costs, Judge Posner also noted that the seller's interpretation of article 74 would create an anomalous result. He explained:

"On Zapata's view the prevailing plaintiff in a suit under the Convention would (though presumably subject to the general contract duty to mitigate damages, to which we referred earlier) [page 114] get his attorneys' fees reimbursed more or less automatically (the reason for the "more or less" qualification will become evident in a moment). But what if the defendant won? Could he invoke the domestic law if, as is likely other than in the United States, that law entitled either side that wins to reimbursement of his fees by the loser? Well, if so, could a winning plaintiff waive his right to attorneys' fees under the Convention in favor of domestic law, which might be more or less generous than Article 74, since Article 74 requires that any loss must, to be recoverable, be foreseeable, which beyond some level attorneys' fees, though reasonable ex post, might not be? And how likely is it that the United States would have signed the Convention had it thought that in doing so it was abandoning the hallowed American rule? To the vast majority of the signatories of the Convention, being nations in which loser pays is the rule anyway, the question whether "loss" includes attorneys' fees would have held little interest; there is no reason to suppose they thought about the question at all."[97]

Many commentators have been critical of the decision in Zapata. They argue that, pursuant to article 7(1), the Convention must be interpreted autonomously. Thus, characterizations of domestic law are irrelevant, and recourse to domestic law should be made only as a last resort.[98] Under this view, interpreting article 74 broadly in accordance with the principle of full compensation, with regard to the Convention's need for uniformity, and with respect to the Convention's international character, necessarily calls for the conclusion that an aggrieved party should be able to recover litigation expenses associated with vindicating its rights. Otherwise, the aggrieved party would not be made whole.[99]

Most courts and tribunals that have resolved contract disputes governed by the Convention have allowed the successful claimant to [page 115] recover litigation expenses.[100] It should be noted, however, that in many of these decisions the court or tribunal did not explain whether the source of authority for awarding fees and costs to the prevailing party was based on article 74 or applicable procedural law.[101] One decision where the court did make such a distinction was the decision of the Amtsgericht Viechtach of April 11, 2002. In that case, the court held the seller was entitled to attorneys' fees because the word "loss" in article 74 encompasses the cost of pursuing one's rights.[102] While unclear from the translation, it seems the court ultimately relied on BRAGO, a domestic set of rules for the determination of attorneys' fees, as the basis for its awarding of damages. Despite this, the Amtsgerich Viechtach decision and a subsequent decision from a District Court in Berlin stand for the notion that article 74 allows for the recovery of attorneys' fees.[103] [page 116]

C. Calculating Interest

Perhaps the most litigated article of the Convention is article 78.[104] This is because, although article 78 provides an obligation to pay interest whenever a payment is in arrears, it does not specify how interest is to be calculated.[105] As a result, courts, arbitral tribunals and legal scholars have offered various methods for calculating interest, particularly determining the rate at which interest accrues.[106]

Many courts and tribunals have ruled that the calculation of interest, including determining the rate at which interest accrues, falls outside of the scope of the Convention. Therefore, it is governed by the national law applicable by the rules of private international law.[107]

While most courts and arbitral tribunals determine the rate at which interest accrues by applying domestic law as determined by a conflicts of law analysis,[108] there are numerous other approaches. Other approaches taken by courts and arbitral tribunals include: the law of the creditor's place of business,[109] the law of the debtor's place of business, [110] [page 117] the law of the country of the currency of payment, [111] the law of the country in which payment is to be made,[112] trade usage,[113] and the use of the International Institute for the Unification of Private Law (UNIDROIT) Principles of International and Commercial Contracts (UNIDROIT Principles) [114] or the Principles of European Contract Law (PECL) [115] to fill the gap. However, if the parties' agreement sets forth a [page 118] specific rate at which interest shall accrue, that rate will be applied.[116]

A number of courts and tribunals have ruled that issues concerning interest should be resolved within the Convention.[117] The Convention provides that it should be interpreted in light of its international character and the need to promote uniformity in its application.[118] Those who believe that the issue of selecting the appropriate interest rate is a matter within the scope of the Convention argue that the use of national laws to determine interest rates does not show regard for the Convention's goal of promoting uniformity in international trade. Instead, courts, arbitral tribunals and commentators favoring a uniform approach believe that the matter of interest rates falls under article 7(2), which states that matters governed by, but not settled in, the Convention "are to be settled in conformity with the general principles on which it is based."[119] Only if there are no such general principles applicable is the matter to be settled by the domestic law applicable to the contract under the rules of private international [page 119] law.[120] The general principles most often applied to the issue of interest under the Convention are: full compensation to the aggrieved party for the loss they have endured,[121] reasonableness,[122] and restitution to the aggrieved party of unjust enrichment gained by the defendant.[123]

The Convention also does not address whether interest should be simple or compound. The majority of courts and tribunals that have required interest to be paid under Article 78 have awarded only simple interest. [124] This result stems from the fact that most statutes on the payment of interest provide only for simple interest and the practice is in accord with the traditional view.[125]

In sum, applying the substance/procedure distinction when a gap exists in the Convention's damages provisions has led to inconsistent awards. This is not only unfair, but it makes it difficult, if not impossible, for parties to predict with any degree of certainty the outcome of claims for damages, which could be financially significant. The lack of predictability and certainty also makes it difficult for parties to evaluate their case and settle the dispute. Moreover, it undermines the legitimacy of the Convention and thwarts its goal of creating uniform rules [page 120] for the international sale of goods.

IV. INTERPRETING THE CONVENTION

The problems associated with applying the damages provisions of the Convention could be remedied by discarding the substance/procedure distinction. Instead, a court or tribunal should first decide whether the issue can be decided according to the literal text or the plain and natural reading of the applicable article. If the result is not formally imposed by the relevant article, then it must be determined whether the issue was one that was deliberately left to national laws.[126] If the issue was not deliberately left to national laws, according to article 7(2), a court or tribunal must then attempt to resolve the issue "in conformity with the general principles on which [the Convention] is based."[127] This means that a court or tribunal should try to resolve an unsettled question by means of liberally applying specific provisions of the Convention by analogy. Only in the event that the issue cannot be resolved using this analysis should the court or tribunal turn to domestic law to settle the matter.[128] Finally, this approach should be used instead of the substance/procedure distinction to resolve (1) what level of proof is required in order to recover damages under article 74, (2) whether attorneys' fees and costs are recoverable under article 74, and (3) how interest should be calculated under article 78, particularly the rate at which interest should accrue on sums in arrears. In each of these cases, applying this interpretive approach would result in the unsettled issues being resolved through the application of the general principles on which the Convention is based, as opposed to domestic law or rules.

A. Discarding the Substance/Procedure Distinction

The approach that looks to see if the issue is governed by substantive law or procedural law, the latter clearly falling outside the scope of the Convention, should be discarded. Whether a matter is considered substantive or procedural may vary from jurisdiction to jurisdiction and [page 121] may depend on the circumstances of a particular case.[129] Consequently, relying on a substance/procedure distinction in cases where jurisdictions differ over the classification of a matter is counterproductive and, as noted above, can lead to conflicting results.

The distinction is also highly artificial. The United States Supreme Court has noted, "Except at the extremes, the terms substance' and procedure' precisely describe very little except dichotomy, and what they mean in a particular context is largely determined by the purposes for which the dichotomy is drawn."[130] Indeed, the United States Supreme Court abandoned the distinction for determining the validity of a federal rule of civil procedure where it may conflict with a state law.[131] Similarly, in conflict of laws, the substance/procedure distinction has been criticized and cast aside in favor of more modern rules.[132]As one commentator remarked, "we should feel encouraged at the fading abstract distinctions between substance and procedure, which have often favoured the prevalence of the lex fori."[133]

The substance/procedure analysis is also problematic because it is an easy way for a court or tribunal to apply laws or rules that they are most familiar with to resolve difficult issues, thereby avoiding the Convention interpretation analysis and ultimately undermining the purpose of the Convention "to promote uniformity in its application."[134] As one leading commentator on the Convention pointed out,

"If national courts simply qualify [an issue] as a procedural matter to be decided under their own lex fori, thereby circumventing ... [an analysis under the Convention], there will soon [page 122] be more enclaves of domestic law, which for a deciding judge may seem to be self-evident and which conform to his or her convictions, formed by historic rules and precedents, but which will not be followed in other jurisdictions and, thereby, will cause an erosion of the uniformity achieved."[135]

B. The Interpretative Approach: Looking to Other Provisions and the Convention as a Whole to Resolve Gaps

Instead of first resorting to local law in the case of a gap in the Convention, courts should look to the Convention itself for an answer. As Professor Michael Joachim Bonell notes, in cases of ambiguities or obscurities in text and gaps, "courts should to the largest possible extent refrain from resorting to the different domestic laws," and instead "try to find a solution within the Convention itself" by looking "to the underlying purposes and policies of individual provisions as well as of the Convention as a whole."[136]

The first step in the analysis is to determine whether the issue can be decided according to the literal text or the plain and natural reading of the relevant provision of the Convention. This is a standard method for interpreting statutes and has the support of leading commentators on the Convention.[137]

If the result is not formally imposed by the relevant Convention article, then it must be determined whether the issue was one that was deliberately left to national laws. Indeed, the Convention states that the general principles for applying the Convention are to be used with regard to "matters governed by [the] Convention." [138] The Convention itself states that some issues are explicitly excluded from the Convention, such as "(a) the validity of the contract" and "(b) the effect which the contract may have on the property in the goods sold." [139] However, courts and tribunals should interpret "matters governed by the Convention" broadly. A narrow definition would require that anything not [page 123] explicitly addressed is to be resolved by applying domestic law. This step would result in nullifying both the directive in article 7(1) to develop uniform rules [140] and the interpretive rules in article 7(2) calling for "questions concerning matters governed by this Convention which are not expressly settled in it ... to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law."[141] As Professor Peter Schlechtriem explains:

"Obviously, ... issues arise in the wider context of a sales transaction on which the Convention is silent. The draftsmen of the Convention deliberately abstained from regulating certain matters. ... Other matters may have been overlooked. Finally, as [with] every codification, the CISG reflects the state of knowledge up to 1980 only [the date of its conclusion]; its drafters did not and could not foresee new technical and economic developments. ... Gap-filling, therefore, becomes an instrument of developing the Convention and adjusting it to new needs. The principles of the Convention to which one should have recourse in order to fill gaps also have an influence on the ambit of 'matters governed by the Convention. ...'."[142]

In the event that the issue is not excluded from the Convention, then a court or tribunal must attempt to resolve the question "in conformity with the general principles on which [the Convention] is based."[143] This means that a court or tribunal should try to resolve an unsettled question by means of liberally applying specific provisions of the Convention by analogy or by looking to the principles underlying the Convention as a whole. Only in the event that "there are no principles on which new rules could be based, or if the principles discernable are too vague to allow rules on specific issues," should a court or tribunal turn to domestic law to settle the matter.[144] This approach is well [page 124] known in civil law countries, but is not regularly utilized by many common law countries.[145] Nevertheless, as Professor John Honnold points out, it is the preferable interpretative approach and one that is mandated by the Convention:

"International unification calls for [common law jurisdictions] to reexamine our traditional approach. Invoking domestic law under the Convention has more serious consequences than invoking common law principles to solve problems under a statute in a common law jurisdiction. Even in dealing with a statute designed to unify law among states of a common-law country, references to general common-law principles do not seriously undermine the statute's objective to achieve uniformity for the common law principles stem from common roots. Within the Commonwealth, respect for decisions in England and other Commonwealth jurisdictions limits the degree of disharmony; in the United States a strong unifying influence is exerted by periodic Restatements of the law.[146] This degree of unity is not found among the domestic laws of the many States of diverse legal systems that have adopted the Convention. Nor will references to domestic law contribute to a body of international case-law under the Convention. Thus, a generous response to the invitation of Article 7(2) to develop the Convention through the "general principles on which it is based" is necessary to achieve the mandate of Article 7(1) to interpret the Convention with regard to "the need to promote uniformity in its application. ..." In sum, a response to the Convention's invitation to consider its "general principles" before turning to domestic law can minimize the confusion inherent in conflicts rules and avoid the uncritical and wooden application of scraps of domestic law that were developed without regard for the special needs of international trade."[147]

In short, the application of domestic law to resolve gaps in the Convention should be used as a last resort. When faced with a gap, courts and tribunals should first attempt to "find a solution whenever [page 125] possible within the Convention itself, either by means of an analogical application of specific provisions or on the basis of the general principles underlying the uniform law as a whole."[148]

C. Applying the Interpretative Approach

Applying the above interpretative approach would yield the following results. First, in the case of the level of proof needed to recover damages, an analysis of various provisions of the Convention as well as the Convention as a whole indicates that an aggrieved party should be required to show, with reasonable certainty, that it has suffered damage as a result of the breach of contract. Second, with regard to whether attorneys' fees and costs may be recovered under article 74, the interpretative approach would not permit the aggrieved party to recover legal expenses associated with litigation as damages. However, an aggrieved party would be permitted to recover legal expenses in connection with extra-judicial attempts to assert rights under the Convention before avoidance of the contract. Third, in the case of calculating interest, the interpretative approach would call for interest to accrue at a rate corresponding to that of a commonly used savings vehicle in the country in which payment is to be made, and to be compounded quarterly.

1. Level of Proof

The purposes and policies of article 74, as well as the Convention as a whole, lead to the conclusion that, under article 74, an aggrieved party must show, with reasonable certainty, that it has suffered damage as a result of the breach of contract.

The level of proof is not addressed by article 74, and it is not an issue that is explicitly excluded by the Convention. However, principles set forth in various articles provide guidance on how to interpret article 74 on this issue. In particular, the issue of who has the burden of proof is one that is addressed implicitly and explicitly in the Convention. For example, article 79 states that "[a] party is not liable for a failure to perform if he proves that the failure was due to an impediment beyond his control."[149] In addition, it is well settled that article 74 implicitly places the burden of proof on the party who asserts the claim for damages.[150] [page 126]

While there is no question that the burden of proof is a different issue from the level of proof, the level of proof, like the burden of proof, is integrally related to the exercise of a party's right to damages.[151] Furthermore, once it is established which party has the burden of proving damages, then the standard can be deduced by analyzing various articles of the Convention to see if a relevant standard exists. This analysis leads to the conclusion that the party who has the burden of proof, the aggrieved party, must show with "reasonable certainty" that it has suffered damage as a result of the breach of contract. A "reasonableness" standard with regard to the level of proof of damages can be inferred from other provisions and would be consistent with the Convention as a whole. As one commentator notes:

"On several occasions the Convention refers to the parties as "reasonable" persons (see, e.g., Articles 8(2) and (3); 25; 35(1) (b); 60; 72(2); 75; 77; 79(1); 85; 86; 88(2)), requires that a particular act must be accomplished or a notice given within a "reasonable" time (see, e.g., Articles 18(2); 33(3); 39(1); 43(1); 47; 49; 63; 64; 65; 73(2)) and distinguishes between "reasonable" and "unreasonable" expense, inconvenience or excuse (see, e.g., Article 43; 37; 48; 87; 88(2) and (3)). These references demonstrate that under the Convention the "reasonableness" test constitutes a general criterion for evaluating the parties' behaviour to which one may resort in the absence of any specific regulation."[152]

It should be noted that a more exacting standard would be contrary to the purpose of article 74, to provide full compensation to the injured party. Requiring a party to prove damages with mathematical precision would, in many instances, prevent that party from being fully compensated for its loss. In particular, it could preclude claims for lost profit, the only damage specifically mentioned as being recoverable in the Convention. In fact, article 74 specifically included a reference to lost profit to ensure that it would be recoverable, and an exacting level of proof would thus be contrary to article 74.

It also must be remembered that "the invitation of Article 7(2) to develop the Convention through the general principles of which it is based' is necessary to achieve the mandate of Article 7(1), which is to [page 127] interpret the Convention with regard to the need to promote uniformity in its application.'"[153] In the area of the level of proof, a uniform rule is particularly important. It is logical that article 74 should be interpreted in such a way that similarly situated parties receive the same or similar results. That simply does not happen when courts and tribunals apply different standards of proof to the same types of damages claims under article 74. Indeed, a non-uniform approach would greatly undermine the legitimacy of the system to resolve disputes in a fair and predictable manner. It would also thwart the Convention's goal of unifying the law on international sale of goods.

Requiring the aggrieved party to establish damages with reasonable certainty is consistent with the UNIDROIT Principles and the PECL.[154] UNIDROIT Principles Article 7.4.3 (Certainty of Harm) states: "Compensation is due only for harm, including future harm, that is established with a reasonable degree of certainty."[155] The Comment to UNIDROIT Principles Article 7.4.3 explains that the text "reaffirms the well-known requirement of certainty of harm. ..."[156] PECL Article 9:501 (2) states: "The loss for which damages are recoverable includes: (a) non-pecuniary loss; and (b) future loss which is reasonably likely to occur."[157] [page 128]

2. Attorneys' Fees and Costs

Applying an interpretative approach instead of the substance/procedure distinction to the issue of attorneys' fees and costs yields different results, depending on whether the claim for recovery is for legal expenses associated with litigation ("litigation expenses") or for extra-judicial attempts to assert rights under the Convention before avoidance of the contract. The former is not recoverable, while the latter is.

In the case of litigation expenses, one article appears on its face to support the recovery of attorneys' fees and costs, while others do not. While it is a close case, the Convention as a whole indicates that an aggrieved party may not recover legal expenses associated with litigation as damages under article 74.

The starting point for the interpretative approach is article 74. It broadly provides that "damages for breach of contract, including loss of profit, consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach."[158] This article expresses the principle of full compensation; that is, in principle the aggrieved party has a right to be compensated for all disadvantages suffered as a result of the breach. However, article 74 does not explicitly provide for the recovery of litigation expenses as damages. Nor does it prohibit their recovery. Moreover, the history that led to the drafting of article 74 is silent on the issue. Thus, the matter is not one that explicitly falls outside the Convention.

Article 74's principle of full compensation, however, supports the view that litigation expenses should be recoverable as damages. This is because the failure to do so would leave the aggrieved party less than whole.

The scope of article 74, however, is not unlimited. It is circumscribed by the concepts of foreseeability and mitigation, which are embodied in articles 74 and 77. In addition, other provisions of the Convention as a whole may implicitly limit its scope. For example, while article 74 is to be interpreted broadly, non-material loss, which includes emotional [page 129] injury, mental suffering and "moral damages," is not recoverable under the Convention based on article 5 and a reading of the Convention as a whole.[159] Thus, not all loss suffered by an aggrieved party is compensable under article 74.

Other Convention provisions do not support the recovery of litigation expenses as damages. In particular, interpreting article 74 as providing for the recovery of attorneys' fees and costs as damages would be contrary to the principle of equality between buyers and sellers as expressed in articles 45 and 61.[160] If litigation expenses were awarded as damages under article 74, an anomaly would result where only a successful claimant would be able to recover litigation expenses.[161] The ability to recover damages under article 74 is grounded on a breach of contract; thus, a successful respondent will not be able to recover its legal expenses if the claimant has not committed a breach of contract.[162] Therefore, the purpose of awarding attorneys' fees and costs -- to make a prevailing party whole for costs incurred in litigation [163] [page 130] will not be realized in those cases where the respondent prevails.[164] Remedies are the core of contract law, and to interpret article 74 as creating unequal recovery of damages between buyers and sellers is contrary to the design of the Convention.[165]

Interpreting article 74 to provide for the recovery of litigation expenses incurred by a successful claimant would also require the creation of standards for calculating the amount of fees and costs. One may argue that a reasonableness standard should prevail based on the Convention as a whole. The problem with this approach is that such a standard may conflict with otherwise applicable procedural laws and rules that regulate the amount of attorneys' fees that may be recovered.[166] For example, in a number of countries, awards of attorneys' fees are calculated pursuant to a fixed fee schedule that may result in an award amounting to less than the actual fee incurred.[167] If article 74 [page 131] were interpreted to allow for the recovery of litigation expenses, then these laws and rules would presumably be preempted by the Convention because they would be inconsistent with the principle of full compensation.[168] However, in that case, such preemption may result in [page 132] a successful respondent not being able to rely upon these laws and rules for the recovery of litigation expenses when the respondent is successful in defending a breach of contract action under the Convention. To prevent such a result, it may be argued that the laws and rules regulating the recovery of litigation expenses may be preempted by the Convention in the case of a claimant's recovery of litigation expenses, but not where the successful respondent seeks to recover its litigation expenses. That is, article 74 would presumably leave the ability of successful respondents to recover these expenses dependent on applicable domestic laws or rules. The problem with this approach is that a successful respondent in a jurisdiction that requires each party to bear its own litigation expenses may be left without recovery. Moreover, in those jurisdictions that limit the recovery of litigation expenses, a successful respondent would be treated differently than a successful claimant with respect to the recovery of such expenses. This is because a successful respondent's recovery would be limited by laws or rules regulating awards of litigation expenses, but such laws would not apply to a successful claimant.[169] Such unequal treatment is patently unfair and contrary to the Convention.[170] The interpretative approach thus leads to the conclusion that litigation expenses are not recoverable as damages under the Convention.

While article 74 does not allow for the recovery of litigation expenses, the interpretative approach indicates that it does allow for the recovery of extra-judicial costs, which are legal costs incurred in connection with preventing the breach or pursuing rights under the contract, such as a demand for performance. Extra-judicial expenses are to be [page 133] treated differently because they cannot be separated from other incidental expenses resulting from a breach of contract.[171] In particular, article 77 requires that an aggrieved party mitigate its damages.[172] In fulfilling its obligation to mitigate under article 77, a party may incur attorneys' fees. For example, in demanding performance, an attorney may be engaged to write the demand letter. Not only are such expenses often made in accordance with the explicit requirements of the Convention, but it is an established general principle of the Convention to favor continuation of the contract.[173] Continuation of the contract is undermined if parties cannot recover expenses incurred to ensure performance.

In short, applying the interpretive approach to article 74 would allow an aggrieved party to recover legal expenses in connection with extrajudicial attempts to assert rights under the Convention before avoidance of the contract. However, the same approach would not allow a party to recover legal expenses associated with litigation.

3. Interest

Determining the rate at which interest accrues poses a slightly different problem altogether. Article 78 is silent on how interest should be calculated. The reason it is not more specific is because the drafters could not agree on more detailed language. Under such circumstances, it may appear that the Convention deliberately rejects an extension of article 78. However, a closer examination indicates that such is not the case. [page 134]

Professor John Honnold states that "article 78 was designed to establish a general rule that would be free from the vagaries of domestic law."[174] Leaving the calculation of interest to domestic law would produce the non-uniformity that the drafters sought to avoid in promulgating article 78. Moreover, Professor Honnold believes that the gaps in article 78 can be filled through "Article 7(2)'s invitation to settle unresolved questions in conformity with the general principles' of the Convention.'"[175] He supports his argument by drawing an analogy to article 74, which he states provides a general measure of damages and may be supplemented by other provisions.[176] Thus, the fact that the Convention drafters chose a general rule on the payment of interest does not mean that they intended for issues concerning the calculation of interest to be governed by domestic law.

Solutions to unresolved issues concerning the calculation of interest can be found in other provisions and the Convention as a whole. For example, with regard to the time period for which interest is owed, article 78 itself provides guidance. One of the main goals of article 78 is to provide compensation for the loss of the use of money because of the debtor's delay in payment. It also prevents unjust enrichment on the debtor's part. Allowing interest to accrue from the time the breach occurs serves both purposes. This is because the claimant has been deprived of the use of the money from the time of the breach and so is owed compensation from that time.[177] Article 74 also reflects a similar purpose with respect to damages generally -- that an aggrieved party is entitled to be placed in the same economic position it would have been in had the breach not occurred. Thus, to achieve the goal of compensating a party for the loss of the use of money and to further the Convention's principle of full compensation, interest should accrue from the date that the claim arises to the date of the award. Interest on damages accrues from the time when the loss occurred. In cases where a buyer does not pay the price, interest should run from the date the contract provides payment is due. If the contract does not set forth a specific time for the buyer to pay the price, then interest should accrue from the date that the buyer is obligated to pay the price under article 58.[178]

The principle of full compensation that underlies articles 78 and 7 [page 135] also supports resolving the issue of the proper interest rate pursuant to general principles underlying the Convention. In deciding a case involving a claim for interest under the Convention, Professor Bonell, acting as the sole arbitrator, ruled that the interest rate should be settled in conformity with the general principles of the Convention:

"The immediate recourse to a particular domestic law may lead to results which are incompatible with the principle embodied in Art. 78 of the CISG, at least in the case where the law in question expressly prohibits the payment of interest. One of the general principles underlying the CISG is that of 'full compensation' of the loss caused (cf. Art. 74)."[179]

With respect to determining the rate itself, an analogous provision is article 74, which provides that damages are equal to the "loss suffered." Article 74 embodies the principle of full compensation. This purpose is similar to the goal of interest. Thus, the interest rate should be real commercial loss, not a contrived loss under a domestic statute.[180] In fact, using domestic interest rates creates numerous problems. Statutory interest rates can vary among jurisdictions and, in many instances, do not change to reflect economic realities.[181] Using a statutory [page 136] interest rate could actually encourage the debtor to delay resolution. If the prevailing market interest rate is higher than the interest rate set by statute, the debtor could essentially earn money by delaying payment, earning a high return on the invested funds. On the other hand, if the prevailing savings rate is much lower than the fixed statutory rate, the result will be that the claimant is overcompensated. Both of these results are contrary to the damages provisions of the Convention.[182]

To achieve the goals of the Convention, interest should accrue at a savings rate commonly used in the country of the currency in which payment is to be made.[183] It is not appropriate to use a lending rate because article 74 awards the claimant actual damages, including any loss from borrowing money to continue operations upon the debtor's default. Thus, a claimant forced to borrow will be returned to his pre-injury position. Article 78 provides for interest in alternative cases where the creditor was not forced to borrow money to continue operating after the debtor's breach. In contract disputes where the creditor is not forced to borrow, the creditor would conceivably be holding the money, using some savings instrument, or reinvesting the money in the company. By following this approach, the claimant will also be returned to its pre-injury position; by awarding at a savings rate, the claimant will be in the same position as if they had invested the money.

A floating approach will create both uniformity and consistency. A commercial savings rate also is likely to compensate a claimant fully, one of the main principles of the Convention.[184] A floating deposit rate will reflect prevailing market conditions and currency valuations. Awarding [page 137] a claimant interest at a savings rate restores the claimant to its pre-injury condition by compensating it for the opportunity lost by not being able to earn a return on the sum in default.[185]

Awarding interest at a floating savings rate also accounts for inflation-driven devaluation of currency.[186] Using a floating savings rate accounts for inflation because the effects of inflation are included in the rate. The contracting parties picked the currency at the time the contract was made. With the commercial savings rate of the chosen currency, the claimant will ensure that any changes in the value of that currency will be mitigated by that country's savings rate. As a result, international tribunals will be able to rely on a simple rate instead of making additional calculations for currency devaluation.[187]

Thus, focusing on the dual goals of uniformity and returning the claimant to its pre-injury condition, applying the savings rate of the currency in which payment is to be made is the best approach to awarding interest in international disputes under the Convention.

To achieve the best result under the Convention, interest should be compounded quarterly.[188] Currently, compound interest is awarded in some countries, under specific circumstances, but is prohibited in other countries.[189] The Convention does not specifically address whether interest should be simple or compound. To determine the appropriate approach, we must again look to the governing principles of the Convention, focusing on the need for a uniform approach that fully restores any loss suffered by the non-defaulting party.

As discussed above, interest should be awarded at the savings rate of the currency specified in the contract, using a financial instrument that [page 138] the claimant could possibly have used had the debtor not defaulted. Using compound interest brings the claimant closer to his position had the injury not occurred.[190] Most modern financing instruments involve compound, not simple, interest.[191] If the debtor had not defaulted, the claimant could have invested the funds owed to it in an easily available investment instrument, such as a certificate of deposit or a money market account, with compound interest.[192] This is a readily accepted practice.[193] Thus, awarding the claimant only simple interest would result in the claimant receiving less than it could have earned by reinvesting the funds owed in an established commercial investment vehicle. [194]

The payment of compound interest does not result in a windfall to the claimant. Rather, it simply restores the claimant to the position it would have been in had it been paid in a timely manner. Although some interest awards, especially in the case of a long-term default, may exceed the funds withheld, "during that period the wrongdoer has enjoyed the fruits of the money withheld."[195] The claimant has been deprived of the opportunity to invest the money owed. In view of the readily available investment vehicle paying compound interest and the accepted practice of investing in them, it is inconceivable that if the claimant had been paid in time, it would have placed the money in an [page 139] investment vehicle paying only simple interest.

In keeping with the general principles of contract law and the Convention, this approach places the claimant in the position it would have occupied had the breach not occurred.[196] This compensates the claimant for its loss of the use of the money owed while preventing the defaulting debtor from being unjustly enriched.[197] It also provides a uniform, easily applied rule to create certainty in international contracts.

V. CONCLUSION

The Convention is intended to provide a set of uniform rules for the international sale of goods. Unfortunately, this goal has not been met with respect to one of the most important areas of the Convention -- damages for breach of contract. The lack of uniformity with respect to awards of damages can, in a number of instances, be traced to the improper use of domestic procedural law to fill gaps in the Convention's provisions. The practice of determining whether an issue is governed by applicable procedural law instead of the Convention is outdated, counterproductive, and should be abandoned. Instead, tribunals should try to fill gaps by trying to find a solution within the Convention itself, through an analogical application of specific provisions or on the basis of principles underlying the Convention as a whole, before turning to domestic law. This approach would lead to more consistent and predictable awards of damages and would ultimately further the goal of the Convention to create uniform commercial law. [page 140]


FOOTNOTES

* John Y. Gotanda, Associate Dean for Faculty Research, Professor of Law, and Directory, J.D./M.B.A. Program, Villanova University School of Law.

1. See Peter Schlechtriem, Introduction, in PETER SCHLECHTRIEM & INGEBORG SCHWENZER, COMMENTARY ON THE UN CONVENTION ON THE INTERNATIONAL SALE OF GOODS (CISG) 1 (2d ed. 2005); see also Clayton P. Gillette & Robert E. Scott, The Political Economy of International Sales Law (Apr. 2005), <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=709242>.

2. See ALBERT H. KRITZER, GUIDE TO PRACTICAL APPLICATIONS OF THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS 2a-2c (1994); see also United Nations Convention on Contracts for the International Sale of Goods, Preamble, U.N. Doc. A/Conf.97/18 Annex I (1980) [hereinafter CISG]. For a discussion of the CISG, see FRITZ ENDERLEIN & DIETRICH MASKOW, INTERNATIONAL SALES LAW: UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS (1992);JOHN HONNOLD, UNIFORM LAW FOR INTERNATIONAL SALES UNDER THE 1980 UNITED NATIONS CONVENTION (3d ed. 1999); THE CONVENTION FOR THE INTERNATIONAL SALE OF GOODS: A HANDBOOK OF BASIC MATERIALS 1 (Reed R. Kathrein & Daniel Barstow Magraw eds., 1987).

3. For a list of contracting States, see <http://www.cisg.law.pace.edu/cisg/countries/cntries.html>.

4. See generally BRUNO ZELLER, DAMAGES UNDER THE CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS (2005); Djakhongir Saidov, Damages: The Need for Uniformity (UNCITRAL 2005); 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 COM. L. & ARB. 3, 3-35 (1998); Liu Chengwei, Remedies for Non-performance: Perspectives from CISG, UNIDROIT Principles and PECL, 14.2.5 (Sept. 2003), <http://www.cisg.law.pace.edu/cisg/biblio/chengwei-74.html>.

5. See CISG, supra note 2, art. 6 ("The parties may exclude the application of this Convention or, subject to article 12, derogate from or vary the effect of any of its provisions."); see also Gillette & Scott, supra note 1, at 2.

6. See CISG, supra note 2, arts. 74-78.

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

8. CISG, supra note 2, art. 7(2).

9. See, e.g., Delchi Carrier S.p.A. v. Rotorex Corp., 71 F.3d 1024 (2d Cir. 1995) (applying domestic law concerning level of proof); Zapata Hermanos Sucesores v. Hearthside Baking Co., 313 F.3d 385, 388 (7th Cir. 2002) (applying American rule to deny claim for attorneys' fees and costs under the Convention); Bezirksgericht Arbon [BG] [Arbon District Court] Dec. 9, 1994, Case No. 341/1994 (Switz.), <http://cisgw3.law.pace.edu/cases/941209s1.html> (calculating interest on damages award under CISG according to domestic rate); Landgericht Frankfurt am Main [LG] [Frankfurt District Court] Sept. 16, 1991, Case No. 3/11 O 3/91 (F.R.G.), <http://cisgw3.law.pace.edu/cases/910916g1.html> (calculating interest on damages award under CISG according to domestic rate).

10. See, e.g., Zapata, 313 F.3d at 388; see also Harry Flechtner & Joseph Lookofsky, Viva Zapata! American Procedure and CISG Substance in a U.S. Circuit Court of Appeal, 7 VINDOBONA J. INT'L COM. L. & ARB. 93 (2003); Jarno Vanto, Attorney's Fees as Damages in International Commercial Litigation, 15 PACE INT'L L. REV. 203 (2003).

11. Schlechtriem, supra note 1, at 7.

12. See infra text accompanying notes 69-125.

13. See Oberlandesgericht Celle [OLG] [Celle Provincial Court of Appeal] Sept. 2, 1998, Case No. 3 U 246/97 (F.R.G.), <http://cisgw3.law.pace.edu/cases/980902g1.html> (requiring exact calculation of damages); Oberlandesgericht Koln [OLG] [Koln Provincial Court of Appeal] May 21, 1996, Case No. 22 U 4/96 (F.R.G.), <http://cisgw3.law.pace.edu/cases/960521g1.html> (requiring precise calculation damages); Landgericht Munchen [LG] [Munchen District Court] Feb. 20, 2002, Case No. 10 O 5423/01 (F.R.G.), <http://cisgw3.law.pace.edu/cases/020220g1.html> (requiring specific ascertainment of damages); Karajaoikeus Kuopio [KO] [District Court of Kuopio] Nov. 5, 1996, Case No. 95/3214 (Fin.), <http://cisgw3.law.pace.edu/cases/961105f5.html> (reasonable standard); Cloth Wind Coats Case China International Economic and Trade Arbitration Commission (CIETAC), 1990 (P.R.C.), <http://cisgw3.law.pace.edu/cases/900000cl.html>; CIETAC, 1995 (P.R.C.), <http://www.unilex.info/case.cfm?pid=1&do=caseid=210&step=Abstract> (sufficient proof); Tribunal de Commerce Namur [Namur District Court] Jan. 15, 2002, Case No. R.G. no. 985/01 (Belg.), <http://cisgw3.law.pace.edu/cases/020115b1.html> (sufficient proof).

14. See Zapata, 313 F.3d at 388.

15. See Amtsgericht Augsburg [AG] [Augsburg Petty District Court] Jan. 29, 1996, Case No. 11 C 4004/95 (F.R.G.), <http://cisgw3.law.pace.edu/cases/960129g1.html> (holding attorneys' fees may be recoverable as damages under article 74); Down Coat Case, CIETAC May 14, 1996 (P.R.C.), <http://cisgw3.law.pace.edu/cases/960514c1.html> (awarding attorneys' fees as indirect damages caused by the breach of contract).

16. See Thiele, supra note 4, at 3.

17. Compare Oberlandesgericht Koln [OLG] [Koln Provincial Court of Appeal] Nov. 13, 2000, Case No. 16 U 45/00 (F.R.G.), <http://cisgw3.law.pace.edu/cases/001113g1.html> (awarding interest according to domestic law applicable in accordance with the conflict of laws rules of the forum state) with International Chamber of Commerce [ICC] Arbitration Award in Case No. 6653 (Mar. 26 1993), <http://cisgw3.law.pace.edu/cases/936653i1.html> (awarding interest at the London Interbank Offering Rate (LIBOR)).

18. See CISG, supra note 2, at annex I.

19. See CISG, supra note 2, arts. 45 ("If the seller fails to perform any of his obligations under the contract or Convention, the buyer may: (a) exercise the rights provided in articles 46 to 52 [i.e., require substitute performance, demand repair of defective goods, fix additional time for performance, avoid or cancel the contract, or reduce sales price]; (b) claim damages as provided in articles 74 to 77."), 61 ("If a buyer fails to perform any of his obligations under the contract or this Convention, the seller may: (a) exercise the rights provided in articles 62 to 65 [i.e., require specific performance, fix an additional time for performance, avoid or cancel the contract, or have goods identified under the contract]; (b) claim damages as provided in articles 74 to 77."). While articles 74 through 77 set forth the rules concerning damages, numerous other articles can affect the right to or calculation of damages. See CISG, supra note 2, arts. 6, 7, 8, 9, 66, 80, 85, 86, 87, 88.

20. See Harry M. Flechtner, Remedies Under the New International Sales Convention: The Perspective from Article 2 of the U.C.C., 8 J.L. & COM. 53, 59 (1988).

21. See E. Allan Farnsworth, Damages and Specific Relief, 27 AM. J. COMP. L. 247, 249 (1979); Jeffrey S. Sutton, Measuring Damages Under the United Nations Convention on the International Sale of Goods, 50 OHIO ST. L.J. 737, 742 (1989).

22. CISG, supra note 2, art. 74.

23. See CISG, supra note 2, art. 74.

24. Id.

25. See id.

26. See SECRETARIAT COMMENTARY, art. 70 [draft counterpart to CISG art. 74], reprinted in JOHN HONNOLD, DOCUMENTARY HISTORY OF THE UNIFORM LAW FOR INTERNATIONAL SALES 449 (1989) [hereinafter SECRETARIAT COMMENTARY], available at <http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-74.html>. There exists no official commentary on the Convention. The Secretariat Commentary is on the 1978 Draft of the Convention. Nevertheless, the Commentary reflects the Secretariat's impressions of the purposes and effects of the Commission's work and provides a helpful analysis of the official text of the CISG. See KRITZER, supra note 2, at 2 (stating that the "Commentaries are the closest available counterpart to an Official Commentary on the Convention and, when they are relevant, constitute the most authoritative citations to the meaning of the Convention that one can find.").

With respect to lost profits, Professors Enderlein and Maskow note:

It may be questioned whether the injured party is entitled to recover for 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. ... Honnold holds that what matters is the loss which the injured party in fact suffered. ... According to Knapp, 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.

ENDERLEIN & MASKOW, supra note 2, at 299-300 (citations omitted).

27. SECRETARIAT COMMENTARY, supra note 26, P 5.

28. CISG, supra note 2, art. 75.

29. Id.

30. Id.

31. Id.

32. Id. art. 76(1).

33. Id.

34. Id. art. 76(2).

35. See PETER SCHLECHTRIEM, UNIFORM SALES LAW -- THE UN-CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS 97 (1986).

36. Victor Knapp, Damages, in C.M. BIANCA & M.J. BONELL, COMMENTARY ON THE INTERNATIONAL SALES LAW, THE 1980 VIENNA SALES CONVENTION 558 (1987).

37. See ENDERLEIN & MASKOW, supra note 2, at 298.

38. CISG, supra note 2, art. 5 ("This convention does not apply to the liability of the seller for death or personal injury caused by the goods to any person.").

39. See ENDERLEIN & MASKOW, supra note 2, at 298.

40. As noted above, the concept of foreseeability has its roots in common law countries from Hadley v. Baxendale, 156 Eng. Rep. 145 (Ex. 1854). See Delchi Carrier S.p.A. v. Rotorex Corp., 71 F.3d 1024, 1029 (2d Cir. 1995) (stating "CISG requires that damages be limited by the familiar principle of foreseeability established in Hadley v. Baxendale"). It can also be found in many civil law countries, such as article 1150 of the French Civil Code, which limits damages to those which were foreseen or which could have been foreseen at the time of the contract.

41. CISG, supra note 2, art. 74.

42. See Chengwei, supra note 4, 14.2.5.

43. ENDERLEIN & MASKOW, supra note 2, at 301 (emphasis omitted).

44. KRITZER, supra note 2, at 477 (emphasis added).

45. See RESTATEMENT (SECOND) OF CONTRACTS 351 (1979).

46. A number of commentators believe this broadens the scope of what is foreseeable. See KRITZER, supra note 2, at 479; Jacob S. Ziegel, The Remedial Provisions in the Vienna Sales Convention: Some Common Law Problems, <http://www.cisg.law.pace.edu/cisg/biblio/ziegel6.html>. But see Farnsworth, supra note 21, at 253 (noting that article 74's use of possible consequences "may seem at first to cast a wider net than the Restatement's probable result,' [but] the preceding clause ('in light of the facts ...') cuts this back at least to the scope of the ... language").

47. KRITZER, supra note 2, at 494.

48. SECRETARIAT COMMENTARY, supra note 26, art. 73, P 4.

49. The United States delegation to the Convention proposed that article 77 read instead: "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, or a corresponding modification or adjustment of any other remedy." HONNOLD, supra note 2, at 133. This proposal, which would have broadened the scope of the second sentence of article 77, was rejected. Id. at 398. For a discussion of the U.S. proposal, see HONNOLD, supra note 2, at 520-22. See also ICC Final Award in Case No. 8817, reprinted in 25 Y.B. COM. ARB. 355, 367 (2000).

50. ICC Arbitration Award in Case No. 8786 (Jan. 1997), <http://cisgw3.law.pace.edu/cases/978786i1.html>.

51. See CISG, supra note 2, art. 72(1) ("If prior to the date for performance of the contract it is clear that one of the parties will commit a fundamental breach, the other party may declare the contract avoided.").

52. Id. art. 74.

53. ICC Arbitration Award in Case No. 8786, at 73.

54. Id. at 74-75.

55. CISG, supra note 2, art. 78.

56. Despite the article's firm language, international interest awards are as varied as they are uncertain -- far from a rational and uniform approach. See John Y. Gotanda, Awarding Interest in International Arbitration, 90 AM. J. INT'L L. 40, 40 (1996) (discussing problems with inconsistent arbitral awards). Indeed, as one commentator has described, "A party to a contract controlled by the Convention relies on article 78's rule on interest at his own peril." Sutton, supra note 21, at 749. Of course, contracting parties are free to specifically authorize whether interest will be awarded, the date of default, the interest rate, and whether the interest will be simple or compound. Unfortunately in many instances, they fail to do so, and thus are dependant upon the Convention to solve any disputes.

57. Of course, if the claimant was forced to borrow money to continue operations after the debtor's default, it should be able to recover those actual damages under article 74. See Hans Stoll & Georg Gruber, Interest, in SCHLECHTRIEM & SCHWENZER, supra note 1, at 756.

58. See Alan F. Zoccolillo, Jr., Determination of the Interest Rate Under the 1980 United Nations Convention on Contracts for the International Sale of Goods: General Principles v. National Law, 1 VINDOBONA J. INT'L COM. L. & ARB. 3, 31 (1997).

59. See Phanesh Koneru, The International Interpretation of the UN Convention on Contracts for the International Sale of Goods: An Approach Based on General Principles, 6 MINN. J. GLOBAL TRADE 105, 123 (1997) ("As the legislative history nevertheless shows, the delegates could not agree on the rate of interest or the time for accrual of the interest payment.").

60. See Franco Ferrari, Uniform Application and Interest Rates Under the 1980 Vienna Sales Convention, in CORNELL REVIEW ON THE CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS (CISG) 3, 6 (Cornell Law Journal et al. eds., 1995).

61. Gotanda, supra note 56, at 50. In fact, even some countries whose religious beliefs generally prohibit the payment of interest have allowed it in certain commercial transactions. See id. at 47-50.

62. See Case Law on UNCITRAL Texts (CLOUT) Case No. 79, Jan. 18, 1994, <http://www.uncitral.org/pdf/english/clout/abstracts/A_CN.9_SER.C_ABSTRACTS_6.pdf>; CLOUT, Case No. 5, Sept 26, 1990, <http://www.uncitral.org/pdf/english/clout/abstracts/A_CN.9_SER.C_ ABSTRACTS_1.pdf>; CLOUT, Case No. 7, Apr. 24, 1990, <http://www.uncitral.org/pdf/english/clout/abstracts/A_CN.9_SER.C_ABSTRACTS_1.pdf>.

63. See Stoll & Gruber, supra note 57, at 756.

64. CISG, supra note 2, art. 78.

65. See Thiele, supra note 4, at 3 n.4-6. CISG article 84 provides:

(1) If the seller is bound to refund the price, he must also pay interest on it, from the date on which the price was paid.

(2) The buyer must account to the seller for all benefits which he has derived from the goods or part of them:
(a) if he must make restitution for the goods or part of them; or
(b) if it is impossible to make restitution of all or part of the goods or to make restitution of all or part of the goods substantially in the condition in which he received them, but he has nevertheless declared the contract void or required the seller to deliver substitute goods.

CISG, supra note 2, art. 84.

66. See, CLOUT Case No. 328, Oct. 21, 1999, <http://www.uncitral.org/uncitral/en/case_law/abstracts.html>; CLOUT, Case 214, Feb. 5, 1997, <http://www.uncitral.org/uncitral/en/case_law/abstracts.html>.

67. See Thiele, supra note 4, at 24-25.

68. HONNOLD, supra note 2, at 445.

69. It should be noted that commentators have asserted that the Convention imposes upon a claimant the burden of providing evidence of damages. See ENDERLEIN & MASKOW, supra note 2, at 299. However, the Convention does not expressly require that damages be proved with certainty. See Djakhongir Saidov, Methods of Limiting Damages Under the Vienna Convention on Contracts for the International Sale of Goods, 14 PACE INT'L L. REV. 307, 368-72 (2002).

70. See Delchi Carrier S.p.A. v. Rotorex Corp, 71 F.3d 1024 (2d Cir. 1995) (applying U.S. state law to determine level of proof); Helsingin hoviokeus [Helsinki Court of Appeals] Oct. 26, 2000, Case No. S 00/82 (Fin.), <http://cisgw3.law.pace.edu/cases/001026f5.html> (estimating damage according to Finnish Law of Civil Procedure); Bezirksgericht der Saane (Zivilgericht) [District Court] Feb. 20, 1997, Case No. T171/95 (Switz.), <http://cisgw3.law.pace.edu/cases/970220s1.html> (finding that "CISG does not provide any principle regarding damages whose exact figure is not verifiable," and applying Swiss law to estimate damages); ICC Arbitration Case No. 8611, (Jan. 23, 1997), <http://cisgw3.law.pace.edu/cases/978611i1.html> (stating that arbitrator must be able to estimate damages, citing German Civil Procedure Code). One commentator examined CISG cases in the Russian Federation and concluded that arbitration tribunals there have consistently applied their own discretion to determine the level of proof necessary. See Djakhongir Saidov, Cases on CISG Decided in the Russian Federation, 7 VINDOBONA J. INT'L COM. L. & ARB. 1, 50 (2003).

71. Delchi Carrier S.p.A. v. Rotorex Corp., 71 F.3d 1024 (2d Cir. 1995).

72. See RESTATEMENT (SECOND) OF CONTRACTS 352 (1981); DAN B. DOBBS, LAW OF REMEDIES 12.9(2), 12.4(3) (2d ed. 1993); HARVEY MCGREGOR, MCGREGOR ON DAMAGES 261 (14th ed. 1980); see also S.M. WADDAMS, THE LAW OF DAMAGES 310 (Canada Law Book Limited 1983); J.W. CARTER & D.J. HARLAND, CONTRACT LAW IN AUSTRALIA PP 2105 et seq. (14th ed. 2002) (1986).

73. ICC Final Award in Case No. 78445, reprinted in 26 Y.B. COM. ARB. 167, 175 (2001) (citing State of Kerala v. K. Bhaskaran, AIR (1985) Kerala 55).

74. Bagwell Coatings v. Middle S. Energy, 797 F.2d 1298 (5th Cir. 1986); Locke v. United States, 283 F.2d 521 (Ct. Cl. 1960); Kozlowski v. Kozlowski, 403 A.2d 902 (N.J. 1979); 1 CHITTY ON CONTRACTS 1562, at 733 (A. G. Guest ed., 24th ed. 1977); CARTER & HARLAND, supra note 72, P 2117; ROBERT L. DUNN, RECOVERY OF DAMAGES FOR LOST PROFITS 1.6 (5th ed. 1998); see also John Y. Gotanda, Recovering Lost Profits in International Disputes, 36 GEO. J. INT'L L. 61 (2005).

75. Code des obligations [Co] [Code of Obligations] art. 42 (Switz.) (applying to determine damages for breach of contract pursuant to article 99 of Code of Obligation).

76. See Markus Wirth et al., Switzerland, in TRANSNATIONAL LITIGATION: A PRACTITIONER'S GUIDE SWI-77 (1997). It should be noted, however, that article 42 of the Code of Obligation states that "damage not ascertainable by calculation is determined by the judge at his discretion, taking into account the ordinary course of events and measures taken by the damaged party." Co art. 42 (Switz.).

77. See Lucien Simont et al., Belgium, in TRANSNATIONAL LITIGATION: A PRACTITIONER'S GUIDE BEL-64 (2003); Manuel Vargas et al., Brazil, in TRANSNATIONAL LITIGATION: A PRACTITIONER'S GUIDE BRA-103-12 (2003); see also Asser's Handbook at 231-32 ("If the amount of the damage claimed is disputed, the creditor must prove the amount.").

78. See Codice civile [Cc] art. 1226 (Italy); see also BARRY NICHOLAS, FRENCH LAW OF CONTRACT 228 (2d ed. 1992) (stating that under French law recovery is calculated as estimate of probability of success); Burgerlijk Wetboek [BW] art. 6:105 (Neth.), stating

The court may wholly or partially postpone the assessment of damage which has not yet occurred or, after an evaluation of the favourable and unfavourable probabilities, make an anticipatory assessment. In the latter case the court may order the obligor either to pay a lump sum or to make installment payments with or without an obligation to provide security; such order may be subject to conditions determined by the court.

79. See also Sun Oil Co. v. Wortman, 486 U.S. 717, 726 (1998) ("Except at the extremes, the terms substance' and procedure' precisely describe very little except dichotomy, and what they mean in a particular context is largely determined by the purposes for which the dichotomy is drawn."); Hanna v. Plumer, 380 U.S. 460 (1965) ("The line between substance' and procedure' shifts as the legal context changes. Each implies different variables depending upon the particular problem for which it is used."); Gotanda, supra note 56, at 52 ("Many countries regard the awarding of interest as substantive, while others deem rules concerning interest procedural."); see generally Chiara Giovannucci Orlandi, Procedural Law Issues and Uniform Law Conventions, 5 UNIFORM L. REV. 23 (2000).

80. See C.C. art. 1226 (Italy).

81. See Bezirksgericht Sissach [BG] [Sissach District Court] Nov. 5, 1998, Case No. A 98/126 (Switz.), <http://cisgw3.law.pace.edu/cases/981105s1.html>; Handelsgericht St. Gallen [HG] [St. Gallen Commercial Court] Dec. 3, 2002, Case No. HG.1999.82-HGK (Switz.), <http://cisgw3.law.pace.edu/cases/021203s1.html>; Landgericht Hamburg [LG] [Hamburg District Court] Sept. 26, 1990, Case No. 5 O 543/88 (F.R.G.), <http://cisgw3.law.pace.edu/cases/900926g1.html>.

82. See Oberlandesgericht Celle [OLG] [Celle Provincial Court of Appeal] Sept. 2, 1998, Case No. 3 U 246/97 (F.R.G.), <http://cisgw3.law.pace.edu/cases/980902g1.html> (requiring exact calculation of damages); Oberlandesgericht Koln [OLG] [Koln Provincial Court of Appeal] May 21, 1996, Case No. 22 U 4/96 (F.R.G.), <http://cisgw3.law.pace.edu/cases/960521g1.html> (requiring precise calculation of damages); Landgericht Munchen [LG] [Munchen District Court] Feb. 20, 2002, Case No. 10 O 5423/01 (F.R.G.), <http://cisgw3.law.pace.edu/cases/020220g1.html> (requiring specific ascertainment of damages).

83. See Karajaoikeus Kuopio [KO] [District Court of Kuopio] Nov. 5, 1996, Case No. 95/3214 (Fin.), <http://cisgw3.law.pace.edu/cases/961105f5.html> (reasonable standard); Cloth Wind Coats, CIETAC, 1990 (P.R.C.), <http://cisgw3.law.pace.edu/cases/900000c1.html> (reasonable proof).

84. See Tribunal de Commerce Namur [Namur District Court] Jan. 15, 2002, Case No. R.G. no. 985/01 (Belg.), <http://cisgw3.law.pace.edu/cases/020115b1.html> (sufficient proof); CIETAC, 1995 (P.R.C.), <http://www.unilex.info/case.cfm?pid=1&do=case&id=210&step=Abstract> (sufficient proof).

85. The Helsinki Court of Appeals dealt with a similar scenario, where the seller had refused delivery of plastic carpets that the buyer had not previously been in the business of selling. There, the buyer had entered into a requirements contract with a third party for the resale of the plastic carpets. The court, in estimating the buyer's damages as a result of the seller's breach, held that the buyer's sales goal could not be used as a basis for estimating lost profits. See Helsingin hoviokeus [Helsinki Court of Appeals] Oct. 26, 2000, Case No. S 00/82 (Fin.), <http://cisgw3.law.pace.edu/cases/001026f5.html>.

86. Himpurna California Energy Ltd., 25 Y.B. COM. ARB. 13, 83-84 (2000).

87. Compare Amtsgericht Viechtach [AG] [Viechtach Lower Court] Apr. 11, 2002, Case No. 1 C 419/01 (F.R.G.), <http://cisgw3.law.pace.edu/cases/020411g1.html> (awarding collection costs based on the principle that "loss" encompasses pursuing one's rights); Amtsgericht Augsburg [AG] [Augsburg Petty District Court] Jan. 29, 1996, Case No. 11 C 4004/95 (F.R.G.), <http://cisgw3.law.pace.edu/cases/960129g1.html> (holding under article 74 that damages could include attorneys' fees); Turku Court of Appeal, Apr. 12, 2002 (Fin.), <http://cisgw3.law.pace.edu/cases/020412f5.html> (awarding winning party legal expenses in their entirety under CISG where defendant lost on all defenses); Tribunal Cantonal Vaud [Canton Appellate Court] Mar. 11, 1996, Case No. 01 93 1061 [163/96/BA and 164/96/BA] (Switz.), <http://cisgw3.law.pace.edu/cases/960311s2.html> (awarding plaintiff Sf8, 830 in legal costs); John Felemegas, An Interpretation of Article 74 CISG by the U.S. Circuit Court of Appeals, 15 PACE INT'L L. REV. 91 (2003) (arguing that principles of the Convention allow for award of attorney fees under article 74); Bruno Zeller, Interpretation of Article 74 -- Zapata Hermanos v. Hearthside Baking -- Where Next?, 2004 NORDIC J. COM. L. 1, <http://www.njcl.fi/1_2004/commentaryl.pdf> (arguing that attorneys' fees must be compensable under article 74 in order to promote uniformity); with Zapata Hermanos Sucesores v. Hearthside Baking Co., 313 F.3d 385, 388 (7th Cir. 2002); Ajax Tool Work Inc. v. Can-Eng Manufacturing, Ltd., No. 01 C 5938, 2003 U.S. Dist. LEXIS 1306 at *21 (N.D. Ill. 2003) (holding that attorneys' fees are procedural and thus not covered by article 74); Chi. Prime Packers Inc. v. Northam Food Trading, 320 F. Supp. 2d 702, 717 (N.D. Ill. 2004) (holding that the term loss in article 74 does not include attorneys' fees); Flechtner & Lookofsky, supra note 10, at 203 (arguing that attorneys' fees should not be allowed under article 74 because an anomalous and unfair result was not within Convention's intentions).

88. CISG, supra note 2, art. 74.

The International Institute for the Unification of Private Law (UNIDROIT) Principles of International and Commercial Contracts (UNIDROIT Principles) also do not explicitly provide for the awarding of attorneys fees and costs. The UNIDROIT Principles set forth general rules for international commercial contracts. See UNIDROIT: INTERNATIONAL INSTITUTE FOR THE UNIFICATION OF PRIVATE LAW, THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS pmbl. (2004) [hereinafter UNIDROIT Principles]; see also THE UNIDROIT PRINCIPLES IN PRACTICE: CASELAW AND BIBLIOGRAPHY ON THE PRINCIPLES OF COMMERCIAL CONTRACTS 27 (Michael Joachim Bonell ed., 2002) [hereinafter UNIDRIOT Principles in Practice]. Like article 74, the UNIDROIT Principles' article 7.4.2 (2004) provides in the case of a breach of contract for the recovery of damages that will place the aggrieved party in the same economic position it would have been in had the breach not occurred and the contract been properly performed. In one ICC case where the tribunal relied upon the UNIDROIT Principles, the tribunal awarded the successful claimant attorney's fees and costs. However, it did not explain whether the award of fees and costs was made pursuant to the damages provisions of the UNIDROIT Principles, national procedural law, or applicable rules. See ICC Final Award No. 9797 (2000), reprinted in UNIDROIT PRINCIPLES IN PRACTICE, supra, at 641, 659. As one commentator writes, "neither the CISG nor the UNIDROIT Principles devote explicit attention to the issue of legal fees or litigation costs. It is therefore unlikely that the UNIDROIT Principles can come to the aid in the solution of this controversy ..." See Sieg Eiselen, Remarks on the Manner in Which the UNIDROIT Principles of International Commercial Contracts May Be Used to Interpret or Supplement Article 74 of the CISG, Pt (Oct. 2004), <http://www.cisg.law.pace.edu/cisg/principles/uni74.html#editorial>.

89. See Stoll & Gruber, supra note 57, at 744; HONNOLD, supra note 2, at 445 (citing G.H. TREITEL, REMEDIES FOR BREACH OF CONTRACT: A COMPARATIVE ACCOUNT 82 (1998)).

90. See text accompanying note, supra note 87 (listing tribunal decisions that have awarded attorneys' fees under article 74 of CISG).

91. See, e.g., Down Coat Case, CIETAC Arbitration Proceeding, May 14, 1996 (P.R.C.), <http://cisgw3.law.pace.edu/cases/960514c1.html>; Landgericht Berlin [LG] [Berlin District Court] Mar. 21, 2003 (F.R.G.), <http://cisgw3.law.pace.edu/cases/030321g1.html>.

92. See Zapata Hermanos Sucesores v. Hearthside Baking Co., 313 F.3d 385, 388 (7th Cir. 2002); Flechtner & Lookofsky, supra note 10.

93. See Stoll & Gruber, supra note 57, at 755-56 ("The compensation of costs of litigation ... is governed exclusively by the relevant lex fori."); see also Zapata, 313 F.3d at 388 (holding U.S. procedural law governs recovery of attorneys' fees).

94. See Zapata, 313 F.3d at 385.

95. See id. at 388.

96. See id.

97. Id. at 388-89. A number of commentators agree with the Seventh Circuit's decision in Zapata. See Flechtner & Lookofsky, supra note 10, at 93; Vanto, supra note 10, at 221-22.

98. See CISG, supra note 2, art. 7(2) ("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 or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law.").

99. See John Felemegas, The Award of Counsel's Fees Under Article 74 CISG, in Zapata Hermanos Sucesores v. Hearthside Baking Co., 6 VINDOBONA J. INT'L COM. L. & ARB. 30 (2001) (arguing that Zapata was mistaken in failing to interpret the Convention properly and not awarding attorneys' fees as part of "full compensation"); Zeller, supra note 87.

100. See Turku Court of Appeal, Apr. 12, 2002 (Fin.), <http://cisgw3.law.pace.edu/cases/020412f5.html> (awarding winning party legal expenses in their entirety under CISG where defendant lost on all defenses); Tribunal Cantonal Vaud [Canton Appellate Court] Mar. 11, 1996, Case No. 01 93 1061 [163/96/BA and 164/96/BA] (Switz.), <http://cisgw3.law.pace.edu/cases/960311s2.html> (awarding plaintiff Sf 8,830 in legal costs); see also Lower Court BerlinTiergarten, Mar. 13, 1997 (F.R.G.), <http://cisgw3.law.pace.edu/cases/970313gl.html> (holding that damages under article 74 include court and lawyers' fees, but article 74 does not permit debt collection costs); Tribunale [District Court] di Rimini, Nov. 26, 2002, Case No. 3095 (Italy), <http://cisgw3.law.pace.edu/cases/021126i3.html> ("The costs of the procedure are charged against the losing party.").

101. See Rechtbank van Koophandel [District Court] Hasselt, Feb. 25, 2004, Case No. AR 04/601 (Belg.), <http://cisgw3.law.pace.edu/cases/040225b2.html> (awarding legal fees in amount of Euro $580.94); Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, Mar. 5 1998, Case No. 160/1997 (Russ.), <http://cisgw3.law.pace.edu/cases/980305r2.html> (awarding buyer full compensation for legal fees); Tribunal Cantonal Vaud [Canton Appellate Court] Mar. 11, 1996, Case No. 01 93 1061 [163/96/BA and 164/96/BA] (Switz.), <http://cisgw3.law.pace.edu/cases/960311s2.html>; Lentils case, CIETAC, Dec. 18, 1996 (P.R.C), <http://cisgw3.law.pace.edu/cases/961218cl.html> (awarding partial attorneys' fees to winning party); Down Coat Case, CIETAC, May 14, 1996 (P.R.C.), <http://cisg3.law.pace.edu/cases/960514c1.html> (awarding seller attorneys' fees an indirect loss caused by buyer's breach).

102. See Amtsgericht Viechtach [AG] [Viechtach Lower Court] Apr. 11, 2002, Case No. 1 C 419/01 (F.R.G.), <http://cisgw3.law.pace.edu/cases/020411g1.html>.

103. See Landgericht Berlin [LG] [Berlin District Court] Mar. 21, 2003 (F.R.G.), <http://cisgw3.law.pace.edu/cases/030321g1.html> (awarding attorneys' fees under articles 61 and 74); see also ICC Arbitration Final Award in Case No. 7585 (1992), <http://cisgw3.law.pace.edu/cases/927585i1.html> (awarding attorneys' fees under article 74 because they were foreseeable damages and usual for avoidance of contract for breach of one party).

104. Francesco G. Mazzotta, CISG Article 78: Endless Disagreement Among Commentators, Much Less Among the Courts (2004), <http://www.cisg.law.pace.edu/cisg/biblio/mazzotta78.html>.

105. Andre Corteier, A New Approach to Solving the Interest Rate Problem of Art 78 CISG, 5 INT'L TRADE & Bus. L. ANN. 33, 33 (2000).

106. See generally Thiele, supra note 4, at 3-35; Mazzotta, supra note 104.

107. See, e.g., ICC Arbitration Award in Case No. 7153 (1992), <http://cisgw3.law.pace.edu/cases/927153i1.html>; Oberlandesgericht Koblenz [OLG] [Koblenz Provincial Court of Appeal] Jan. 31, 1997, Case No. 2 U 31/96 (F.R.G.), <http://cisgw3.law.pace.edu/cases/970131g1.html>.

108. See Case Law on UNCITRAL Texts (CLOUT) Case No. 132, Aug. 16, 1996, <http://www.uncitral.org/uncitral/en/case_law/abstracts.html>; CLOUT, Case No. 97, July 12, 1995, <http://www.uncitral.org/pdf/english/clout/abstracts/A_CN.9_SER.C_ABSTRACTS_7.pdf>; see also Landgericht Hamburg [LG] [Hamburg District Court] Sept. 26, 1990, Case No. 5 0 543/88 (F.R.G.), <http://cisgw3.law.pace.edu/cases/900926g1.html>; Internationales Schiedsgericht der Bundeskammer der gewerblichen Wirtschaft [Arbital Tribunal] Vienna, Jun. 15, 1994, docket No. SCH-4318 (Austria), <http://www.unilex.info/case.cfm?pid=1&do= case&id=56&step=Abstract>.

109. Several courts have applied the domestic law of the creditor, regardless of whether that law was applicable under the rules of private international law. See Bezirksgericht Arbon [BG] [Arbon District Court] Dec. 9, 1994, Case No. 341/1994 (Switz.), <http://cisgw3.law.pace.edu/cases/941209s1.html>; Case Law on UNCITRAL Texts (CLOUT) Case No. 6, Sept. 16, 1991; Case Law on UNCITRAL Texts (CLOUT) Case No. 4, Aug. 31, 1989. But see Landgericht Kassel [LG] [Kassel District Court] June 22, 1995, Case No. 8 O 2391/93 (F.R.G.), <http://www.unilex.info/case.cfm?pid=1&do=case&id=143&step=FullText>.

One arbitral tribunal applied the law of the creditor's place of business to determine the applicable rate because the tribunal found that under article 7(2), the approach was "in conformity with the general principles underlying the convention." Internationales Schiedsgericht der Bundeskammer der gewerblichen Wirtschaft [Arbitral Tribunal] Vienna, Jun. 15, 1994, docket No. SCH-4318 (Austria), <http://www.unilex.info/case.cfm?pid=1&do= case&id=56&step=Abstract>.

110. Tribunal Cantonal Vaud [Canton Appellate Court] Mar. 11, 1996, Case No. 01 93 1061 [163/96/BA and 164/96/BA] (Switz.), <http://cisgw3.law.pace.edu/cases/960311s2.html> (holding that rate was to be determined according to domestic law of buyer's country, Switzerland, because the buyer's obligation was the only disputed performance).

111. See Rechtbank van Koophandel [Commercial Court] leper, Feb. 18, 2002, Case No. A.R. 318/00 (Belg.), <http://www.unilex.info/case.cfm?pid=l&do=case&id=771&step=FullText>; Rechtbank van Koophandel [Commercial Court] Veurne, Apr. 25, 2001 (Belg.), <http://www.unilex.info/case.cfm?pid=1&do=case&id=953&step=FullText>; Case Law on UNCITRAL Texts (CLOUT) Case No. 164, Dec. 5, 1995; Hungarian Chamber of Commerce and Industry Court of Arbitration, Nov. 17, 1995, Case No. VB/94124 (Hung.), <http://www.unilex.info/case.cfm? pid=l&do=case&id=181&step=FullText> (holding that to determine interest rate according to law of State other than that of currency of payment would be improper, especially when other State has weak currency and high inflation figure.).

112. See Case Law on UNCITRAL Texts (CLOUT) Case No. 220, 1997; Rechtbank Almelo, Aug. 9, 1995, Nederlands Internationaal Privaatrecht, Case Law on UNCITRAL Texts (CLOUT) Case No. 26, 1992.

113. Some courts and arbitral tribunals have used CISG article 9 to solve the interest rate problem. Article 9 provides that trade usages that the parties to the contract knew or ought to have known are applicable to the contract if the usages are widely known in international trade and regularly observed by parties to contracts of the type concerned. See ICC Award No. 6653 of 1993, <http://cisgw3.law.pace.edu/cases/936653i1.html> (holding that most logical solution from economic standpoint point of view in matters of international commerce is rate currently applied between merchants using currency in which payment must be made); see also Juzgado Nacional de Primera Instancia en lo Comercial No. 10, Oct. 6 1994, Case No. 56.179, Bermatex S.r.l. v. Valentin Rius Clapers S.A. v. Sbrojovka Vsetin S. A. (Arg.) <http://www.unilex.info/dynasite.cfm?dssid=2376&dsmid=13353&x=1> (holding that since CISG does not determine interest rate, reference should be made to international trade usages).

114. For a discussion of the UNIDROIT Principles, see supra note 88. A few commentators have suggested the use of the UNIDROIT Principles to fill the gap in the CISG. This approach has in fact been used by arbitral tribunals. See ICC Award No. 8128 of 1995, available at <http://cisgw3.law.pace.edu/cases/958128i1.html> (setting interest rate as average bank short-term lending rate, referring to UNIDROIT Principle 7.4.9 and PECL Article 4.507 as general principles on which CISG is based); Internationales Schiedsgericht der Bundeskammer der gewerblichen Wirtschaft [Arbitral Tribunal] Vienna, Jun. 15, 1994, docket No. SCH-4318 (Austria), <http://cisgw3.law.pace.edu/cases/940615a.3.html>. The UNIDROIT Principles have also been used by an arbitral tribunal to justify a certain approach to awarding interest. See ICC Award No. 8769 of December 1996, available at <http://cisgw3.law.pace.edu/cases/968769i1.html>.

115. Article 9:508 PECL provides:

(1) If payment of a sum of money is delayed, the aggrieved party is entitled to interest on that sum from the time when payment is due to the time of payment at the average commercial bank short-term lending rate to prime borrowers prevailing for the contractual currency of payment at the place where payment is due.

(2) The aggrieved party may in addition recover damages for any further loss so far as these are recoverable under this Section.

At least one commentator has concluded that the PECL cannot be used in determining the proper rate of interest under article 78 of the Convention. See Francesco G. Mazzotta, CISG Articles 78 and 84(1) and their PECL Counterparts (Oct. 2004), <http://cisgw3.law.pace.edu/cisg/text/anno-art-78.html>.

116. See, e.g., Hof van Beroep, Antwerpen, Nov. 4, 1998, Case No. 1995/AR/1558 (Belg.), <http://www.unilex.info/case.cfm?pid=l&do=case&id=810&step=FullText>; Zivilgericht [ZG] [Civil Court] Basel Dec. 21, 1992, Case No. P4 1991/238, (Switz.), <http://cisgw3.law.pace.edu/cases/921221s1.html>.

117. See Zapata Hermanos Sucesores v. Hearthside Baking Co. Inc., No. 99 C 4040, 2001 U.S. Dist. LEXIS 15191 at *8 (N.D. Ill. 2001); Internationales Schiedsgericht der Bundeskammer der gewerblichen Wirtschaft [Arbitral Tribunal], Vienna, Jun. 15, 1994, docket No. SCH-4318 (Austria), <http://unilex.info/case.cfm?pid=l&do=case&id=56&step=FullText>; see also Arthur B. Colligan, Jr., Applying the General Principles of the United Nations Convention on Contracts for the International Sale of Goods to Fill the Article 78 Interest Rate Gap in Zapata Hermanos, S.A. v. Hearthside Baking Co. Inc., 6 VINDOBONA J. INT'L COM. L. & ARB. 40, 48 (2002).

118. CISG, supra note 2, art. 7(2).

119. Id.

120. See id.; see also Joanne M. Darkey, A U.S. Court's Interpretation of Damages Provisions Under the U.N. Convention on Contracts for the International Sale of Goods: A Preliminary Step Towards an International Jurisprudence of CISG or a Missed Opportunity?, 15 J.L. & COM. 139, 150 (1995).

121. The general principle of full compensation can be extracted from article 74, which provides that damages should "equal the loss [...] suffered as a consequence of the other party's breach." Colligan, supra note 117, at 50.

122. See, e.g., Rapeseed Dregs Case, Rapeseed Dregs Case, CIETAC, Jun. 10, 2002 (P.R.C.), <http://cisgw3.law.pace.edu/cases/020610c1.html> (awarding interest at reasonable rate, which was determined to be three percent).

123. The general principle of protecting against the unjust enrichment of one of the parties can be extracted from article 84. The delegates to the convention were concerned about protecting against the purposeful delay in payment by one party in order to take advantage of the availability of high interest rates or cheap credit. Article 84 was included to prevent this. See Zoccolillo, supra note 58, at 31. In applying the general principles in determining the applicable interest rate, the issue arises as to which principle takes precedence: full compensation or preventing unjust enrichment? At least one commentator has concluded that judges and arbitral tribunals should look to fully compensate first, then prevent any unjust enrichment. See id. at 31-33.

124. See Stoll & Gruber, supra note 57, at 804.

125. See John Y. Gotanda, Compound Interest in International Disputes, 2004 OXFORD U. COMP. L.F. 2, <http://ouclf.iuscomp.org/articles/gotanda.shtml> (containing comparative study of laws on interest).

126. See BIANCA & BONELL, supra note 36, at 75; HONNOLD, supra note 2, at 108.

127. CISG, supra note 2, art. 7(2).

128. Id. ("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 or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law.").

129. See C.G. Orlandi, Procedural Law Issues and Law Conventions, 5 UNIFORM L. REV. 23 (2000); see also Sun Oil Co. v. Wortman, 486 U.S. 717 (1998); Hanna v. Plumer, 380 U.S. 460 (1965); Gotanda, supra note 56, at 52 ("Many countries regard the awarding of interest as substantive, while others deem rules concerning interest as procedural.").

130. Sun Oil Co. v. Wortman, 486 U.S. 717, 726 (1998).

131. See Hanna v. Plumer, 380 U.S. 460 (1965).

132. See, e.g., RESTATEMENT (SECOND) CONFLICTS OF LAWS 142 (1988) (discarding substance/procedure distinction for statutes of limitations in favor of uniform choice of law analysis based on interests and contacts); see also Janeen M. Carruthers, Substance and Procedure in Conflict of laws: A Continuing Debate in Relation to Damages, 53 INT'L & COMP. L.Q. 691 (2004) (pointing out problems with substance/procedure distinction in tort and delict and advocating a new perspective).

133. Orlandi, supra note 129, at 40.

134. See ZELLER, supra note 4, at 158-59 (noting "procedural law may aptly be described as the last bastion of forum shopping" and noting that in cases "the application of domestic procedural law distorted the process of what could have been a uniform application of substantive law" (citation omitted)).

135. Schlechtriem, supra note 1, at 7.

136. See BIANCA & BONELL, supra note 36, at 73-75 (stating that, in cases of ambiguities or obscurities in text and gaps, "courts should to the largest possible extent refrain from resorting to the different domestic laws and try to find a solution within the Convention itself" by looking "to the underlying purposes and policies of individual provisions as well as of the Convention as a whole").

137. Id. at 76-77; HONNOLD, supra note 2, at 108; Peter Schlechtriem, General Provisions, in SCHLECHTRIEM & SCHWENZER, supra note 1, at 101.

138. CISG, supra note 2, art. 7(2).

139. Id. art. 4.

140. Id. art. 7(1).

141. Id. art. 7(2).

142. Schlechtriem, supra note 137, at 103.

143. See CISG, supra note 2, art. 7(2) ("Questions concerning matters governed by this Convention ... not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law.").

144. Schlechtriem, supra note 137, at 103; see also CISG, supra note 2, art. 7(2).

145. BIANCA & BONELL, supra note 36, at 76-77.

146. It should be noted that today Restatements of the law in some cases no longer attempt to restate what the law is, but instead propose what the law should be. However, numerous treatises summarize the state of the law and thus assume the function that Restatements once served.

147. HONNOLD, supra note 2, at 109-10.

148. BIANCA & BONELL, supra note 36, at 78.

149. CISG, supra note 2, art. 79.

150. See Stoll & Gruber, supra note 57, at 771.

151. See Saidov, supra note 4, at 8.

152. BIANCA & BONELL, supra note 36, at 80-81.

153. HONNOLD, supra note 2, at 110.

154. See Sieg Eiselen, Remarks on the Manner in which the UNIDROIT Principles of International Commercial Contracts May Be Used to Interpret or Supplement Article 74 of the CISG, P k, <http://www.cisg.law.pace.edu/cisg/principles/uni74.html>; Friedrich Blase & Philipp Hottler, Remarks on the Damages Provisions in the CISG, Principles of European Contract Law (PECL) and UNIDROIT Principles of International Commercial Contracts (UPICC), <http://www.cisg.law.pace.edu/cisg/text/peclcomp74.html>.

155. UNIDROIT Principles, supra note 88, art. 7.4.3. (emphasis added).

156. Id. at cmt. 1.

157. PECL art. 9:501(2) (emphasis added).

Requiring an aggrieved party to prove damages with reasonable certainty does not mean that the aggrieved party must prove it is more likely than not that an exact amount of damages occurred. Rather, an aggrieved party must show with reasonable certainty the fact of loss because of the respondent's breach of the contract. If the aggrieved party is able to do so, it then need only provide a basis upon which a tribunal can reasonably estimate the extent of the aggrieved party's loss. An aggrieved party might be able to do this through, for example, the use of expert testimony, economic and financial data, market surveys and analyses, or business records of similar enterprises. This requirement strikes a balance between the need for evidence upon which a tribunal may base an award of damages and the need to recognize that the difficulty in proving damages may in fact stem from the breaching party's wrongful act. As the tribunal in Final Award in Case No. 8362 of 1995 pointed out in a non-CISG case:

With respect to the calculation of the amount of damages, counterbalancing factors are taken into account under the law: on the one hand, there must be a sound basis upon which alleged damages are to be calculated. They cannot be the product of sheer speculation unsupported by tangible evidence. On the other hand, the law will not reward a party in breach by depriving the other party of compensation merely because no precise basis for determining the amount of damages exists.

Final Award in Case No. 8362 of 1995, reprinted in pertinent part in 22 Y.B. COM. ARB. 164, 177 (1997).

158. CISG, supra note 2, art. 74.

159. See Stoll & Gruber, supra note 57, at 752-53. Moral damages are moneys awarded for "intangible injury to feelings, honor, or moral principles, causing pain or suffering." See Alberto Zuppi, A Comparison of Buyer's Remedies Under the CISG with the Latin American Legal Tradition, available at <http://www.cisg.law.pace.edu/cisg/biblio/zuppi.html> (listing civil codes of Ecuador, Mexico, Peru, Bolivia, and Venezuela as having specific moral damages clauses); see also Codigo Civil Federal [C.C.F.], art. 1916, translated in MEXICAN CIVIL AND COMMERCIAL CODES 439 (1995).

160. Articles 45 and 61 provide equivalent remedies to both buyer and seller, respectively, following a failure of the other party to perform its obligations. See CISG, supra note 2, arts. 45, 61; see also Liu Chengwei, Comparsion of CISG Article 45/61 Remedial Provisions and Counterpart PECL Articles 8:101 and 8:102, 2004 NORDIC J. COM. L. 1, 2, <http://www.njcl.fi/1_2004/commentary2.pdf> (discussing parallel remedies available to buyer and seller).

161. See Harry M. Flechtner, Recovering Attorneys' Fees as Damages under the U.N. Sales Convention: A Case Study on the New International Commercial Practice and the Role of Case Law in CISG Jurisprudence, with Comments on Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Co., 22 Nw. J. INT'L L. & Bus. 121, 151 (2002) (discussing "anomaly" created by allowing recovery of attorneys' fees as damages); Troy Keily, How Does the Cookie Crumble? Legal Costs Under a Uniform Interpretation of the United Nations Convention on Contracts for the International Sale of Goods, 2003 NORDIC J. COM. L. 1, 5.6, <http://www.njcl.fi/1_2003/commentary2.htm>; Vanto, supra note 10, at 221.

162. See Vanto, supra note 10, at 221 (noting that without breach of contract, nothing in CISG would support award of attorneys' fees); see also Flechtner, supra note 161, at 151 (asserting that "Article 74 does not yield sensible or desirable results if construed to encompass recovery of lawyer costs"); Keily, supra note 161, 6.2(b) (claiming that principle of equity in CISG suggests attorneys' fees are not recoverable). But see Zeller, supra note 87, at 10 (arguing that creation of anomaly only reveals that CISG has gaps). According to Professor Zeller, the gap identified by the anomaly would be filled by domestic law in accordance with article 7(2). See id. This, however, would not resolve the problem as successful respondent may still not be able to recover their litigation costs.

163. Commentators explain that the modern justification for the principle that costs follow the event "is founded on the concept that if and to the extent that a claimant is entitled in law and justice to obtain a sum of money from another party, [a claimant] should not have to suffer any expense (beyond the cost of addressing a simple demand) for being awarded it; conversely, if a respondent is exposed to a claim which at the end of the day is deemed not to be founded in law and justice, [a respondent] should not suffer any expense for defending the action." J. Gillis Wetter & C. Priem, Costs and Their Allocation in International Commercial Arbitrations, 2 AM. REV. INT'L ARB. 251, 329 (1991).

164. One commentator argues that a claimant breaches a duty of loyalty when it files a breach of contract action, but the tribunal determines that the respondent was not in breach. He argues that, in such case, attorneys' fee and costs may be awarded under the Convention. See Felemegas, supra note 99, at 126. This proposal, however, stems from an overly strained interpretation of the Convention. Neither the language nor the structure of the Convention supports the imposition of liability for attorneys' fees and costs on the claimant in such circumstance. See Flechtner, supra, note 161, at 152.

165. See Keily, supra note 161, 6.2(b) (arguing Convention's principle of equality between buyer and seller prevents such unequal treatment of parties); see also BIANCA & BONELL, supra note 36, at 73 (stating that, in interpreting the Convention, "courts are expected to take a much more liberal attitude and to look, wherever appropriate, to the underlying purposes and policies of individual provisions as well as the Convention as a whole").

166. Of course, it may be argued that laws and rules governing the payment of fees and costs could be evidence of what is reasonable. That may or may not be true, depending on the particular circumstance. In addition, such an approach would undermine uniformity as results would differ depending on local norms.

167. See ACCESS TO CIVIL PROCEDURE ABROAD 9.9.3 (Henk J. Snijders et al. eds., 1996) (noting that Germany has detailed rules governing amount court fees, cost of legal proceedings, and attorneys' fees); id. at 8.9.3 (noting that in the Netherlands the winning party will never recover the actual costs of the litigation because costs are based on certain standard amounts for certain standard activities and the amount of the claim and that the "costs for legal representation are awarded on the basis of fixed amounts which usually do not cover the real costs"); NEW CODE OF CIVIL PROCEDURE IN FRANCE 143 (Francoise Grivart de Kerstrat & William E. Crawford trans., 1978) (noting that under article 695 costs awarded include "advocats' fees insofar as they are regulated"); see also ANN C. M. J. SCHOT, LEGAL ASPECTS OF FOREIGN INVESTMENT IN THE SOCIALIST REPUBLIC OF VIETNAM 17.4.3 (1996) (stating that, in Vietnam, the losing party in an arbitral proceeding is required to pay arbitration fee, which, for small cases, is fixed at certain amount and, for larger cases, is determined by multiplying the amount claimed by varying percentage).

168. Presumably, interpreting article 74 to enable a successful claimant to recover its litigation expenses would also trump as being inconsistent with the principle of full compensation laws, rules and practices giving a court or tribunal the authority to decline to award litigation expenses in certain situations, such as where the issues are particularly difficult. See Act on the Reform of the Law Relating to Arbitral Proceedings, December 22, 1997, BGB1. I at 3224 1057 (F.R.G.), translated in Germany: Act on the Reform of the Law Relating to Arbitral Proceedings, 37 I.L.M. 790 (1998) [hereinafter German Arbitration Law of 1998]. The Act provides:

Unless the parties agree otherwise, the arbitral tribunal shall allocate, by means of an arbitral award, the costs of the arbitration as between the parties, including those incurred by the parties necessary for the proper pursuit of their claim or defence. It shall do so at its discretion and take into consideration the circumstances of the case, in particular the outcome of the proceedings.

See also International Arbitration Act, art. 27(1)-(2) (1974) (Austl.) (providing that the arbitrator has discretion over award of costs in the absence of agreement by parties); Vietnam, in DOING BUSINESS IN ASIA, VIT 70-015, at 87,432 (Asian Law Centre & Univ. of Melbourne eds., 1996) (stating that in Vietnam the Economic Court maintains full discretion over "the costs, security for costs and any delay associated with litigation"); Smadar Ottolenghi, Israel (Aug. 1984), in 2 INTERNATIONAL HANDBOOK ON COMMERCIAL ARBITRATION, supp. 23, at 18-19, (Pieter Sanders & Albert Jan Van Den Berg eds., 1998) (noting that in Israel, unless parties agree otherwise, arbitrators maintain full discretion to determine and allocate their own fees, as well as other costs of arbitration, and commonly award fees and costs to winning party); Nancy B. Turck, Saudi Arabia (Jan. 1994), in 3 INTERNATIONAL HANDBOOK ON COMMERCIAL ARBITRATION, supra, at 29 (1998) (noting that in Saudi Arabia arbitrators have authority to determine the amount and allocation of fees between the parties); International Centre for Settlement of Investment Disputes Proceedings, Rule 28 (1984) (giving tribunals discretion to allocate costs and fees among the parties); [hereinafter ICSID Arbitration Rules] International Chamber of Commerce Rules of Arbitration art. 31 (1988) (providing that the tribunal, in the final award, "shall fix the costs of the arbitration and decide which of the parties shall bear them or in what proportion they shall be borne by the parties.").

Of course, one may argue that the ability to recover attorneys' fees and costs is a substantive matter that is governed by the Convention, but the determination of the amount is a procedural matter that is subject to applicable local law and rules. This distinction is highly artificial and would be contrary to the principle of full compensation and the need for uniformity, particularly because recovery of litigation expenses would vary depending on the applicable procedural law or rules.

169. For example, in a dispute governed by the Convention and taking place in Australia, a successful respondent would likely have their award of attorneys' fees significantly limited by the nation's procedural laws which generally prohibit full awards of attorneys' fees. If this same dispute was resolved in a country that did not have such limits, however, the respondent would likely receive a higher award. Thus, while the CISG is attempting to create uniformity, awarding attorneys' fees would ultimately undermine the principles of the Convention, more so than not having a set of uniform rules at all.

170. Interpreting article 74 to allow for the recovery of attorneys' fees and costs would not be entirely compatible with the purposes of awarding such fees and costs. While the policy behind the awarding of attorneys' fees is predominantly to fully compensate the aggrieved party, awarding of such fees also serves the purposes of deterrence and punishment. See Jennifer F. Reinganum & Louis L. Wilde, Settlement, Litigation, and the Allocation of Litigation Costs, 17 RAND J. ECON. 557, 563 (1986) (discussing the deterrence function awarding attorneys' fees serves); Wetter & Priem, supra note 163, at 329 (arguing that courts awarded costs and fees in order to punish an unsuccessful plaintiff for bringing a false claim or to fine a losing defendant for unjustly refusing the plaintiffs right). The latter is clearly not a policy to be furthered by article 74.

171. See Zapata Hermanos Sucesores v. Hearthside Baking Co., 313 F.3d 385, 388 (7th Cir. 2002) (noting that "certain prelitigation legal expenditures, for example expenditures designed to mitigate the plaintiff's damages, would probably be covered as incidental' damages" (citing RESTATEMENT (SECOND) OF CONTRACTS 347 cmt. c (1981)); Stoll & Gruber, supra note 57, at 755-56 (concluding whether or not extra-judicial expenses are recoverable is issue of foreseeability). However, commentators note that the use of debt collection agencies has typically been regarded as not foreseeable and, thus, not ordinarily recoverable under the Convention. Id.

172. CISG, supra note 2, art. 77.

173. See John Felemegas, Comparison Between Provisions of the CISG Regarding the Right to Require Specific Performance (Arts. 28, 46 and 62) and the Counterpart Provisions of the UNIDROIT Principles (Arts. 7.2.1 -- 7.2.5), available at <http://www.cisg.law.pace.edu/cisg/biblio/felemegas13.html> (stating "the Convention ... adopts the principle of contractual performance of the parties' obligations"); cf. UNCITRAL Digest of Case Law on the United Nations Convention on the International Sale of Goods, U.N. Doc. A/CN.9/562 (Jun. 9, 2004), available at <http://www.uncitral.org/english/clout/digest_cisg_e.htm> ("Under the Convention the contractual bond should be preserved as far as possible while the termination of the contract should be available as a last resort (ultima ratio) only if the continuation of the contract would no longer be tolerable.").

174. HONNOLD, supra note 2, at 466 (citing B. NICHOLAS, COMMENTARY 570).

175. Id. at 467.

176. Id.

177. Gotanda, supra note 56, at 58-59.

178. Article 58 provides:

(1) If the buyer is not bound to pay the price at any specific time, he must pay it when the seller places either the goods or documents controlling their disposition at the buyer's disposal in accordance with the contract and this Convention. The seller may make such payment a condition for handing over the goods or documents.

(2) If the contract involves carriage of the goods, the seller may dispatch the goods on terms whereby the goods, or documents controlling their disposition, will not be handed over to the buyer except against the payment of the price.

(3) The buyer is not bound to pay the price until he has had an opportunity to examine the goods, unless the procedures for delivery or payment agreed upon by the parties are inconsistent with his having such an opportunity.

CISG, supra note 2, art. 58.

179. Internationales Schiedsgericht der Bundeskammer der gewerblichen Wirtschaft [Arbitral Tribunal] Vienna, Jun. 15, 1994, docket No. SCH-4318 (Austria), <http://cisgw3.law.pace.edu/cases/940615a4.html>.

180. HONNOLD, supra note 2, at 466-67.

181. See JOHN Y. GOTANDA, SUPPLEMENTAL DAMAGES IN PRIVATE INTERNATIONAL LAW 15-41 (1998) (containing comparative study of laws on interest). For example, in the United States, many states have statutorily fixed interest rates, which typically range from six to twelve percent. See, e.g., ALASKA STAT. 45.45.010 (2004) ("The rate of interest in the state is 10.5 percent per year and no more on money after it is due."); D.C. CODE 28-3302 (2005) ("The rate of interest in the District upon the loan or forbearance of money, goods, or things in action in the absence of expressed contract, is 6% per annum."); MASS. GEN. LAWS ch. 231, 6B (2005) ("There shall be added by the clerk of the court to the amount of interest thereon at the rate of twelve percent per annum."); N.Y. C.P.L.R. 5004 (McKinney 2005) ("Interest shall be at the rate of nine percent per annum.").

182. See CISG, supra note 2, arts. 74-76.

183. The savings vehicle should be easily accessible to the average entity in the claimant's position. It could be a certificate of deposit, money market account or commercial savings account.

184. See John Y. Gotanda, Compound Interest in International Disputes, 2004 OXFORD U. COMP. L. FORUM 1, <http://ouclf.iuscomp.org/articles/gotanda.shtml>. A fixed interest rate could actually encourage the debtor to delay resolution. If the prevailing market interest rate is higher than the interest rate set by statute, the debtor could essentially earn money by delaying payment, earning a high return on the invested funds. This method also avoids overcompensating the claimant when the prevailing savings rate is much lower than the fixed statutory rate.

185. See David J. Branson & Richard E. Wallace, Jr., Awarding Interest in International Commercial Arbitration: Establishing a Uniform Approach, 28 VA. J. INT'L L. 919, 943 (1988).

186. See J. Gillis Wetter, Interest as an Element of Damages in the Arbitral Process, INT'L FIN. L. REV., Dec. 1986, at 22-23.

187. This will avoid the complex process of supplementing a statutory rate of interest to reflect inflation to fully compensate a claimant for its loss. In some instances, such as in the United States and Europe where there are many different savings instruments, it may be difficult to determine the appropriate rate. In these cases, it may be helpful to look to the place of business of the claimant as a tiebreaker if necessary.

188. Quarterly compounding is a compromise, attempting to provide the claimant with full compensation without burdening tribunals with excessively complicated calculations. Daily compounding can be burdensome, especially if interest accrues over a long period of time. Yearly compounding may not fully compensate the claimant for two reasons. First, most savings vehicles are compounded on a more regular basis. Second, yearly compounding is not responsive enough to market and currency value fluctuations to fully satisfy the claimant for its loss. Quarterly compounded interest is generally accepted in commercial investment vehicles.

189. See generally Gotanda, supra note 184.

190. Id.

191. See Decision of Oct. 21, 1988, High Court of Bombay, reprinted in 25 Y.B. COM. ARB. 465, 488 (1990). Compound interest is regularly awarded in the United States and also is available in some Asian countries under specific conditions. See MINPO art. 405 (Japan); Civil Code art. 207 (P.R.C.).

192. For, example, a business engaged in transnational activities could invest the money in a short-term investment vehicle, such as a ninety-day Eurodollar deposit rate.

193. See Onti, Inc. v. Integra Bank, 751 A.2d 904, 926-27 (Del. Ch. 1999) (recognizing that business persons seek to earn maximum amount of return on their money, which is usually achieved by compounding interest); see also Peter Canellos & Edward Kleinbard, The Miracle of Compound Interest: Interest Deferral and Discount After 1982, 38 TAX L. REV. 565, 566 (1983).

194. If, however, the business chose to reinvest its earnings in its own company, a compound rate of return would still result. This is because the business would be accelerating its growth, which would also increase the businesses' intrinsic value and increase its stock price. Cf. Carol Loomis, Warren Buffet on the Stock Market, FORTUNE, Dec. 10, 2001, at 81-86 ("Well-managed industrial companies, do not as a rule, distribute to shareholders the whole of their earned profits. In good years, if not in all years they retain a part of their profits and put them back in the business. Thus there is an element of compound interest operating in favor of a sound industrial investment.").

195. See F.A. MANN, FURTHER STUDIES IN INTERNATIONAL LAW 384-85 (1990) ("It is completely wrong to attach any significance to the fact that the award of interest, or compound interest may lead to the payment of a sum exceeding the capital due from the wrongdoer.").

196. See Gotanda, supra note 56, at 58.

197. Avoiding unjust enrichment is another concern under article 78, but it is not as important as fully compensating the aggrieved party and maintaining uniformity in international contracts. See Zoccolillo, supra note 58, at 3-43.


Pace Law School Institute of International Commercial Law - Last updated May 25, 2006
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