Excerpt from John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, 3rd ed. (1999), pages 445-448. Reproduced with permission of the publisher, Kluwer Law International, The Hague.
§403 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. This is the role of the present article.
"Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract."
The standard established by Article 74 is brief but powerful. Damages consist of "the loss, including loss of profit suffered...as a consequence of the breach"—a standard that is designed to place the aggrieved party in as good a position as if the other party had properly performed the contract. See Treitel, Remedies (1988) 82 (basic principle of remedies). We shall have occasion to illustrate this principle in several settings. Difficulties in applying the legal rules may be minimized or avoided by a [page 445] well-drafted contract provision specifying ("liquidating") damages. See Kritzer Manual Ch. 6. But cf. CISG Art. 4(a) & UCC 2–718(1) (unreasonably large "liquidation" may be "void as penalty".)
§404 A. Relation Between Article 74 and Remainder of Section II
The measurement of damages in cases where the contract is avoided can best be considered in the setting of Articles 75 and 76, infra at §409, since these articles are addressed specifically to this problem. Thus, we shall temporarily put to one side the following situations: (a) The seller fails to deliver the goods on time or delivers goods that are seriously defective and the buyer declares the contract avoided (i.e., the buyer rejects or returns the goods); (b) The buyer fails to take delivery and pay for the goods and the seller declares the contract avoided (i.e., the seller refuses to deliver or recovers the goods). Nevertheless, the general rules of Article 74 on the recovery of damages are applicable to the above situations governed by Articles 75 and 76. For example, a failure of performance leading to avoidance of contract may reduce the volume of business of the aggrieved party and thus lead to loss of profit; under these circumstances the damages specified in Article 75 and 76 may be enhanced by the provision of Article 74 that damages may include "loss of profit". This question will be discussed under Articles 75 and 76 at §415.
When the goods are delivered to and retained by the buyer the only breach by the buyer is normally the failure to pay the price. This seldom presents problems of damage-measurement; under Article 62, supra at §345, the seller "may require the buyer to pay the price", and under Article 78, infra at §420, the seller "is entitled to interest" for the period that the payment is in arrears. (As we shall see, Article 78 provides generally for interest on any "sum that is in arrears" from either party.)[page 446]
§ 405 B. Damages Caused by Defective Goods and by Delays in Delivery
There remain cases where the buyer receives and uses goods that do not conform to the contract. Machinery may fail to function properly; defective raw materials may cause production problems in the buyer’s factory; goods purchased for resale may lead to complaints and claims by sub-purchasers. Similar problems may result from the late delivery of machinery or raw materials. For these cases, the primary rule is that of Article 74: The seller is responsible for "the loss...suffered" by the buyer "as a consequence of the breach".
Buyers may use or dispose of defective goods in a wide variety of circumstances; in some circumstances the losses resulting from nonconformity of the goods may be extreme and unpredictable. This possibility is dealt with in the second sentence of Article 74 which sets an outer limit—"the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract...." For example, suppose that the non-conformity (or delay in delivery) of a small item interrupts production in the buyer’s factory. The seller, of course, is responsible to the buyer for breach of contract. But if the seller did not know and could not have foreseen at the time of contracting that a defect in the goods or a delay in delivery might cause damages of such magnitude as the shutdown of a factory, the above provision of Article 74 could provide a ground for limiting the recoverable damages.
§ 407 (a) Sources in Domestic Law
This approach is well-known in the common-law world as the "foreseeability" or "improbability" test developed in the name of the 1854 English decision of Hadley v. Baxendale. [page 447]
The (U.S.A.) Uniform Commercial Code limits the buyer’s damages by language derived from the Hadley tradition. Where the buyer accepts goods that are non-conforming he may recover "the loss resulting in the ordinary course of events from the seller’s breach..." (§2–714(1)). The UCC also allows the buyer to recover "incidental" and "consequential" damages; the latter are defined (§2–715(2)) with a "foreseeability" limitation that is similar to that of Article 74 of the Convention:
A "foreseeability" limit is also well-known within the domain influenced by French law. The French Civil Code §1150 limits damages to those "which were foreseen or which could have been foreseen at the time of the contract", unless the breach was the result of "willfulness." Indeed, in the 1854 Hadley opinion, favorable reference was made to this rule of French law; the extent to which the English court relied on the French approach has been a subject for interesting but inconclusive speculation.
§ 408 (b) Foreseeable Damages
Decisions: (1) NETH. Arr-Rb. Roermond, 9201.59, 6 May 1993. G. IMAR v. Horst. S delivered 20 electric kettles to B. B did not pay and four months later claimed a set-off on the ground that 4 of the kettles were defective. B’s notice and claim of set-off were rejected. S was awarded the price, plus damages based on currency devaluation during B’s delay in payment. UNILEX D.1993–14. (2) But cf: GER. OLG Düsseldorf, 17 U 146/93, 14 January 1994. UNILEX D.1994-1. (Denied augmented damages based on currency devaluation.)
Comments: Draetta, U., Consequential Damages, 4 Int. Bus. L.J. 487–498 (1991); Darkey, J., Damages (CISG), 15 JLC 139–152 (1995), Murphey, A. G., Foreseeability & Hadley, 23 Geo. Wash. J. Int. L.& Com. 415–474 (1989); Schlechtriem, Tort & Contract: A New Frontier? 21 Cornell Int. L. J. 467–478 (1988); Schlechtriem, Com. (1998) 553–572 (Stoll).[page 448]
FOOTNOTES: Chapter on Article 74
1. Art. 74 is the same as Art. 70 of the 1978 Draft and closely follows ULIS 82. This provision did not provoke significant controversy. See VI YB 107, 62, VIII YB 59, O.R. 394, 131, Docy. Hist. 232, 253, 352, 615, 703.
2. Art. 74 drives home the Convention’s unified approach to the parties’ obligations and to remedies for breach. See Ch. 2, supra at §26. Intro. to Ch. II, Sec. III at §274. For the fragmented approach of some legal systems see Treitel, Remedies (Int. Enc.) §75; Treitel, Remedies (1988) Ch. V, 129–131.
3. Knapp, B-B Commentary 539. The provision in Art. 74 on unpredictable consequential damages, discussed infra at §406, may also apply to damages following avoidance of the contract .
4. Problems invoking the general rules of Art. 74 can arise from changes in exchange rates subsequent to the date when the buyer should have paid. See Hellner, The Limits of Contractual Damages in the Scandinavian Law of Sales, 10 Scan. Stud. 37, 60; Ziegel, Parker Colloq. 9–36, 9–38. For a 1978 German decision under ULIS 82 and 83 awarding damages for loss from changes in exchange rates during delay see UNIDROIT, 1979 Uniform Law Review, No. I, 344–348, citing Neue Juristische Wochenschrift 1979, 2480.
5. (1854) 9 Ex. 341, 156 Eng. Rep. 145, discussed in its historical setting in Danzig, 4 J. Legal Studies 249 (1975). See Benjamin §1277–1282; Atiyah, 417–418; Farnsworth, Contracts 873–881; Bridge, Sale 743–746; Murphey, 23 Geo. Wash. J. Int. L. & Econ. 415 (1989) Curiously, neither the Hadley judgment nor (U.K.) SGA (1893) explicitly states the rule in terms of "foreseeability", SGA 50(2), 51(2) and 53(2) all refer to "loss directly and naturally resulting in the ordinary course of events" from the breach. For a thorough review of rules in the common-law world and an analysis of civil law developments see Treitel, Remedies (Int. Enc.) §84 et seq. See also: Treitel, Remedies (1988) 150–173; Treitel, Contract, 744–753; Nicholas, French Law of Contract 223–226 (1982).
6. For case law under the UCC see White & Summers §10–4. See also 5 Corbin §§1007–1014.
7. For a careful analysis and critique of the use of German concepts in Scandinavia, see Hellner, The Limits of Contractual Damages in the Scandinavian Law of Sales 10 Scan. Stud. 37, 40–79; the author suggests, inter alia, wider judicial discretion to limit "consequential" damages. See also: Cooke, Remoteness of Damage and Judicial Discretion,  Camb. L.J. 288.