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Excerpt from Djakhongir Saidov, The Law of Damages in International Sales: The CISG and other International Instruments, Hart Publishing (2008). Reproduced with the permission of the publisher. Click here to order the entire text, from the publisher's online bookstore; for U.S. orders, click here

Chapter 5. Foreseeability of Damages

Djakhongir Saidov

  1. General
  2. The Foreseeability Test
    2.1   General
    2.2   Relevant factors
            2.2.1   Knowledge
            2.2.2   Other factor
  3. Foreseeability of What?
  4. Time of Foreseeability and Degree of Probability
  5. Concluding Remarks

1. GENERAL

The 'Foreseeabilty' Test has been widely used as a method of limiting damages and it is its popularity amongst domestic systems as well as its perceived suitability to the needs of international commerce which encouraged drafters to introduce the test into the international instruments.[1] According to the CISG, damages awarded to the injured party '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'[2] The UPICC also provide that '[t]he non-performing party is liable only for harm which it foresaw or could reasonably have foreseen at the time of the conclusion of the contract as being likely to result from its non-performance'.[3] The PECL contain the following provision: '[t]he nonperforming party is liable only for loss which it foresaw or could reasonably have foreseen at the time of conclusion of the contract as a likely result of its non-performance, unless the non-performance was intentional or grossly negligent'.[4] There seems to be an agreement, at least insofar as the CISG is concerned, that it is the injured party who bears the burden of proving foreseeability.[5]

The existence of the foreseeability test can be justified on various grounds. First, it has been said that the test rests upon the notion that in determining the desirability of an act, regard is to be had to its foreseeable consequences.[6] This notion is arguably a part of a broader idea that '[t]he commonest person lives according to maxims of prudence wholly founded on foresight of [page 101] consequences'.[7] The proponents of this view argue that since even outside law people often judge a person's action from the standpoint of whether he/she foresaw the consequences of his/her action, it is natural and fair [8] that the extent of legal liability should also depend on foreseeability by the party of the consequences of his/her actions.[9] The most widely accepted justification of the rule,[10] however, rests on its function of allocating risk in a fair [11] and reasonable [12] manner. The underlying aim is to make it possible for the parties to calculate the risks and their potential liability.[13] If, at the time of the conclusion of the contract, the party foresaw or ought to have foreseen a particular loss, it could have taken it into account and acted accordingly by excluding or reducing its potential liability, procuring insurance, increasing the amount of benefit to be obtained from the contract, or even refusing to enter into the contract. This risk allocation function has been viewed as an indication that the foreseeability test is related to the very nature and purpose of the contract [14] and that the breaching party can be held liable only to the extent that its liability is within the scope of the contract.[15] Finally, when approached from the perspective of the consequences and incentives to which it can give rise, the foreseeability rule has been justified on the grounds that it encourages commercial activity [16] and promotes economic efficiency. The former is explained on the basis that the rule not only enables the parties themselves to manage possible risks, associated with making and performing contracts,[17] but also reduces such risks by protecting the parties [page 102] from unusual and excessive losses.[18] Its ability to promote economic efficiency can be summarised thus:

It saves transaction costs in that it represents the usual agreement that most parties would make if they negotiated on the question. It saves the plaintiff the cost of explaining the obvious consequences of breach, of which the defendant knows just as much. It creates an incentive upon the plaintiff to reveal facts peculiarly within the plaintiff's knowledge that will cause the cost of breach to be greater than the defendant would have expected. The defendant, knowing of these peculiar facts, can act accordingly by making a rational allocation of resources to reduce the probability of breach, by refusing to contract, by raising the price, or by excluding liability.[19]

2. THE FORESEEABILITY TEST

2.1 General

In contrast with the common law systems which require that loss be contemplated by both parties,[20] the instruments make it clear that it is foreseeability of the breaching party which is of legal significance.[21] Although this difference is probably of minor practical significance, the instruments' approach is preferable to that of the common law. First, it is more consistent with the 'risk allocation' rationale underlying the foreseeability rule which refers to the assumption of risk by the breaching party,[22] and second, the question of foreseeability of loss is only relevant in the case of the breaching party's knowledge because 'the plaintiff nearly always knows his own business and circumstances better than the defendant'.[23]

The instruments' foreseeability test is both subjective and objective: the party may be held liable not only for losses which it actually foresaw, but also for losses which it 'ought to have foreseen'[24] or 'could reasonably have foreseen'.[25] Thus, to make the party liable, it is not necessary to prove that this party actually foresaw the loss in question as long as it was in the position to reasonably [page 103] foresee that loss.[26] There is, at first sight, a difference in the way the instruments formulate the objective standard. The CISG uses the words 'ought to have been foreseen' and they may seem to impose a stricter requirement than that implied by the words 'could reasonably have foreseen' used by the UPICC and the PECL. It is unlikely, however, that this insignificant variation in wording will lead to the Convention being interpreted more restrictively than the UPICC and PECL and this suggestion finds support in the comments on the two sets of Principles. The comments on the UPICC state that art 7.4.4 corresponds to art 74 CISG [27] and the comments on the PECL expressly use the wording used in the CISG.[28]

The question arises as to whether it is the breaching party itself or a reasonable person in the same circumstances who 'ought to have foreseen' or 'could reasonably have foreseen' the loss. This question may be relevant where some characteristics of the breaching party are different from those attributable to a 'reasonable person'. While, in some legal systems, it is stressed that it is foreseeability by a reasonable man and not of a party in breach which is relevant,[29] the wording of art 74 CISG suggests that it is the breaching party itself who ought to have foreseen the loss--'the loss which the party in breach ... ought to have foreseen'.[30] The same can be said about the position of the UPICC and the PECL which state that it is the non-performing party who 'could have reasonably foreseen' the loss.[31] The word 'reasonably' in this context refers to reasonable foreseeability of the non-performing party and not of a 'reasonable person'. [page 104]

2.2 Relevant factors

2.2.1 Knowledge

There are a number of factors that need to be taken into account when applying the foreseeability test. The first important factor in assessing the breaching party's foreseeability is this party's knowledge. So far as the subjective standard of foreseeability is concerned, a person can only foresee a certain result if it has knowledge of relevant facts and matters enabling it to foresee that result. When it comes to the objective standard of foreseeability, no foreseeability can be imputed into a person without considering what knowledge that person had or ought to have had (or could reasonably have had). Knowledge (both actual and imputed) is thus an integral part of the foreseeability test and this is expressly recognised in the CISG, which refers to foreseeability 'in light of the facts and matters of which [the party] ... knew or ought to have known'.[32] Because foreseeability can be both subjective and objective, knowledge can also be of two types: actual and presumed.

Actual knowledge of relevant facts is particularly important where the loss in question is of an unusual kind or of an unusually high extent because if there is nothing extraordinary about its type or extent, relevant knowledge and foreseeability will, in any event, be imputed. Therefore, if a party knows that a breach by the other party is likely to give rise to unusual losses it needs to notify the other party of the likelihood of such losses occurring before or at the time of the conclusion of the contract. Consider the case where the buyer knows that delay in delivery will cause it to process the goods in a country other than that originally intended and that such a change in location will cause the buyer extra expense. Clearly, if there is no particular reason why the seller would be expected to know of this consequence,[33] this loss would not be foreseeable to the seller unless it is duly informed before or at the conclusion of the contract.[34]

More generally, however, there is no need for a rigid separation and distinction between actual and imputed knowledge because both have their respective roles to play. The extent of the buyer's lost profits and liability to its sub-buyers may be held foreseeable because of the supplier's actual knowledge that the buyer is a trader and the further knowledge imputed into the supplier, in the light of its own business experience, of the usual levels of profit margins received from the sale of the goods in question. In other words, a piece of actual knowledge often triggers a further presumption about what the seller is then expected to know.[35] [page 105]

It needs to be mentioned that the possibility of imputing knowledge and foreseeability has led some judges and commentators to argue, no doubt in the interests of uniformity,[36] that certain types of knowledge can generally be imputed and certain types of losses can generally be regarded as foreseeable. For example, one court stated that where commercial goods are sold to a merchant, a resale 'can always be assumed without any further indications'.[37] Changes in market conditions have also been regarded as part of the knowledge which can generally be imputed.[38] It has also been suggested that the breaching party should reckon with the fact that after the breach, the injured party will incur expenses in the attempt to 'bring about a state of affairs that would have existed had the contract been properly performed'.[39] The following types of loss have also been said to be generally foreseeable: liability to customers or costs of taking the goods back where the goods are sold to a commercial buyer;[40] compensation for missed uses of the goods to be delivered; additional costs for transportation, storage and insurance; the loss of clients resulting from the defect in the goods.[41]

This approach, it is submitted, is not helpful. Although the instruments' foreseeability rule allows that the extent of the breaching party's liability be determined by knowledge and foreseeability this party is presumed to have had, this should not mean that we should 'de-personalise' the rule entirely. The goals of certainty and uniformity that the described approach aims to achieve must be balanced against the rationale underlying the foreseeability rule. As shown, the rule pursues the purpose of allocating the risk in a fair and reasonable manner and considering the multiplicity of circumstances in which the breaching parties may find themselves, it seems grossly unfair to presume, from the mere fact that breaching parties are businesspersons, that they automatically find themselves in a position to foresee the losses referred to above. Such a sweeping presumption would negate the very purpose of the foreseeability rule by altogether ignoring the breaching parties' particular circumstances. Surely, a more balanced approach is to rely on presumed knowledge and foreseeability but only insofar as they can be reasonably inferred from the party's particular circumstances. This does not mean, however, that we should refrain from identifying factors and patterns which may lead judges and arbitrators to imputing certain types of knowledge. Without being 'set in stone', such factors and patterns can help [page 106] parties develop reasonable expectations as to how the instruments' foreseeability rule is likely to work in a particular case.

In general, a businessperson will be presumed to know of the facts and matters which will enable it to foresee the consequences of the breach if such knowledge can be expected of it taking into consideration its commercial experience.[42] Where traders are involved, it will often be reasonable to expect the breaching party to know that prices for the goods, particularly those in volatile markets, will fluctuate and that the injured party will suffer losses as a result. In one case decided under the ULIS,[43] the buyer's refusal to perform put the seller in the position where it had to purchase the goods from the supplier but was unable to find any use for the goods until the time when the price dropped considerably. The court ruled that the seller's loss was foreseeable:

[The buyer] is a businessperson. Furthermore, the brass material that [the seller] purchased to perform its contract with the buyer is an article which depends on the market. Consequently, considerable fluctuations in price are to be expected. That includes a sudden drop in prices to the depths the seller uses to calculate its losses.[44]

In another case (this time, under the CISG),[45] the delivery of a defective packaging system caused the buyer, amongst other things, to incur additional costs relating to the maintenance of its production facility. The court held that because this loss would be foreseeable 'to any company dealing in implements of manufacture', this loss was foreseeable to the breaching seller as the latter itself was a manufacturer. It may also be the case that the buyer's delay in payment causes the seller to procure credit and in one case, the cost of doing so was held to have been foreseeable by the buyer.[46] [page 107]

In several cases, besides relying on the breaching party's business experience, courts and tribunals have also taken into account some other factors in deciding as to whether it was appropriate to impute knowledge and foreseeability. One such factor was knowledge of the innocent party's business. In one case under the CISG,[47] the seller knew that the buyer was a car dealer and when its delivery of a non-conforming car made the buyer liable to its customer, the court ordered the seller to compensate the buyer for those damages as they were, in the court's opinion, 'foreseeable'. Where the seller sells a large quantity of the goods and knows that it sells the goods to a wholesaler in a sensitive market, it is likely to be found to be in the position to foresee that the buyer will lose custom, profits, and that its reputation and goodwill will be damaged.[48] In some cases, the seller may be held liable for loss of custom and profits even if the breach was trivial so long as the seller knew that the buyer was a middleman operating in a market which is saturated with the type of product delivered by the seller. In a case under the ULIS,[49] the Dutch seller who delivered cheese, only 3 per cent of which was found to be defective, was held to be in a position to foresee loss of custom and profits because 'at the time of contract formation both seller and buyer knew that the cheese market in Germany was saturated with Dutch imports so that the threat existed that purchasers such as buyer's customers might change suppliers even for trivially unsatisfactory deliveries other than the defects complained of by buyer'. In a similar vein, where the seller is aware that it sells the goods to be used in the buyer's manufacturing process, it is expected to foresee that non-delivery or non-conforming delivery is likely to cause the buyer to lose profits from selling the final product.[50] Where, however, the buyer demands damages for lost profits on its sub-sale contracts, they were held not to be foreseeable to the seller who had made a non-conforming delivery, where the buyer permitted a wrongful rejection of the goods by its subbuyers.[51] It may also be the case that where the parties have had a long-standing [page 108] business relationship, the breaching seller can be safely presumed to have been aware of the purpose for which the buyer bought the goods. If, in such a case, the buyer bought the goods for resale, the seller may be presumed to have foreseen that delay in delivering the goods (or non-delivery, for that matter) would make the buyer liable to its sub-buyers.[52] However, where the nature of the buyer's liability to third parties is unusual, excessive, or unjustified, losses flowing therefrom are unlikely to be foreseeable. In one case,[53] the buyer bought materials for use in the construction project it had been commissioned to carry out. As a result of the seller's delay in delivering the goods, the buyer had to pay a contractual penalty to its sub-contractor. The court held that while such penalty clauses 'can be expected to be included in construction contracts', the penalty paid in that particular case was not foreseeable by the seller because of the clause being too disadvantageous [54] to the buyer by requiring to pay the full amount of the penalty (which, presumably, was deemed to be excessive in the circumstances) within a short period, considering the large scale of the project. The court, relying on the 'assumption of risk' rationale of the foreseeability rule, stated that the risk that had materialised in that case did not conform to the risk assumed by the seller because the seller 'did not have to reckon with the fact that [the buyer] would forfeit the full contractual penalty with a delay in delivery of two weeks'.[55] Where the breaching seller had no reason to be aware at the time of concluding the contract that the buyer acted as an agent, it is highly unlikely that the buyer's loss of its agency commission would be regarded as a foreseeable loss.[56] [page 109]

Another factor that has been relied upon, along with knowledge of the innocent party's business, is knowledge of the nature of the goods. In one case, the tribunal held that the breaching seller should have known that the buyer was a clothing retailer and that the goods were seasonal in nature. Therefore, the seller ought to have known and foreseen that 'late delivery would mean that the goods could only be sold [at] reduced price once they were out of season and therefore profits would be lost'.[57] This overview demonstrates that while it is possible to discern a set of factors which may influence the court's or tribunal's decision in respect of whether to impute certain types of knowledge and foreseeability, the question of whether a particular loss was foreseeable must be resolved on a case-by-case basis. This overview also appears to support the view that the foreseeability rule 'would bear upon the different cases with varying degrees of rigour'.[58]

Another question to be addressed in this section is whether it is reasonable to presume that the breaching party will always expect the injured party to mitigate its loss and therefore, the foreseeable loss is only that which cannot be reasonably avoided or reduced.[59] For example, suppose that the seller refuses to deliver the goods at the contract price of 50,000. The buyer intended to resell the goods to its sub-buyer for 80,000 and it is possible for the buyer to purchase replacement goods at the current price of 60,000. Assuming that the foreseeability rule refers not only to the type of loss but also to its extent, is it the 30,000 or the 10,000 that is within the seller's foreseeability range? In other words, should the foreseeability rule take into account a reasonably available opportunity to mitigate the loss? It can be argued that it is justifiable to interpret the foreseeability rule in such a way not only because the mitigation rule is a method of limiting damages but also because taking measures of mitigating loss is what reasonable parties often do in protecting their own interest.[60] It is submitted, however, that this approach will introduce an unnecessary degree of complexity to the foreseeability rule and will also undermine the existence of the mitigation rule as a separate method of limiting damages since its function will be then performed by the foreseeability rule. This approach will also place an additional burden on the injured party by making it bear the burden of proof of both foreseeability and mitigation. As noted above, the burden of proving foreseeability is borne by the injured party while the burden of proving mitigation is generally borne by the breaching party.[61]

This section will be concluded on a more general point--that is, that imputed knowledge and foreseeability are dynamic concepts and in applying the foreseeability [page 110] rule, it needs to be borne in mind that common knowledge, which is the basis for imputing knowledge to a given party, changes over time. It has been correctly stated that:

"[m]odern business practices (and equipment), accounting methods, and extensive communication of information make more knowledge available to [the] parties. This increased knowledge may make potential amounts of loss easier to compute."[62]

2.2.2 Other factors

Besides knowledge, a number of other factors can potentially influence the court's or tribunal's assessment of whether a particular loss was foreseeable in the circumstances. One such factor is a 'trade usage' and in a case decided under the ULIS, the court held that the foreseeability requirement could 'be conclusively met by a showing of trade custom as to foreseeability'.[63] This suggests the possibility that a particular trade usage may categorise certain losses as 'foreseeable' and where this is the case, it would seem appropriate to rely on the requirements of such a trade usage on the basis of two alternative lines of reasoning. One is to argue that a trade usage forms the background against which the businesspersons' understandings and expectations arise and therefore a particular usage, so long as it is a true trade usage,[64] can be considered as part of knowledge to be imputed into the breaching party. An alternative line of reasoning is that, in such cases, a trade usage already recognises the applicability of the foreseeability rule and it can then be argued that the parties have exercised their right to derogate from the instruments' foreseeability rule by implicitly agreeing [65] that it is the foreseeability rule, based on a trade usage, which is applicable.

Another consideration which may potentially influence the interpretation of the foreseeability rule in particular circumstances relates to whether a breach was deliberate or negligent. In fact, the PECL go much further than that by expressly requiring that, ven if the loss was unforeseeable to the breaching party, it will still be liable for that loss if its 'non-performance was intentional or grossly negligent'.[66] While no such requirement exists in the CISG and the UPICC, the experience of other legal systems using a similar foreseeability rule teaches us that judges' and arbitrators' assessment of foreseeability may still be influenced by whether or not the breaching party's breach was deliberate.[67]

A difficult question is whether the foreseeability rule should be concerned with maintaining a degree of proportion between the loss and the amount of [page 111] benefit received by the breaching party under the contract. For example, if the seller's delivery of defective seeds to the farmer caused the latter substantial losses resulting from lost crop, should the seller be held liable in full for all the losses suffered by the farmer despite the fact that the price of seeds is incommensurate with the amount of losses? If not, is the foreseeability rule an appropriate tool for limiting damages in such cases? To begin with, it is well known that the foreseeability rule, in its pure form, is often not capable of limiting damages for disproportionate losses [68] as it may well be the case that such losses were foreseeable: in our example, the farmer may have specifically warned the seller, or the seller with its extensive experience in the agricultural sector could have reasonably expected, that defective seeds were likely to cause substantial losses to the farmer. To address this problem, some legal systems have, on occasions, applied a more restrictive foreseeability rule by holding the breaching party liable for disproportionate losses only where it accepted the risk of such losses as a term of the contract.[69] It is suggested that there is no basis for this latter approach (known as the 'tacit agreement rule') in the context of the international instruments. Adopting it would not only lead to non-uniformity in their application,[70] but would also undermine the 'risk allocation' rationale of the foreseeability rule for if, in our example, the seller was in a position to foresee the possibility of the farmer incurring substantial losses, it would certainly be reasonable to expect it to take measures to account for that risk (by charging a higher price, by procuring insurance, or by limiting or excluding its liability). Its failure to do so can, fairly and reasonably, be interpreted as the seller's implied assumption of that risk. As correctly suggested by some commentators, however, an outright dismissal of the possibility of the issue of disproportionate losses being within the sphere of the foreseeability rule may be too simple an approach. The proportion between the loss and contractual benefit is, it is submitted, a valid concern and in the absence of a specific provision in the instruments to that effect,[71] it should not come as a surprise if the foreseeability rule is used to limit damages in order to reduce the degree of disproportion.[72] [page 112]

Yet another factor which may influence the court's or tribunal's assessment of foreseeability is the degree of detail with which circumstances of the loss are described. It has been suggested that if the circumstances in which the loss has arisen are described in general terms, the likelihood that the loss will be found to be foreseeable will increase;[73] conversely, describing such circumstances in more specific and precise terms may reduce the chances of the loss being foreseeable. If, in the example above, the farmer describes the cause of the loss in a precise technical language, known only to agricultural specialists, then the reliance on such a description of the conditions causing no crop to be produced may reduce the chances of the seller being in a position to foresee the loss, unless the seller itself possesses the relevant expertise. In this regard, it is important not to lose sight of the true purpose of the foreseeability rule and not to overemphasise the importance of the description of the circumstances giving rise to the loss, as opposed to the nature and type of the loss itself. The real concern of the foreseeability rule is the type and nature (as well as the extent) of the loss and as long as they were reasonably foreseeable, this, it is submitted, should be sufficient, even if the party did not have an in-depth understanding of the nature of the circumstances in which the loss has arisen. To return to our example, if it is reasonable to impute into the seller, having regard to its background and experience, knowledge that the delivery of defective seeds is likely to result in the farmer's inability to produce crop which, in turn, will result in, for example, lost profits and the farmer's liability to third parties, this is sufficient to hold the seller liable for these losses (provided also that the extent of actual losses was within the foreseeable range).[74]

3. FORESEEABILITY OF WHAT?

Legal systems that use the foreseeability rule to limit damages take different positions as to what precisely needs to be foreseen. English law, for example, generally requires that only the type of loss be foreseeable while French law requires foreseeability of the type as well as of the extent of the loss.[75] By simply referring to foreseeability of 'loss' or of 'harm', the international instruments do not make their position clear and there is no agreement amongst commentators in this respect. Some commentators argue, in relation to the CISG, that the type and the extent of the loss as well as the 'chain of events leading up to the loss' must be foreseen.[76] The Comments to the UPICC provide a different interpretation by stating that foreseeability in the UPICC 'relates to the [page 113] nature or type of the harm but not to its extent unless the extent is such as to transform the harm into one of a different kind'.[77] Comments to the PECL seem to imply that not only the type, but also the extent of the loss are required to be foreseen.[78] There seems to be no particular reason why three very similar provisions of the international instruments should be interpreted differently in this respect. The absence of clarity regarding what needs to be foreseen has farreaching implications as it will generate not only a non-uniform application of the instruments but also uncertainty as to the injured party's entitlement to, and amount of, compensation. Each of the factors to which foreseeability may potentially refer must therefore be examined.

One such factor is the possibility of the occurrence of a loss and it is submitted that this factor must be generally regarded as foreseeable. Although businesspersons normally enter into contracts in order to perform and not to breach them, they must nonetheless be regarded as always being in the position to foresee that a breach may occur and that loss may result therefrom: the possibility of a breach and resulting losses is an integral part of a commercial activity. It can also be argued that damages are an instrument of protecting the party against this type of risk and that the foreseeability rule, being a part of the law of damages, cannot be interpreted in a way which suggests that a businessperson may be in a position where it could not foresee the possibility of a breach and the resulting losses. The very existence of the law of damages reflects the recognition of such a possibility.

Some decisions under the CISG appear to have interpreted the foreseeability rule as requiring foreseeability of the precise amount of the loss. In one case,[79] the tribunal denied the buyer's claim for loss of a profit margin on its sub-sale contract because 'the difference between the contract price and the resale price was not foreseeable by [Seller] at the time of the conclusion of the Contract'. Rarely, however, will it be possible for a party to be in the position to foresee the precise amount of the loss and the most the breaching party will usually be able to foresee at the time of the conclusion of the contract will be the type (nature) and extent of the loss. If the rule required foreseeability of the precise amount of the loss, the injured party would, in most cases, be denied compensation and such an interpretation would, surely, deprive the instruments' remedy of damages of any value and use.

Furthermore, it is sometimes argued that foreseeability should not be interpreted as referring to the nature (type) of the loss because this would deny damages to those who suffer loss in the amount 'that is fully within reasonable [page 114] expectation of the party in breach, if that loss was of an unexpected type'.[80] According to this view, the type of loss should be of importance only where it is indicative of the extent of loss.[81] However, a better approach is to interpret the rule as requiring foreseeability of the type (nature) of the loss as it is a defining and integral feature of the notion of loss.[82] It is also suggested that foreseeability of the extent of the loss (which, as argued below, must also be foreseeable) is rarely possible without foreseeability of the type and nature of the loss because translating loss into money terms is hardly possible without an understanding of the nature or type of the loss. Arguments to the contrary are infrequent and interpreting the rule as requiring foreseeability of the type and nature of the loss has been, by and large, uncontroversial and, indeed, most systems using the foreseeability rule interpret it in this way.[83] This position, however, is not without difficulty: How are losses to be distinguished from one another? What are the criteria for determining whether the loss that was foreseeable was in fact of the same type as the one actually suffered? The only guidance that the instruments provide is the division between 'loss suffered' and 'loss of profit' and this division is, it is suggested, the necessary starting point. The real difficulty, however, lies at the point where it must be determined whether the loss that was foreseeable and the one which actually occurred fall within the same broad category and are of the same type. For example, are damage to property and losses incurred in mitigation, while both being losses 'actually suffered', of the same type for the purposes of foreseeability? It is suggested that headings under which losses were considered earlier in this work [84] can perhaps provide some additional guidance: expenditure wasted as a result of the breach, additional expenditure incurred as a result of the breach, damage to the performance interest, currency losses, damage to reputation and goodwill, loss of profit and loss of a chance. As is well known, though, no categorisation can ever be perfect and an overlap among groupings is inevitable. In attempting to categorise a particular loss, it is important not to get lost in a labyrinth of classifying losses but to keep sight of the 'risk allocation' rationale of the foreseeability rule.

The type of loss needs to be distinguished from its extent which refers to translating the limits of the loss into money terms. The importance and farreaching implications of requiring that the extent of the loss be foreseeable is illustrated by several cases under the CISG. One such case [85] is where the tribunal interpreted the CISG as not requiring foreseeability of the extent of loss. In this case, the buyer's claim for damages for the penalty it had to pay to [page 115] its customer was held to be foreseeable despite the seller's argument that the penalty was excessive. The tribunal held that the amount of the penalty was irrelevant on the ground that 'establishing ... the amount of the penalty is entirely a matter to be agreed between the contracting parties ... and [it] complies with the freedom of contract principle set forth in the CISG'. The implication of this decision is that as long as the penalty itself was foreseeable, the extent of the loss is irrelevant for the purposes of the foreseeability rule. This decision can be contrasted with several other decisions where the extent of the loss was deemed to be relevant. In one case,[86] for example, it was held that although the seller was in a position to foresee that a buyer would have a subsale contract and would make a profit therefrom, the seller could not reasonably expect that the profit margin exceeded the contract price by 100 per cent. The tribunal, however, did not deny damages altogether but awarded damages for lost profits in the amount of 20 per cent of the original contract price because that profit margin was 'reasonable' (and for that reason, presumably, foreseeable).[87] In another case,[88] the injured buyer who had to take out a loan to make an advance payment was rendered unable to return the loan on time and, as a result, had to pay additional interest on the sum in arrears. The court held that the breaching party could not foresee the interest rate on the sum in arrears in the buyer's country and instead awarded damages by reference to the rate which, in the court's opinion, would be foreseeable to that party.[89]

It is submitted that the instruments should be interpreted as requiring foreseeability of the extent of the loss. First, the 'risk allocation' rationale gives rise to the following question: when businesspersons assume a risk, what do they [page 116] assume the risk for--the type or the extent of the loss? There is little doubt that it is the financial considerations which underlie business planning and commercial activity and where businesspersons contemplate losses, they contemplate not only their nature but also the approximate limits of financial liability that they may entail. Therefore, if only the type of loss were to be foreseeable, a businessperson's ultimate consideration would be disregarded and there would always be a danger that foreseeability would lead to imposing liability to the extent which exceeds the boundaries of the assumed risk.[90] Thus, the view that foreseeability of the extent of the loss is required corresponds both to the way in which business people think and to the 'risk allocation' rationale underlying the foreseeability rule. Second, restricting foreseeability only to the type of loss is likely to give rise to uncertainty in the international legal environment by making it difficult for the parties to develop reasonable expectations regarding likely financial limits of liability in a situation where they breach their contracts.[91] It can even be argued that this uncertainty could encourage businesspersons to exclude the applicability of the international instruments and this would certainly contravene the instruments' unification and harmonisation aspirations. Third, the view that foreseeability refers not only to the type of the loss but also to the extent of the loss is supported by the legislative history of the CISG. According to the Report of the First Committee on the 1977 Vienna Draft, a proposal was considered to clarify the wording of what is now art 74 CISG. The proposed version that damages could be claimed for '... loss of such a nature which the party in breach could not reasonably have foreseen' was rejected [92] and this seems to evidence the drafters' intention not to restrict foreseeability only to the nature or type of the loss. Finally, the wording of art 74 also seems to suggest that the extent of loss is required for the purposes of foreseeability. The phrase that damages 'may not exceed' the foreseeable loss seems to refer to some concrete limit. If only the type of loss were intended to be foreseeable, the wording would have to mean that the recoverable loss is that 'not exceeding the type of loss' and this would, surely, be odd. Although the latter two arguments are only relevant to the CISG, the first two arguments in themselves seem sufficient to justify the interpretation of the UPICC [93] and the PECL in the same manner.

One argument against the view that foreseeability refers to the extent of the loss is that the extent of the loss is a question of quantum or calculation whereas foreseeability is a test 'of remoteness and not one of quantification'.[94] It is [page 117] argued, with respect, that the extent of the loss is not an issue of calculation. The calculation of loss aims to determine the precise amount of the loss [95] whereas the extent of the loss, in contrast, refers not to the precise amount of the loss but represents a translation of the limits of the loss into money terms, or into a monetary 'range' within which losses are deemed foreseeable.

There is, however, a difficulty in reconciling the position that the extent of loss is required by the foreseeability rule with the fact that the instruments' provisions which contain two specific methods of calculating damages (the socalled 'concrete'[96] and 'abstract'[97] formulae) are not, at least expressly, subject to the foreseeability requirement.[98] One way to reconcile the two is to presume that the situations referred to in those provisions are typical situations which are always foreseeable [99] and to require foreseeability of the extent of the loss in all other situations. This would be consistent with the purpose of those methods of calculation, that is, to introduce simplicity and clarity when calculating damages.[100] It is suggested, however, that a better way of interpreting the instruments is to view the foreseeability rule as applicable to the situations referred to in the provisions on calculating damages. First of all, this would ensure a consistent application of the foreseeability rule to all cases. Second, although the situations referred to in the instruments' 'concrete' and 'abstract' formulae may well reflect losses which 'arise naturally' and are, for that reason, foreseeable, situations where the extent of such losses is unforeseeable cannot be ruled out. Suppose that the injured seller resells the goods in a reasonable manner and within a reasonable time in a sharply falling market. As a result, the difference between the contract price and the resale price is exceptionally high. It can be argued, in such a case, that while the buyer was in the position to foresee the possibility of price fluctuations (type of the loss), such a drastic fall (extent of the loss) was not foreseeable. Requiring that the extent of the difference be foreseeable would seem to correspond with the rule's purpose of allocating risks in a fair and balanced manner.[101] Finally, although the instruments' 'concrete' and 'abstract' formulae do not themselves refer to the foreseeability rule, this approach is not necessarily inconsistent with these formulae so long as they are [page 118] simply treated as specific methods of calculation whereas the foreseeability rule is a general rule and one method of limiting damages.

4. TIME OF FORESEEABILITY AND DEGREE OF PROBABILITY

Whether a particular loss was foreseeable is to be assessed as of the time of the conclusion of the contract.[102] Although this position has been criticised,[103] the rule is generally fair: only the risk assumed by the party at the conclusion of the contract should, as a rule, be of legal significance because the time of making the contract is the only time when the party has an opportunity to protect itself (for example, by raising the price, excluding or limiting liability, or by procuring insurance). If foreseeability were to be assessed at a time after the contract was concluded, the party would be denied an opportunity for selfprotection.[104] This argument can, of course, be criticised on the ground that in practice, foreseeability of consequences is unlikely to affect the terms of the transaction because '[i]t is normally impracticable to fix a separate rate for every contract'.[105] This view has, however, been said to be speculative [106] and although the argument that the party can protect itself either at or before the making of the contract is just as speculative,[107] the time of concluding the contract should remain as a standard time for determining foreseeability. Whatever the reality may be, the law should not deny the breaching party an opportunity for self-protection. It should also be noted that clarity as to the precise moment in time may be important because negotiations 'leading to the conclusion of the contract may ... last a certain period of time'.[108] In this regard, the precise moment by reference to which the question of foreseeability is to be resolved is that when the contract comes into existence.[109]

However, it by no means follows, either from the instruments' express requirement that the foreseeability rule be applied by reference to the time of concluding the contract or from the requirement's justification, that in some cases a later time for assessing foreseeability cannot be more appropriate. In fact, it is precisely the rule's 'assumption of risk' rationale which leads to this [page 119] conclusion. One such case is where subsequent to the conclusion of the contract, the parties have agreed to change the terms of the contract. It can be argued that, at this stage, a renewed assumption of risk has occurred (at least, insofar as the renegotiated obligations are concerned) for if the potential breaching party has become aware of risks which were not foreseeable at the time of concluding the contract, it now has an opportunity to protect itself.[110] For example, if some time after the contract had been made the parties decided to renegotiate the delivery date and at that time the seller becomes aware that delay in delivery will cause the buyer to pay an unusually high penalty to a third party, it is appropriate, if this risk materialises, to hold that loss foreseeable by reference to the time when the delivery obligation was renegotiated so long as a reasonable opportunity was available to the seller to protect itself. The instruments' express reference to the 'time of the conclusion of the contract' will not necessarily preclude this result since the parties' agreement to change the terms of the contract can be interpreted as the parties' implied intention to derogate from the provision that foreseeability is to be assessed by reference to the time of the conclusion of the contract.[111] This result may also be justified in some cases involving longterm contracts which often provide that terms such as price, quantity or delivery dates are to be agreed at future points in time [112] and it can be argued that where such contracts are terminable at will, 'a new contract is formed at each and every point in any continuing and terminable relationship'.[113] Thus if, by the time when the parties to a long-term contract are to negotiate a term which was left open for future negotiation, one party becomes aware of risks which it could not foresee at the time of concluding the contract, it may be appropriate to assess the party's foreseeability by reference to the point of such negotiation because it has an opportunity to protect itself at least by terminating the contract. The problem of the date of assessing foreseeability in long-term contracts is likely to arise rarely in practice because 'the parties' assumption of risk will usually be broadly defined for the very reason that the contract is a long-term contract and the parties can be assumed to understand that things will change throughout the life of the contract, and the price and insurance will accordingly be calculated generally and with an eye on the long term'.[114]

So far as the required degree of probability of loss is concerned, the CISG refers to foreseeability of the loss 'as a possible consequence of the breach' and [page 120] this provision has, on occasions, been interpreted as imposing a more extensive liability in comparison with those systems which provide for foreseeability of loss 'as a probable result' of the breach.[115] However, despite a potentially broader scope of liability, it has been correctly pointed out that the words 'in light of the facts and matters' cut back a potentially extensive liability.[116] The UPICC and the PECL use a more restrictive standard by referring to foreseeability of loss which is 'likely to result from ... non-performance'[117] or which is 'a likely result of ... non-performance'.[118] However, as explained, this difference in wording between the CISG and the two sets of Principles [119] is unlikely to lead to different results in practice.

5. CONCLUDING REMARKS

On a number of occasions, it has been questioned whether the foreseeability rule is an appropriate method of limiting damages. It has been argued, for example, that the foreseeability rule is a 'product' of its time and is ill suited to the present age of a 'diverse and complex' economy. It has been suggested that in 'masstransaction situations a seller cannot plausibly engage in an individualised "contemplation" of the consequences of breach and a subsequent tailoring of a transaction'.[120] More specifically, the period of pre-contractual negotiation, presupposed by the foreseeability rule, 'is far removed from the world of shipping and commodity sales, where transactions are often concluded between substitutes, brokers and ship's agents ... on an expedited and informal basis'.[121]

In such conditions, there is little opportunity for extensive negotiations apart from agreeing on the most essential terms. The incentive for disclosing information [page 121] is also not well suited to the interests of some commercial circles such as Middlemen [122] because possessing information regarding price differentials is '[a]n essential element of middleman entrepreneurship'[123]: clearly, if middlemen's counterparts possess relevant information they may prefer to bypass the middlemen and to contract directly with the ultimate buyer or supplier, as the case may be.[124] What can be said in response is that perhaps no general rule designed to accommodate a variety of circumstances can be expected to be ideally suited to all commercial sectors. If businesspersons in a particular trade find that the rule is wholly unsuitable to their needs, they can always avail themselves of the right to derogate from the unwanted rule.

The rule has also been criticised on the ground that it is inherently imprecise, involving a substantial degree of judicial discretion [125] and giving rise to uncertainty. This point touches upon a perennial dilemma, faced by any legal system, between relying on broad and flexible standards on the one hand, and specific but precise rules on the other. The law of damages, it seems, requires a balanced approach which would rely upon rules which would be sufficiently flexible to accommodate a variety of factual settings and, at the same time, would still have a discernible content. The foreseeability rule would appear to fit this description. It is certainly not true that it 'utterly lacks the descriptive content that allows it to be the principled basis for decision'[126] for it is clear about its underlying considerations and purposes; and while it may be based on flexible and broad standards, this will not necessarily create an unacceptable degree of uncertainty. In fact, recent empirical research suggests that broad principles do not necessarily lead to less predictable results than those reached by applying more detailed rules, and are more likely to achieve just and efficient outcomes.[127]

To end this discussion on a positive note, it needs to be noted that the foreseeability rule, which has existed for centuries,[128] is still widely used by many [page 122] domestic legal systems and by the international commercial law instruments.[129] Such a wide acceptance of the foreseeability rule surely evidences, at least to some extent, that the rule is still an effective method of limiting damages which corresponds, by and large, to the modern demands of the commercial world.[130] [page 123]


FOOTNOTES

1. See A Komarov, 'The Limitation of Contract Damages in Domestic Legal Systems and International Instruments' in D Saidov and R Cunnington (eds), Contract Damages: Domestic and International Perspectives (Oxford, Hart Publishing, 2008) 250-52.

2. Article 74 CISG.

3. Article 7.4.4 UPICC.

4. Article 9:503 PECL.

5. See, eg, Case No 3 U 83/98 Appellate Court Bamberg (Germany) 13 January 1999 (Fabric case) <http://cisgw3.law.pace.edu/cases/990113g1.html>; H Stoll and G Gruber, 'Arts 74-77 CISG' in P Schlechtriem and I Schwenzer (eds), Commentary on the UN Convention on the International Sale of Goods, 2nd English edn (Oxford, OUP, 2005) 771-2.

6. PS Atiyah, The Rise and Fall of Freedom of Contract (Oxford, Clarendon Press, 1979) 432.

7. JS Mill, 'Sedgwick's Discourse' in JM Robson (ed), The Collected Works of John Stuart Mill, Volume X, Essays on Ethics, Religion and Society (London, University of Toronto Press, Routledge and Kegan Paul Ltd, 1969) 63.

8. 'The principle that does not allow a debtor ... to be made liable for the damages resulting from the inexecution of his obligation, above the sum to which he may reasonably have imagined they would amount, being grounded on natural law and equity, we ought to follow' (RJ Pothier, A Treatise on Obligations, Considered in a Moral and Legal View (Clark, NJ, The Lawbook Exchange Ltd, 1999) 99-100).

9. See HLA Hart and T Honore, Causation in the Law, 2nd edn (Oxford, Clarendon Press, 1985) 254 stating that '[i]t is not surprising to find that lawyers often stress the importance of foreseeability in relation to problems of responsibility, for even outside law the fact that harm was or was not foreseeable is frequently an important factor in blaming or excusing people for its occurrence'.

10. There are numerous sources in which this rationale has been relied upon (see, eg, Stoll and Gruber (n 5) 747; P Schlechtriem, Uniform Sales Law: The UN-Convention on Contracts for the International Sale of Goods (Vienna, Manz Verlag, 1986) 96).

11. See Hart and Honore (n 9) 230, stating that foreseeability is a rule which promotes 'a fair balance between the contracting parties'.

12. See EA Farnsworth, 'Legal Remedies for Breach of Contract' (1970) 70 Columbia L Rev 1208.

13. See, eg, Pothier (n 8) 94; Farnsworth (n 12) 1207; H Bernstein and J Lookofsky, Understanding the CISG in Europe, 2nd edn (The Hague, Kluwer Law International, 2003) 140, note 163.

14. See J Hellner, 'The Limits of Contractual Damages in the Scandinavian Law of Sales' (1966) 10 Scandinavian L S 48-9; Comment on art 7.4.4 UPICC.

15. See A Kramer, 'An Agreement-Centred Approach to Remoteness and Contract Damages' in N Cohen and E McKendrick (eds), Comparative Remedies for Breach of Contract (Oxford, Hart Publishing, 2005) 249.

16. See EW Patterson, 'The Apportionment of Business Risks through Legal Devices' (1924) 24 Columbia L Rev 335, 342.

17. See Komarov (n 1).

18. See MG Bridge, The Sale of Goods (Oxford, OUP, 1997) 541 (referring to the view that regards the foreseeability rule 'as consonant with the wishes of the business community that a contracting party should not be the insurer of the other's contractual adventure').

19. S Waddams, The Law of Damages, 4th edn (Toronto, Canada Law Book Inc, 2004) 569 (see this source for references to the relevant law and economics literature on the subject).

20. See Hadley v Baxendale (1854) 9 Ex 341, 354.

21. See art 74 CISG, art 7.4.4 UPICC and art 9:503 PECL.

22. See AG Murphey, Jr, 'Consequential Damages in Contracts for the International Sale of Goods and the Legacy of Hadley' (1989) 23 Geo Wash J Int'l L and Economics 415 (also at <http://www.cisg.law.pace.edu/cisg/biblio/murphey.html>).

23. AL Corbin, Corbin on Contracts: A Comprehensive Treatise on the Working Rules of Contract Law vol 5 (St Paul, Minn, West Publishing Co, 2002) 29.

24. Article 74 CISG.

25. Article 7.4.4 UPICC and art 9:503 PECL.

26. See, eg, V Knapp, 'Arts 74-77 CISG' in CM Bianca and MJ Bonell (eds), Commentary on the International Sales Law: The 1980 Vienna Sales Convention (Milan, Giuffrè, 1987) 541.

27. See Comment on art 7.4.4 UPICC.

28. See Comment A on art 9:503 in O Lando and H Beale (eds), Principles of European Contract Law: Parts I and II prepared by the Commission on European Contract Law (The Hague, Kluwer Law International, 2000).

29. 'The debtor cannot escape liability by showing that he personally could foresee less than the reasonable man. This is in fact clear on the face of article 1150, which speaks of damage "which one could have foreseen"--not which he could have foreseen. The question to be asked is what a reasonable man in the "external circumstances" of the debtor (as opposed to his "internal circumstances", such as intelligence, caution) could have foreseen' (B Nicholas, The French Law of Contract, 2nd edn (Oxford, Clarendon Press, 1992) 231).

30. This provision can be contrasted with the definition of the fundamental breach in art 25, which also uses the foreseeability test. According to art 25, '[b]reach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result'. It can be argued, therefore, that had the drafters intended to apply the same standard of foreseeability in relation to damages they would have formulated art 74 in a similar way.

31. Article 7.4.4 UPICC and art 9:503 PECL. By contrast with art 25 CISG, the same standard of foreseeability is used in the definition of fundamental non-performance (see art 7.3.1(2) UPICC, art 8:103 PECL).

32. Article 74 CISG.

33. This knowledge can be imputed to the seller for many reasons: previous dealings between the parties, common knowledge about such practice of processing the goods, a relevant trade usage.

34. Appellate Court Bamberg 13 January 1999 (n 5).

35. For other examples, see Arbitration proceeding Case No 48 of 2005 (Ukraine) <http://cisgw3.law.pace.edu/cases/050000u5.html> ('The Seller knew from the very beginning that goods were purchased by the Buyer for further processing and sale of the derived products. Therefore, the Seller had to realize that stoppage of supply will cause certain losses for the Buyer' (emphasis added)).

36. See Schlechtriem (n 10) (stating that '[j]udicial discretion in the assessment of damages can be reduced by standardizing the damages in question ...').

37. Case No 10 Ob 518/95 Supreme Court (Austria) 6 February 1996 (Propane case) <http://cisgw3.law.pace.edu/cases/960206a3.html>.

38. Case No 2 U 30/77 Appellate Court Hamm (Germany) 23 March 1978 (Brass poles case) <http://cisgw3.law.pace.edu/cases/780323g1.html> (decided on the basis of the ULIS).

39. See Stoll and Gruber (n 5) 766.

40. Ibid, 570.

41. See F Enderlein and D Maskow, International Sales Law: United Nations Convention on Contracts for the International Sale of Goods, Convention on the Limitation Period in the International Sale of Goods (New York, Oceana, 1992) 301.

42. See Knapp (n 26) 542.

43. See Appellate Court Hamm, 23 March 1978 (n 38).

44. See also ICAC Case No 166/1995, decision dated 12 March 1996 <http://cisgw3.law.pace.edu/cases/960312r1.html>, where the seller's apparently extensive commercial experience was decisive for the tribunal in concluding that various types of loss were foreseeable to the seller.

45. TeeVee Tunes, Inc et al v Gerhard Schubert GmbH not reported in F.Supp.2d 2006, WL 2463537 (SDNY) (No 00 Civ 5189 (RCC)).

46. See Case No 2 U 1230/91 Appellate Court Koblenz (Germany) 17 September 1993 (Computer chip case) <http://cisgw3.law.pace.edu/cases/930917g1.html>. See also CIETAC Arbitration proceeding 18 April 2003 (Desulfurization reagent case) <http://cisgw3.law.pace.edu/cases/030418c1.html>, where the American buyer's failure to pay caused the Chinese seller the loss of the duty drawback ('duty drawback' seems to refer to a refund of an import duty where the imported goods (or finished products manufactured from them) are subsequently exported from China). The tribunal held that that loss was foreseeable to the buyer on the ground that it ought to have known and foreseen 'relevant laws, regulations and policies of the State of the counter party before the international business carried out'. The tribunal reasoned that 'the Buyer, as a businessman in the international trade, [ought to] be prudential [with respect] to its rights and obligations ...' and that it was reasonable to expect that it would be aware of Chinese trading policies. While the facts of the case are not set out in sufficient detail to enable drawing the conclusion as to whether the tribunal's decision was correct, its reasoning needs to be treated with caution. The mere fact that a party has entered into a contract with a party from another country is not in itself sufficient to impute knowledge of the intricacies of that country's trading policy and legislation. As has already been argued in the main text, the question of what the breaching party ought to have known and foreseen should be resolved on the basis of the particular circumstances of the case.

47. See Case No 22 U 4/96 Appellate Court Köln (Germany) 21 May 1996 (Used car case) <http://cisgw3.law.pace.edu/cases/960521g1.html>.

48. '[The Sellers] knew that they were delivering to a wholesaler who would resell the meat. The Atlas-delivery, furthermore, constituted a large amount, 172 tons, of meat. Therefore, at the time of the conclusion of the contract, [the Sellers] must have been aware that a deficient delivery would cause problems between [the Buyer] and its clients which could not be easily solved by [the Buyer], eg, through a short-time substitute delivery. [The Sellers] also had to take into account that [the Buyer] could lose clients completely in case of a deficient delivery and that it could thereby suffer additional damages' (EK, L and A v F Supreme Court (Switzerland) 28 October 1998 <http://cisgw3.law.pace.edu/cases/981028s1.html>). For cases where loss of custom and damage to reputation and goodwill were not held to be foreseeable in the circumstances (with no sufficient explanation being given, however), see CIETAC Arbitration proceeding 31 January 2000 (Clothes case) <http://cisgw3.law.pace.edu/cases/000131c1.html>; CIETAC Arbitration proceeding 26 October 1996 (Cotton bath towel case) <http://cisgw3.law.pace.edu/cases/961026c1.html>.

49. Case No VIII ZR 210/78 Supreme Court (Germany) 24 October 1979 (Cheese case) <http://cisgw3.law.pace.edu/cases/791024g1.html>.

50. Federal District Court (New York) 23 August 2006 (n 45).

51. Re: Siskiyou Evergreen, Inc Debtor, Case No 602-66975-fra11, unreported, US Bankruptcy Court for the District of Oregon 29 March 2004 (United States) <http://cisgw3.law.pace.edu/cases/040329u2.html> ('At trial, Barroso conceded that the rejection of the several contracts he had with customers in Mexico was wrongful. It follows that the events could not have been foreseen by the seller'). The same result could, of course, have been achieved by means of the mitigation rule: by accepting unjustifiable rejection of the goods by its sub-buyers, the buyer failed to reduce or avoid its loss. For the discussion of the interrelationship between the foreseeability and mitigation rules, see below.

52. 'Both parties confirmed during the hearings that they had had long-lasting business relations which fact was reflected in numerous contracts. In these circumstances, the [Seller], as a professional participant of the market of this kind of goods, could not have been unaware of the fact that the [Buyer] is not the consumer of the delivered goods and that it distributes them on the internal market of Russia, that naturally includes transshipment (resale) of the purchased goods by the [Buyer] to further customers, as was the case in the relations of the [Buyer] with its customer under Contract No 11-04/KK of 15 April 2004. Equally, having chosen the Russian law as the applicable law, the [Seller] could not have been unaware that failing to perform its obligations to the [Buyer] it will have to recover the loss suffered by the [Buyer] as a result of paying penalties to its contractor in accordance with the rules of Russian civil law' (ICAC Case 97/2004, decision dated 23 December 2004 <http://cisgw3.law.pace.edu/cases/041223r1.html>).

53. Case No 419 O 48/01 District Court Hamburg (Germany) 21 December 2001 (Stones case) <http://cisgw3.law.pace.edu/cases/011221g1.html>.

54. In fact, the clause was held to be void in accordance with the applicable domestic law.

55. For other cases, where damages arising from liability to third parties were held unforeseeable (where no satisfactory explanation has been given, however), see Case No 43 O 136/92 District Court Aachen (Germany) 14 May 1993 (Electronic hearing aid case) <http://cisgw3.law.pace.edu/cases/930514g1.html>; CIETAC Arbitration proceeding 7 May 1997 (Horsebean case) <http://cisgw3.law.pace.edu/cases/970507c1.html>.

56. CIETAC Arbitration proceeding 7 July 1997 (Isobutanol case) <http://cisgw3.law.pace.edu/cases/970707c1.html>.

57. ICC Arbitration Case No 8786 of January 1997 (Clothing case) <http://cisgw3.law.pace.edu/cases/978786i1.html>.

58. Bridge (n 18) 543.

59. The issue has been recently addressed in A Mullis, 'Recoverability of Lost Resale Profit and Compensation Paid to a Sub-Buyer under the Vienna Convention' at the Conference on 'Contract Damages: Domestic and International Perspectives' held in Birmingham, UK, June 2007.

60. For the 'self-interest' rationale of the mitigation rule, see ch 6.

61. See ch 6.

62. Murphey (n 22). For a similar view, see J Lookofsky, Consequential Damages in Comparative Context: From Breach of Promise to Monetary Remedy in the American, Scandinavian and International Law of Contracts and Sales (Copenhagen, Danmarks Jurist, 1989) 173.

63. Supreme Court (Germany), 24 October 1979 (n 49).

64. See arts 9 CISG, 1.8 UPICC, 1:105 PECL.

65. See arts 6 CISG, 1.5 UPICC, 1:102 PECL.

66. See art 9:503 PECL.

67. See Bridge (n 18) 546.

68. See Farnsworth (n 12) 1208 ('in cases where the injured party's loss ... is greatly out of proportion to the benefit that the party in breach was to have received in return ... [foreseeability] does not restrict [liability enough]'); Waddams (n 19) 558 ('the theory that price and liability must be commensurate is a device for restricting liability, and the perceived need for such a device indicates that the rule as announced in Hadley v Baxendale is incomplete').

69. See A Burrows, Remedies for Torts and Breach of Contract, 3rd edn (Oxford, OUP, 2004) 95.

70. See Murphey (n 22).

71. See, by contrast, comment (f) to section 351 of the US Restatement (Second) of Contracts.

72. Other tools can be used to deal with this problem such as interpreting the contract in such a way as to imply the parties' intention to exclude disproportionate losses, applying the applicable standard of proof in a manner reducing the degree of disproportion, developing a relevant general principle or even applying the tools of the applicable domestic law for this purpose (see Bernstein and Lookofsky (n 13) 144). However, the latter approach is, it is submitted, not an appropriate route for dealing with this problem as the operation of the remedy of damages is exclusively within the scope of the instruments and no domestic rules should be allowed to interfere.

73. Waddams (n 19) 562.

74. For the argument that the rule also requires foreseeability of the extent of the loss, see below. For the discussion of the possible relevance of insurance considerations for the application of the foreseeability rule, see Waddams (n 19) 566-7.

75. Nicholas (n 29) 231.

76. See Stoll and Gruber (n 5) 766.

77. Comment on art 7.4.4 UPICC; one commentator supports this view and argues that the same should be the case for the CISG (S 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' <http://www.cisg.law.pace.edu/cisg/principles/uni74.html>).

78. See Illustration 1, Comment A on art 9:503 PECL (Beale and Lando (n 28)).

79. CIETAC Arbitration proceeding 1 February 2000 (Silicon and manganese alloy case) <http://cisgw3.law.pace.edu/cases/000201c1.html>.

80. TA Diamond and H Foss, 'Consequential Damages for Commercial Loss: An Alternative to Hadley v Baxendale' (1994-1995) 63 Fordham L Rev 709.

81. See ibid.

82. For a similar view, see Stoll and Gruber (n 5) 766 ('the risk of loss is mainly characterized by the type of loss threatening').

83. See above.

84. See ch 3.

85. ICAC Case 97/2004, decision dated 23 December 2004 <http://cisgw3.law.pace.edu/cases/041223r1.html>.

86. CIETAC Arbitration proceeding 3 June 2003 (Clothes case) <http://cisgw3.law.pace.edu/cases/030603c1.html>.

87. For a very similar case where the same position has been taken, see ICAC Case 406/1998, decision dated 6 June 2000 <http://cisgw3.law.pace.edu/cases/000606r1.html> ('[Although] the buyer in principle has the right to recover damages for loss of profit ... the seller neither knew nor ought to have foreseen that the buyer's loss of profit would be as much as approximately half the price of contract in dispute. Based on this conclusion and also considering the buyer's conduct, the Tribunal considers that the buyer's loss of profit to be compensated should be measured in the amount of 10%. Reaching this conclusion the Tribunal took into account that the contract had been concluded on CIF terms. Although the contract does not refer to Incoterms, the Tribunal considers it is reasonable and allowed relying on the Incoterms guidelines which reflect the practices of international trade. Regarding the basis of the term CIF, Incoterms 1990 provides that the insurance should cover the price stipulated in the contract plus 10%, ie, a total of 110%. It is commonly known that the mentioned 10% covers the expected profit of the buyer and is the ordinary amount of profit in the practice of international trade').

88. Case No 95/3214 District Court of Kuopio (Finland) 5 November 1996 (Butter case) <http://cisgw3.law.pace.edu/cases/961105f5.html>.

89. 'It has not been shown that K knew the interest rates in Lithuania, namely 7% per month and 0.5% per day interest on arrears, which essentially differs from interest rates in Western Europe. One could not even assume that he should have known it. It is the estimate of the Court, that K should have pre-estimated that the interest loss resulting from not fulfilling the contractual obligations could be about 10% of the sale price, meaning US $8,000' (ibid). For another decision under the CISG where the extent of loss was deemed relevant for the purposes of the foreseeability test, see Case No 271 C 18968/94 Lower Court München (Germany) 23 June 1995 (Tetracycline case) <http://cisgw3.law.pace.edu/cases/950623g1.html>.

90. For a similar view, see Stoll and Gruber (n 5) 766 ('If the extent of the loss is significantly higher than what was foreseeable, then a different loss materialized than that which was foreseeable').

91. Cf HG Beale, Remedies for Breach of Contract (London, Sweet & Maxwell, 1980) 182).

92. See Stoll and Gruber (n 5) 766 note 140.

93. For a different view, see Comments to the UPICC and Eiselen (n 77) (arguing that the UPICC can be used to interpret the CISG in this respect: 'the Comment [to the UPICC] also makes it clear that the foreseeability relates to "the nature or type of harm but not to its extent". This should also be the approach under article 74 of the CISG').

94. See GH Treitel, Remedies for Breach of Contract: A Comparative Account (Oxford, Clarendon Press, 1988) 161 (in relation to the ULIS and the CISG).

95. As shown above, foreseeability does not refer to the precise amount of the loss.

96. This formula calculates damages as the difference between the contract price and the price in a substitute transaction.

97. This formula calculates damages as the difference between the contract price and the current price.

98. Articles 75, 76 CISG, 7.4.5, 7.4.6 UPICC, 9:506, 9:507 PECL.

99. See Farnsworth (n 13) 1201 (the losses ' "arising naturally" ... are those afforded under the standard formulas based on market price'); see also Hellner (n 14) 63-4, arguing that the said methods of calculation do not have any connection with foreseeability.

100. See ch 8.

101. This approach has been taken in a number of cases under the CISG (see CIETAC Arbitration proceeding 4 February 2002 (Styrene monomer case) <http://cisgw3.law.pace.edu/cases/020204c1.html>; Case No 4 R 219/01k Appellate Court Graz (Austria) 24 January 2002 (Excavator case) <http://cisgw3.law.pace.edu/cases/020124a3.html> (the decision is unusual because the injured seller's resale was considered in the context of art 74 CISG and not art 75)).

102. See arts 74 CISG, 7.4.4 UPICC, 9:503 PECL.

103. It has been said, eg, that '[a] sounder decision can be made nearer the time of performance or breach. The true loss to the party who will be injured by a breach will be, on the average, more apparent the closer in time to the intended breach one tries to predict that loss. Fresher data will be available--a knowledge of prices at a time closer to when performance would be due, for example' (Murphey (n 22), who, however, is in favour of the 'time of making the contract' rule). See also R Samek, 'Relevant Time of Foreseeability of Damages' (1964) 38 Australian L J 125.

104. See statement of a US court in Patterson v Illinois Cent Ry Co, 97S.W. 426, 123 Ky 783 (1906) cited in Corbin (n 23) 64.

105. See Atiyah (n 6) 432-3; also Corbin (n 23) 64-5.

106. See Treitel (n 94) 160.

107. See ibid, 160.

108. See Knapp (n 26) 542.

109. See ibid, 542.

110. See A Kramer, 'Remoteness: New Problems with the Old Test' in Saidov and Cunnington (n 1) 297-8.

111. See arts 6 CISG, 1.5 UPICC, 1:102 PECL. So far as the UPICC and PECL are concerned, the only restrictions might be those flowing from mandatory rules in the Principles themselves or those emanating from the applicable mandatory domestic, supranational, or international law (see arts 1:102, 1:103 PECL; arts 1.5 UPICC and comment to arts 1.1 and 1.5). The only restriction on the party autonomy in the CISG itself is art 12. For the possibility of restrictions, emanating from the applicable mandatory domestic law, in cases where the CISG is 'opted-into', see Schlechtriem (n 10) 35.

112. For the discussion of long-term contracts, see ch 9.

113. Kramer (n 110) 301.

114. Ibid, 302.

115. See JS Ziegel, Report to the Uniform Law Conference of Canada on Convention on Contracts for the International Sale of Goods <http://www.cisg.law.pace.edu/cisg/text/ziegel80.html>.

116. See EA Farnsworth, 'Damages and Specific Relief' (1979) 27 AJCL 253.

117. Article 7.4.4 UPICC.

118. Article 9:503 PECL.

119. Cf J Ramberg, International Commercial Transactions ICC Publication 624, 2nd edn (The Netherlands, Kluwer Law International, 2000) 127 ('Semantically there seems to be a difference between the words "possible consequence" and the words "likely to result". To mention a dramatic example one could say that the Third World War hopefully "is not likely to result" but nevertheless "might be possible"').

120. R Danzig, 'Hadley v Baxendale: A Study in the Industrialization of the Law' (1975) 4 JLS 279-80. The conclusion that foreseeability is a product of historical circumstances in England in the mid-1850s is difficult to support in the light of the statement made by Fuller and Eisenberg: 'Professor Danzig contends that the decision in Hadley v Baxendale was essentially a product of historical circumstances, particularly the peculiar state of industry, law, and the judicial system in England in the mid-1850s. This contention, however, is hard to reconcile with the fact that the principle adopted in Hadley v Baxendale also appears in the great French treatise by Pothier . . . In view of the differences between mid-1700s France and mid-1800s England, it seems highly unlikely that a principle which appears in both times and places is essentially of the peculiar state of industry, law, and the judicial system in either time or place' (LL Fuller and MA Eisenberg, Basic Contract Law (St Paul, Minn, West Group Publishing Co, 1981) 235-6).

121. MG Bridge, 'The Market Rule of Damages Assessment' in Saidov and Cunnington (n 1) 438.

122. JT Landa, 'Hadley v Baxendale and the Expansion of the Middleman Economy' (1987) 16 JLS 464 ('[M]arkets with middlemen are characterized by information asymmetry in the producer-middlemen market and the middleman-final consumer market: producer-sellers know only of the prices in their own market and not of the prices in the resale (second) market, while final consumers know of prices in the second market and not of prices in the first market. Only the middlemen possesses information on prices in both markets because, in his role or identity as the middleman, he is both a buyer (in the first market) and a seller (in the second market). Price information flowing between the two markets is the result of entrepreneurial activities of middlemen' (ibid, 459)).

123. Ibid, 465.

124. See ibid.

125. See LC Bulow, 'Consequential Damages and the Duty to Mitigate in New York Maritime Arbitrations' (1984) LMCLQ 625.

126. RA Epstein, 'Beyond Foreseeability: Consequential Damages in the Law of Contract' (1989) 18 JLS 124.

127. See MP Ellinghaus and EW Wright, 'The Common Law of Contracts: Are Broad Principles Better than Detailed Rules? An Empirical Investigation' (2004-2005) 11 Texas Wesleyan L Rev 399.

128. An attempt to introduce foreseeability first has been made in Roman law. Much later foreseeability was established as a limitation of damages in art 1150 of the French Civil Code. Since that time the rule has been said to gain influence in other legal systems, including English law (see F Ferrari, 'Comparative Ruminations on the Foreseeability of Damages in Contract Law' (1992-1993) 53 Louisiana L Rev 1264).

129. See Treitel (n 94) 150, 152; Beale and Lando (n 28) 441; Komarov (n 1).

130. There are, however, some recent examples of the attempts to abandon the rule. It has been reported that, in the course of preparing the reform of the French law of obligations, a proposal has been put forward to abandon the foreseeability rule (see Komarov (n 1) with further references).


Pace Law School Institute of International Commercial Law - Last updated October 24, 2008
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