Go to Database Directory || Go to Bibliography
Search the entire CISG Database (case data + other data)
Reproduced with permission of 13 Vindobona Journal of International Commercial Law & Arbitration (1/2009) 217-228

Fixed Sums in CISG Contracts

Pascal Hachem [*]

  1. Introduction
          1.1     General
          1.2     The position of the CISG
  2. Debtor protection
          2.1     Comparative overview
          2.2     Debtor protection under CISG contracts
                    2.2.1     The standard of the CISG
                    2.2.2     Consequences
  3. Conclusion

1. INTRODUCTION

Dear Ms. Schlechtriem, Ladies and Gentlemen. Being an alumnus from the Albert-Ludwigs-University Freiburg in Breisgau and having worked for the late Professor Schlechtriem, the author feels particularly honoured to have been invited to this symposium. Against the background of Professor Schlechtriem's outstanding achievements, his lasting influence on legislation, legal academia as well as legal practice and, not least, on the generations of law students who have benefited from his work and will continue benefiting from it, the author has to apologise from the outset for his rather basic remarks.

Fixed sums in commercial contracts payable upon breach of an obligation remains one of the most discussed issues in comparative law.[1] The eminent practical importance of clauses stipulating sums for non-performance has also made them a sun that never sets on the CISG horizon.

1.1 General

The cases in which parties include such clauses are manifold. Typical examples include a particular interest in the timely delivery of goods, payment of the purchase price or completion of a certain work, and adherence to a confidentiality or non-competition agreement. Furthermore, the law applicable to the contract may not acknowledge certain detriments as 'losses' and may deny compensation for the breach of an obligation leading to a detriment. This may, for instance, be the situation where [page 217] chances are lost,[2] reputation is damaged, or legal costs are not compensated.[3] Finally, the complexity of the contract may bring about serious problems in proving loss. In these latter cases, fixed sums reduce legal costs, time for producing evidence, and the risk of losing litigation or arbitral proceedings due to the required level of proof not being met.

Numerous other examples could be added. Those given, however, already allow the identification of three essential functions [4] of fixed sums in commercial contracts: Securing performance,[5] compensating,[6] and liquidating detriments incurred.[7] Naturally, these functions overlap and often more than one is given in a particular [page 218] case.[8] Their respective importance also differs in relation to the area of industry and the type of contract in which they are used.

1.2 The position of the CISG

With regard to international sales of goods, the CISG does not contain any provision addressing fixed sums in commercial contracts payable upon breach of an obligation. Unsuccessful efforts were made before the Vienna Conference to have a specific provision dealing with this issue included.[9] This matter was considered to raise too many technical problems and, in light of its practical importance, to require an individual uniform instrument.[10] This resulted in the 1983 Uniform Rules on Contract Clauses for an Agreed Sum Due upon Failure of Performance [11] which however, do not form a convention. Rather, the General Assembly has recommended that these rules be implemented in the form of a convention or model law.[12]

Nevertheless, at least two points are certain. The CISG covers the formation of a clause containing a fixed sum,[13] and the second alternative of Art. 6 CISG allows for the modification of and the derogation from any of the provisions of the Convention. It follows that the CISG is generally capable of determining consent to such clauses and accepting its provisions on remedies -- and here in particular those on damages -- to step back.[14] [page 219]

The main aspect to be addressed here is the protection of the debtor from the sum stipulated in the contract or from the deterring effect it purports to have.

2. DEBTOR PROTECTION

The question relating to the protection of the debtor of fixed sums payable upon breach of an obligation touches upon various issues. It also raises very practical questions because of their frequent use of such clauses. Parties have a genuine interest in legal certainty regarding the fate of their agreements. On the other hand, the approach taken towards clauses stipulating sums payable upon breach of an obligation also leads back to the theoretical underpinnings of contract law and here in particular, to the general understanding of the law of damages.

2.1 Comparative overview

Legal systems have reacted to the problem of protecting the debtor against fixed sums in different ways. While there is global consent amongst legal systems to accept clauses which primarily act as compensation or liquidation mechanisms, this is different for clauses which act as a deterrent towards the debtor of a secured obligation. Here, the well known standard feature of the debate is the dividing line between Common Law and Civil Law legal systems in approaching such clauses. The often repeated (but too general) rule is that in Common Law legal systems these clauses will not be enforced as penalties, while, by contrast, Civil Law countries uphold all clauses, but regularly allow judges or arbitrators to reduce the stipulated sum in question where it is deemed excessive.

The default mechanism of generally accepting clauses stipulating sums payable upon breach of an obligation, while granting judges the possibility to reduce excessive sums is, however, not to be found only in Civil Law legal systems [15] and uniform projects,[16] but also in mixed jurisdictions which follow exactly the same approach [17] or at least apply the same mechanism to liquidated damages.[18] Other legal systems are rather strict in compelling the parties to the clauses agreed upon by merely establishing [page 220] formal requirements for the stipulated sum,[19] or do not even establish formal requirements nor the possibility to reduce the fixed sum when it has been stipulated between merchants.[20] This latter approach is mainly based on the notion that parties active in commerce are assumed to have equal bargaining power and are therefore not considered to be in need of protection apart from the general boundaries of party autonomy.[21]

The situation in Common Law legal systems is far less clear than the abovementioned general rule suggests.[22] The only thing certain is that a distinction has to be made between liquidated damages clauses and penalty clauses.[23] In this regard significant efforts have been made and are still being undertaken, and find their primary basis in the famous decision of the English House of Lords in Dunlop Pneumatic Tyre Company, Ltd. v. New Garage and Motor Company, Ltd. [24] Without repeating the suggested four-tier approach taken by the House of Lords in its entirety; it should suffice to mention the decisive test: the requirement that the clause be a genuine pre-estimate of the loss, as opposed to operating in terrorem so as to induce performance by the counterparty.[25]

Once a clause has been held to operate in terrorem, the consequences are uncertain. A variety of terms are used to describe the fate of the clause including 'unenforceable', 'invalid', 'disregarded', or 'replaced'.[26] Indeed, the position among Common Law legal systems is split. Under the American 2-718(1) UCC, clauses identified as penalties are invalid - meaning they are struck out of the contract.[27] The same approach is taken in Canada [28] and Australia.[29] The English Court of Appeals however, [page 221] has denied this notion for English law.[30] Rather, the court has held that the strict legal position is that the clause remains in the contract and a suit may be based upon it, but the clause will not be enforced by the court beyond the sum which represents the actual loss of the party seeking payment.[31]

This decision of the English Court of Appeals shows striking similarities to the supposedly Civil Law approach of reducing excessive clauses. It also shifts the focus from allowing such clauses to the reference point to be used when reducing an excessive sum. Furthermore, some Civil Law legal systems take a position similar to that of English law by either providing that the stipulated sum must not exceed the value of the principal obligation [32] or otherwise must provide for a certain ratio between the sum stipulated and the principal obligation.[33]

The economic similarities between English law and these latter Civil Law legal systems follow from the fact that compensation for loss is generally understood in such a way that the position of the aggrieved party must be indifferent to the position it would have been in had no breach occurred. Then it is first of all the value of specific performance which must be compensated for. With regard to loss of profit, English law may grant enforcement of the clause to the extent which includes loss of profit insofar as it is included in the notion of 'actual loss'. In those Civil Law legal systems which restrict the fixed sum to the value of the principal obligation this result can be achieved either by granting an additional damages claim,[34] or by holding the notion of the value of the principal obligation to include loss of profit.

2.2 Debtor protection under CISG

2.2.1 The standard of the CISG

As discussed above, the CISG does not contain any provision specifically dealing with fixed sums payable upon breach of an obligation. According to Art. 4, sentence 2(a) CISG, the Convention is not concerned with the validity of the contract or any of its provisions. This question is left to the applicable domestic law. Although there are uncertainties as to what constitutes validity,[35] there can be no doubt that the issue [page 222] whether a clause containing a fixed sum payable upon breach of an obligation is admissible in a contract is to be decided by the applicable domestic law.[36]

Independent of the individual approach taken by legal systems towards fixed sums, the subject matter is always whether and to what extent a clause should be upheld in a contract. In other words, from a functional perspective, some legal systems may completely invalidate clauses while others partially invalidate them by reduction of the sum agreed upon; then again, some legal systems uphold clauses in their entirety and only subject to unconscionability and immorality, which is again a question of validity.

Judges or arbitrators faced with a contract subject to the CISG and containing a fixed sum payable upon a breach therefore have to resort to the domestic law applicable to the contract by default. However, the CISG provides the backdrop against which the validity of the clause in question or -- more precisely -- the extent of its validity, is to be measured. To put it in Civil Law terms, whether a clause is excessive under the circumstances is not to be decided in light of what is held to be excessive in the circumstances of domestic contracts, but to be determined by applying an international standard. To put it in Common Law terms, whether a sum stipulated is a genuine pre-estimate of the loss -- which in the end is always a test of reasonableness -- must not be decided in accordance with domestic case law but in light of what is reasonable in international trade. The international standard against which the clause in question is to be assessed in turn has to be derived from the CISG.

Determining the standard established by the CISG means interpreting the Convention's Art. 7(1). Thereby solutions have to be developed which are acceptable in different legal systems with different legal traditions and cultures -- a task which becomes particularly visible with regard to the subject matter discussed in this article. In developing standards acceptable in different legal systems the general notions of party autonomy and pacta sunt servanda as well as the general understanding of the law of damages become relevant.

The principle of party autonomy, as laid down in Art. 6 CISG, and the principle of pacta sunt servanda can be regarded as globally acknowledged in private law, notwithstanding that the boundaries established to this freedom and the extent of the latter principle by individual legal systems may vary greatly.[37] Consequently, the [page 223] CISG is familiar with acknowledging parties to freely enter into contractual terms and keeping them to their promise.[38]

It is a separate question as to whether the possibility of inducing performance by making use of a fixed sum is also part of the international standard established by the CISG, i.e. whether party autonomy provides sufficient grounds in international trade to do so. In other words, it has to be established whether the general principle of party autonomy underlying the CISG and its provisions on damages provide a sufficient basis to this end.

This question is fairly easy to answer for those legal systems which accept all clauses containing fixed sums regardless of their purpose, and independent of the amount of the sum fixed. Even if an excessive sum is subsequently reduced, the fact remains that pressuring performance of the obligation in kind (and thus re-enforcing the principle of pacta sunt servanda) is possible in these legal systems. In the vast majority of Civil Law legal systems, mixed jurisdictions, and also pursuant to outcomes of the uniform law projects, establishing such a principle as being standard in international trade is acceptable and is in accordance with the requirement of Art. 7(1) CISG with regard to the international character of the Convention when interpreting it.

However, the mandate of Art. 7(1) CISG also requires the standard to be acceptable to those legal systems which take a different stance. This in particular relates to Common Law legal systems. Here, it must be established that the test of whether a fixed sum is a genuine pre-estimate of the loss in international sales contracts can also be influenced by clauses inducing performance by the respective counter-party. In this author's opinion there are several reasons supporting this position.

The traditional Common Law position with regard to liquidated damages rests on two essential pillars. First, the history of penal bonds in English law and, second, -- pertaining particularly to the USA and having been developed in more recent times -- the efficient breach doctrine as introduced by the theory of the economic analysis of law. Today, it is the second notion that receives the most attention. But even among proponents of the economic analysis of law there is a growing tendency holding that a term freely entered into by the parties should be strictly enforced and that the [page 224] paternalistic approach prevalent so far in the law on liquidated damages is hardly compatible with the otherwise praised freedom of contract.[39]

Much has been said about the general weaknesses of the efficient breach doctrine and the discussion cannot be reported here in full -- only two remarks shall be made.[40] First, the basic model of the efficient breach doctrine involving three parties operates on the basis of a set of over-simplified facts. Among other things, this does not take into account buyers who would possibly have been able to re-sell their goods at an even price higher than that paid by the buyer to whom the goods were actually delivered.

Second, the efficient breach doctrine raises serious concerns as to its effect on market stability, as it disappoints parties trusting to receive what they expect when engaging in a market. Moreover, the doctrine is prone to cause losses of goodwill on the side of those buyers who have to pay their customers damages for non-performance or, even worse, 'gain' a reputation of being unreliable contracting partners - which is particularly dangerous in highly competitive and/or volatile markets. With the loss of goodwill often (still) not being recognised as a 'loss' in a technical sense, the buyer will in the first case be regularly under-compensated. In the second case, the buyer will never be able to prove which contracts were not concluded where it is alleged to be unreliable, which may cause long-term economic detriment to the buyer.

Further arguments for the author's position that Common Law legal systems may permit parties to a CISG contract inducing performance using fixed sums can be derived from the general understanding of the law of damages in Common Law.

There is increasing acceptance of the notion that the law of damages protects the interest in the performance of the contractual obligations owed and not merely the economic balance sheet. This issue has recently received attention under the heading of 'Economic Benefits Principle v. Performance Principle'.[41] In particular, English case law has repeatedly been involved in this development. Jarvis v. Swan Tours,[42] Ruxley Electronics and Construction Ltd. v. Forsyth,[43] Farley v. Skinner [44] and -- most [page 225] notably -- Attorney General v. Blake [45] have provided support for those advocating the 'Performance Principle'.

Moreover, the notion that contract damages often, if not regularly, under-compensate the aggrieved party can now often be found in scholarly writings by authors with Common Law backgrounds.[46] One of the results is that an increasing number of authors advocate abandoning the traditional rule, according to which punitive damages may not be awarded in contract cases [47] where the breach has been committed in bad faith.[48] Some courts have already followed this approach in insurance cases and for labour contracts.[49] Others favour the invention of a new basis for damages altogether which they call 'vindication'.[50]

Putting together the developments outlined in Common Law, the exception made for fixed sums from the general principle that terms freely entered into have to be strictly enforced seems to be subject to increasing criticism and the traditional position of the law on liquidated damages in Common Law legal systems may see a change in the near future. This view is supported by the 'Economic Benefits Principle' being in remission and the 'Performance Principle' gaining strength. It follows that it is also acceptable for Common Law legal systems that contractual provisions on damages may be designed to protect the interest in performance of the obligation owed.

The standard in international trade and, thus, applicable under the CISG, therefore allows parties to include fixed sums into their contracts. Party autonomy in international trade at the same time provides a sufficient basis for the parties to use such clauses to induce performance by the respective counter-party. As the remarks made above have demonstrated, this standard is acceptable on a global scale and thus [page 226] serves as a backdrop against which domestic tests of the validity of clauses are to be applied.

2.2.2 Consequences

Fixed sums which are stipulated in CISG contracts litigated in Common Law courts should therefore not fail the genuine pre-estimate of the loss test simply because they seek to induce performance of the obligation owed. Rather, they should fail this test if they are excessive in relation to that goal, i.e. where they are disproportionate in the context of the individual contractual relationship. At least for English law and legal systems frequently employing English solutions, this approach is new only insofar as more functions may be assumed by the clause in question under the CISG. The mechanism of restricting clauses as to their validity is even -- as Jobson v. Johnson shows -- the strict position of English law. Within other Common Law legal systems the application of the standard established is consequent in light of their developments to the law of damages and the fact that they have significantly contributed to this standard by helping to shape the general understanding of the CISG provisions on damages.

For the majority of Civil Law legal systems, the position advocated here does not impact on their current position in relation to fixed sum damages provisions in contracts. However, the very specific question of fixed sums payable upon breach of an obligation as dealt with here may be used in re-evaluating the Civil Law understanding of damages, particularly in German-speaking countries and legal systems employing Germanic solutions. This pertains especially to the different functions assumed by the law of damages. In sum, the issue of the 'Economic Benefits Principle v. Performance Principle' so far has not received the attention it deserves.

3. CONCLUSION

Taking a global perspective, the remarks made here show that the majority of Civil Law legal systems allow parties to induce performance by stipulating a fixed sum payable upon breach while at the same time predominantly rejecting the notion of punitive damages.[51] On the other hand, Common Law legal systems to date reject such clauses drafted by the parties, but are witnessing a growing tendency towards awarding punitive damages in contract cases and a general strengthening of the 'Performance Principle'. The common ground therefore seems to be that inducing performance by the debtor is generally desirable. The main difference between the legal systems is thus the question of who is in charge of doing so. While Civil Law [page 227] legal systems understand this to be the responsibility of the parties, Common Law legal systems rely on the law of damages.

From a comparative point of view, there is an excellent chance that the CISG will lead to further harmonisation among legal systems regarding the treatment of fixed sums. The standard applicable under the CISG to the test of the validity of these clauses as advocated herein enables legal systems to handle a matter of eminent practical importance with their own instruments, while at the same time respecting the mandate of Art. 7(1) of the CISG. It may furthermore fuel developments outside of the specific question dealt with here. The author believes this to be at least an arguable method to maintain and to foster uniformity in international sales law, which not least has been achieved by the singular commitment and dedication of Professor Schlechtriem. [page 228]


FOOTNOTES

* Ref. (Freiburg i.Br.), ACIArb, Senior Research and Teaching Assistant, Chair of Private Law, Prof. Dr. Ingeborg Schwenzer, LL.M., Faculty of Law, University of Basel, Switzerland. The author is co-author of the Global Sales Law Project and is writing his doctoral thesis on penalty and liquidated damages clauses in commercial contracts.

1. See the expression used by Miller, L., "Penalty Clauses in England and France: A Comparative Study" (2004) 53 International and Comparative Law Quarterly 79: 'rewarding area for comparative research'.

2. With regard to the CISG the majority of authors have denied compensation for loss of a chance, see: Stoll, H. and Gruber, G., in Schlechtriem, P. and Schwenzer, I. (eds), Kommentar zum Einheitlichen UN-Kaufrecht (CISG), 4th ed., 2004, Beck, Munich, Art. 74, at para. 23. The preferable contrary view is, however, gaining ground: see CISG-AC, Opinion 6 (Rapporteur: Gotanda), Comment 3.15; Schwenzer, I., in Schwenzer, I. (ed), Schlechtriem / Schwenzer, Kommentar zum Einheitlichen UN-Kaufrecht (CISG), 5th ed., 2008, Beck, Munich [hereinafter cited as 'Kommentar (5th ed.)'], Art. 74, at para. 37; Saidov, D., "Damages: The Need for Uniformity" (2006) 25 The Journal of Law and Commerce 400; Schwenzer, I. and Hachem, P., "The Scope of the CISG Provisions on Damages" in Saidov, D. and Cunnington, R. (eds), Contract Damages: Domestic and International Perspectives, 2008, Hart Publishing, at p. 98. Probably also Brölsch, MW., Schadensersatz und CISG, 2007, Lang, Frankfurt a.M., at p. 61. See also Art. 7.4.3(2) of the 2004 UNIDROIT Principles of International Commercial Contracts.

3. With regard to the CISG, the correct majority view holds that compensation for legal costs may not be sought under Art. 74 CISG: see Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Company, U.S. Ct. App. (7th Cir.), 19 November 2002, available at: CISG-online 684; Schwenzer, I., in Kommentar (5th ed.), supra fn 2, Art 74, at para 30; Flechtner, HM. and Lookofsky, J., "Viva Zapata! American Procedure and CISG in a U.S. Circuit Court of Appeals" (2003) 7 Vindobona Journal 93. Concurring with this decision, CISG-AC, Opinion 6 (Rapporteur: Gotanda), Comment 5.4; Schlechtriem, P., "Verfahrenskosten als Schaden in Anwendung des UN Kaufrechts" (2006) Internationales Handelsrecht 51, who has suggested using penalty clauses to ensure compensation. For comparative views on compensation for legal costs see Schwenzer, I., "Rechtsverfolgungskosten als Schaden" in Gauch P. et al (eds), Melanges en l'honneur de Pierre Tercier, 2008, Schulthess, at pp. 417 ff; Gotanda JY., "Awarding Costs and Attorneys' Fees in International Commercial Arbitrations" (1999) 21 Michigan Journal of International Law 1.

4. Berger, KP., "Vertragsstrafen und Schadenspauschalierungen im Internationalen Wirtschaftsvertrags-recht" (1999) Recht der Internationalen Wirtschaft 401 only distinguishes two functions: securing performance and facilitating the enforcement of damages claims. In this author's view, Berger's approach does not seem to cover the case where a certain detriment is not acknowledged as 'loss' under the respective provisions on damages but restricts the second function to purposes of proof.

5. Some civil codes (hereinafter cited as 'CC') which contain provisions on contractual penalties actually use this function to define them, see for e.g. Argentina Art. 652 CC; Belarus Art. 310 CC; Brazil Art. 409 CC; Chile Art. 652 CC; Colombia Art. 1592 CC; El Salvador Art. 1406 CC; Ecuador Art. 1578; France Art. 1226 CC; Lithuania Art. 6.71(2) CC; Luxemburg Art. 1226 CC; Romania Art. 1066 CC; Uruguay Art. 1363; Venezuela Art. 1.257 CC; Vietnam Art. 377 CC. See also Art. 2005 of the Louisiana Civil Code: 'That stipulation gives rise to a secondary obligation for the purpose of enforcing the principal one'.

6. This function is also specifically addressed by legal systems, see, e.g., for France Art. 1229 CC.

7. Limitation of liability is not an original function of fixed sums. A clause limiting the liability of the debtor to a certain amount of money does not pre-empt the creditor from proving loss in at least that amount. A clause stipulating a fixed sum primarily aimed at making proof of loss superfluous and excluding further remedies is a factual limitation of the debtor's liability but only as a side-effect.

8. The Bulgarian Civil Code in Sec. 92 names all of them to define 'liquidated damages'. See also Miller, Penalty Clauses, supra fn 1, at p. 82; Berger, Vertragsstrafen, supra fn 4, at p. 401.

9. In 1977 the Committee of the Whole I considered a proposed article on liquidated damages. However, the Committee recommended UNCITRAL to 'request the Secretary-General to consider [ ... ] the feasibility and desirability of establishing a uniform regime governing liquidated damage clauses in international contracts', UNCITRAL Yearbook VIII (1977), at p. 60. Furthermore, the Israeli government made a proposal in regard to the draft approved of by UNCITRAL in 1979 to 'include a provision in the section on damages making the a rate of damages agreed in the contract binding, unless reduced by the court for being excessive', Official Records (O.R.), at p. 81.

10. See UNCITRAL Yearbook VIII (1977), at p. 60.

11. The full text is available at: <http://www.uncitral.org/pdf/english/texts/sales/contract/voll4-p272-273-e.pdf>.

12. See General Assembly 38th Session, at p. 270.

13. See Ferrari, F., in Kommentar (5th ed.), supra fn 2, Art 4, at para 40; Magnus, U., in Staudinger, J. (ed), Staudingers Kommentar zum Bürgerlichen Gesetzbuch, CISG, 13th ed., 2005, Berlin, Gruyter/Sellier [hereinafter cited as 'Staudinger'], Art. 4, at para. 61; Benicke, C, in Schmidt, K. (ed), Münchener Kommentar zum Handelsgesetzbuch, Vol. 6, 2nd ed., 2007, Munich, Beck (hereinafter cited as 'MünchKommHGB'), Art. 4, at para. 21; see also Secretariat Commentary, Art. 42, at para. 10, available at: <http://www.globalsaleslaw.org/index.cfm?pageID=644#Article%201>.

14. See Schlechtriem, P., in Schlechtriem, P. and Schwenzer, I. (eds), Commentary on the UN Convention on the International Sale of Goods (CISG), 3nd ed., 2005, Oxford: Oxford University Press [hereinafter cited 'Commentary'], Art. 4, at para. 23; Schwenzer, I., Kommentar (5th ed.), supra fn 2, Art 74 at para. 58; Honnold, J.O., in Uniform Law for International Sales under the 1980 United Nations Convention, 3rd ed., 1999, Kluwer Law International, The Hague (hereinafter cited as 'Uniform Law'), at para. 403; Huber, P., in Rebmann, K. and Säcker, F. (eds), Münchener Kommentar zum Bürgerlichen Gesetzbuch, Vol. 3, 5th ed., 2008, Munich, Beck (hereinafter cited as 'MünchKommBGB'), Art. 74, at para. 57.

15. See, e.g., Argentina Art. 656 CC; Austria 1336(2) CC ('ABGB'); Belarus Art. 314 CC; Bulgaria S. 92 CC; Chile Art. 656 CC; China Art. 114 Contract Law; Colombia Art. 1601 CC; Ecuador Art. 1578 CC; Estonia 162(1) Law of Obligations; Finland Sec. 36(1) Unfair Contract Terms Act; France Art. 1152 CC; Georgia Art. 420 CC; Germany 343 CC ('BGB'); Italy Art. 1384 CC; Japan Art 420(1) CC; Lithuania Art. 6.73(2) CC; Luxemburg Art. 1152 CC; Paraguay Art. 459 CC; Peru Art. 1346 CC; Russia Art. 333 CC; Switzerland Art. 163 Code of Obligations; Uzbekistan Art. 326 CC.

16. See Art. 7.4.13(2) of the 2004 UNIDROIT Principles of International Commercial Contracts: Art. 9:509(2) of the 1999 Principles of European Contract Law.

17. For South-Africa, see S. 3 1962 Conventional Penalties Act. The Scottish Law Commission has also recommended adopting this approach: see Scottish Law Commission, Report on Penalty Clauses, 1999, at p. 10, available at: <http://www.scotlawcom.gov.uk/downloads/rep171.pdf>.

18. For Israel, see Art. 15(a) of the 1970 Remedies for Breach of Contract Law.

19. See, e.g., for the Czech Republic 544(2) CC, with the possibility of reducing fixed sums under 301 Czech Commercial Code only in respect of commercial contracts. Written form is also required in Belarus under Art. 312 CC; for Vietnam see Art. 377(2) CC.

20. See for Germany 348 Commercial Code ('HGB') expressly stating that reduction of a penalty clause under 343 BGB is not possible.

21. See Berger, Vertragsstrafen, supra fn 4, at p. 405.

22. A point well spotted by Miller, Penalty Clauses, supra fn 1, at p. 85.

23. In Civil Law legal systems the distinction between both types of clauses is only relevant if the application of the frequently existing provisions on penalties to liquidated damages is denied or otherwise leads to differences in the outcome of the case. This is, for example, the case under German domestic law with regard to standard terms. 309(1)(5)(a) BGB establishes specific requirements as to cases in which liquidated damages clauses are invalid, while 309(1)(6) BGB invalidates all types of penalties. Both provisions naturally apply only to consumer contracts ( 310 BGB), but are also used as guidelines in commercial contracts. See also for Japan Art. 420 CC, which equates penalties and liquidated damages.

24. [1915] A.C. 79 (H.L.).

25. Harsh criticism towards this approach has been expressed by the Scottish Law Commission, see Scottish Law Commission Report on Penalty Clauses, supra fn 17, at p. 8.

26. See Miller, Penalty Clauses, supra fn 1, p. 85, with references for these terms.

27. See DiMatteo, LA., "Penalties as Rational Response to Bargaining Irrationality" (2006) Michigan State Law Review 890.

28. See the decision of the Canadian Supreme Court in Elsley v. J.G. Collins Ins. Agencies Ltd. (1978) 2 S.C.R. 916, at p. 937.

29. See Lombard, C. and Goss, J., "Liquidated Damages an Penalty Clauses in Australia" (1994) Journal of International Banking Law 547.

30. See Jobson v. Johnson [1989] 1 W.L.R. 1026.

31. Ibid., at p. 1041.

32. See for Bolivia Art. 534 CC; Brazil Art. 412 CC; Mexico Art. 1843 CC; Portugal Art. 811(3) CC.

33. See for Vietnam Art. 378 CC: the fixed sum may be stipulated as a lump sum or as a percentage figure which must, however, not exceed 5% of the value of the principal obligation.

34. See, e.g., for Vietnam Art. 379 CC.

35. For an account of the views advocated, see Ferrari, F., in Kommentar (5th ed.), supra fn 2, at Art. 4, para. 16. The preferred and majority view interprets the term 'validity' in Art. 4(2)CISG autonomously and not in light of what the applicable domestic law determines to be a question of validity.

36. See ICC 7197/1992, available at CISG-online 36; Gerechtshof Arnhem, 22 August 1995, available at CISG-online 317; OLG München, 8 February 1995, available at CISG-online 143; Schlechtriem, P., in Commentary, supra fn 14, at Art. 4, para. 23; Schwenzer, I., in Kommentar (5th ed.), supra fn 2, at Art. 74, para. 58; Ferrari, F., in Kommentar (5th ed.), supra fn 2, at Art. 4, para. 40; Magnus, U., in Staudinger, supra fn 13, Art. 74, para. 60; Honnold, J.O., in Uniform Law, supra fn 14, at para. 403; Benicke, C, in MünchKommHGB, supra fn 13, at Art. 4, para. 21; Huber, P., in MünchKommBGB, supra fn 13, at Art. 74, para. 57.

37. Contrary to Western beliefs it is not naturally to be assumed that a legal system accepts choice of law clauses, as is e.g. the case with Brazil, see Stringer, D., "Choice of Law and Choice of Forum in Brazilian International Commercial Contracts" (2005-06) 44 Columbia Journal of Transnational Law 960. Hailing choice of law clauses as the golden way out of undesired laws, as is done by Brachert, S. and Dietzel, A., "Deutsche AGB-Rechtsprechung und Flucht ins Schweizer Recht" (2005) Zeitschrift für das gesamte Schuldrecht 44, is therefore short-sighted and does not help with the task to foster the international unification of law.

38. Article 28 CISG may not be relied upon to counter this argument. This provision only pertains to the remedy of specific performance. The other remedies available under the CISG are not subject to domestic law and protect the interest in the performance of the obligation.

39. Farnsworth, E.A., Farnsworth on Contracts, 32nd ed., Vol 3, 2004, Aspen, New York, at p. 300, states that the restriction on the parties' freedom in this respect is 'surprising'. See also DiMatteo, supra fn 27, at p. 887.

40. For convincing arguments against the efficient breach doctrine, see Friedman, D., "The Efficient Breach Fallacy" (1989) 18 Journal of Legal Studies 1.

41. See Coote, B., "Contract Damages, Ruxley, and the Performance Interest" (1997) 56 Cambridge Law Journal 537; Pearce, D. and Halson, R., "Damages for Breach of Contract: Compensation, Restitution and Vindication" (2008) Oxford Journal of Legal Studies 73; see also with regard to the CISG Schwenzer, I. and Hachem, P., supra fn 2, at pp. 93ff.

42. [1973] 2 QB 233.

43. [1996] AC 344 (H.L.). For comments and analysis, see Coote, B., supra fn 41, at pp. 537ff.

44. [2002] 2 AC 732 (H.L.). For comments and analysis see Holmes, R., "Mental Distress Damages for Breach of Contract" (2004) 35 Victoria University Wellington Law Review 699.

45. [2001] 1 AC 268 (H.L.). For comments and analysis see Jones, G., "Must the Party in Breach Account for Profits from his Breach of Contract" in Schwenzer, I. and Hager, G. (eds), Festschrift für Peter Schlechtriem zum 70. Geburtstag, 2003, Mohr Siebeck, at pp. 763ff.

46. See Sebert, JA., "Punitive and Nonpecuniary Damages in Actions Based upon Breach of Contract" (1986) 33 University of California Los Angeles Law Review 1571; Pearce, D. and Halson, R., supra fn 41, at pp. 79ff.

47. This rule goes back to Addis v. Gramophone [1909] AC 488 (H.L.).

48. See Sebert, JA., supra fn 46, at pp. 1565 ff; see also Cunnington, R., "Should punitive damages be part of the judicial arsenal in contract cases?" (2006) 26 Legal Studies 3, at pp.369-393; Burrows, AS., Remedies for Tort and Breach of Contract, 3rd ed., 2003, Oxford, at p. 409: '[ ... ] recent developments suggest that the rule in Addis [ ... ] may require reconsideration in the near future.' Contrary to this tendency see Kirby, A., "Punitive Damages in Contract Actions" (1997) 16 Journal of Law and Commerce 226.

49. See USA Fletcher v. Western National Life Insurance, Co., 7 August 1970, 10 Cal. App. 3d 376; Cleary v. American Airlines, Inc., 29 October 1980, 111 Cal. App. 3d 443; Huber v. Standard Insurance Co., 11 March 1988, 841 F.2d 980; Vernon Fire & Casualty Insurance Co. v. Sharp, 10 June 1976, 349 NE 2d 173; Hibschman Pontiac v. Batchelor, 13 May 1977, 362 NE 2d 845; for Canada see the decision by the Supreme Court in Whiten v. Pilot Insurance Co. (2002) 209 DLR (4th) 257. Criticism towards Canadian practice is expressed by Swan, J., "Punitive Damages for Breach of Contract: A Remedy in Search for Justification" (2004) 29 Queen's Law Journal 596.

50. See Pearce, D. and Halson, R., supra fn 41, at pp. 89 ff.

51. See also on this issue Hachem, P., "Prevention und Punitive Damages" in Wolf, S. et al (eds), Prävention im Recht, 2008, Helbing & Lichtenhahn, at p. 197 ff (the author advocates the compatibility of punitive damages with Swiss law stressing its deterring effect as expressing the principle of prevention underlying the law of damages).


©Pace Law School Institute of International Commercial Law - Last updated January 12, 2010
Go to Database Directory || Go to Bibliography
Comments/Contributions