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Use of the UNIDROIT Principles to help interpret CISG Article 77


Match-up of CISG Article 77 with counterpart provisions of UNIDROIT Principles


UNIDROIT Principles
Article 7.4.8 - Mitigation of Harm

CISG
Article 77

(1) The non-performing party is not liable for harm suffered by the aggrieved party to the extent that the harm could have been reduced by the latter party’s taking reasonable steps.

(2) The aggrieved party is entitled to recover any expenses reasonably incurred in attempting to reduce the harm.

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

[The UNIDROIT article displayed above is to be read in conjunction with the Official Comments on it as "the comments on the articles are to be seen as an integral part of the Principles" (UNIDROIT).]


To examine CISG provisions displayed above in their context, go to the full text of the CISG || To examine UNIDROIT Principles displayed above in their context, go to the full text of the UNIDROIT Principles


Editorial remarks

Commentary on the manner in which the UNIDROIT Principles
may be used to interpret or supplement Article 77 of the CISG

Elisabeth Opie [*]
January 2005

  1. Introduction
  2. Duty to mitigate
  3. Reasonableness
  4. Reimbursement of Expenses
  5. Burden of Proof
  6. Conclusion

I. Introduction

If the underlying principle of the United Nations Convention on the International Sale of Goods (CISG or Convention) is reasonableness,[1] Art. 77 CISG could certainly require a plaintiff or respondent to rise to the challenge of being reasonable during what is likely a difficult situation - when he or she is already losing money (or is about to)[2] because of the other party to the international sales contract.

This paper examines the obligations imposed on parties pursuant to Art. 77 CISG by comparing this Article with Art. 7.4.8 UNIDROIT Principles (Mitigation of harm).[3]

Article 77, appearing in Section II of the Convention (Damages),[4] applies only when a party is claiming damages for breach of contract,[5] and will not apply in relation to any other remedy sought (such as specific performance).[6] Article 77 states:

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

Article 7.4.8 of the UNIDROIT Principles (UNIDROIT), entitled 'Mitigation of Harm', also appearing in a Section entitled 'Damages' provides:

(1) The non-performing party is not liable for harm suffered by the aggrieved party to the extent that the harm could have been reduced by the latter party's taking reasonable steps.

(2) The aggrieved party is entitled to recover any expenses reasonably incurred in attempting to reduce the harm.

II. Mitigation of Loss

Commentators have variously described the obligation imposed by Art. 77 as a statement of 'public policy against waste',[7] a duty to mitigate,[8] a duty to cooperate [9] and 'an obligation for oneself'.[10] [11] A literal interpretation of this Article does place a requirement on the party relying on breach to do something - provided that it is reasonable in the circumstances - to reduce loss or damage.[12] If there is a failure to do so by the party relying on breach (again on a literal interpretation), there is a consequence at the option of the non-performing party [13] to seek to have any damages otherwise payable reduced. The difference between Art. 77 CISG and Art. 7.4.8 UNIDROIT Principles is not that one appears to impose an obligation on a party and the other does not. The point of difference is that Art. 7.4.8(1) expressly provides that a reduction of damages (harm suffered by the aggrieved party) is automatic if the aggrieved party could have taken reasonable steps to reduce the harm (but fails to do so).[14] On this reading, the difference between the option and a right to have damages reduced would appear minimal - in practice, the non-performing party would most likely seek to reduce any damages payable for a breach of contract.[15]

III. Reasonableness

'The obligation stated in Art. 77 CISG is to be interpreted taking into account the competing interests of the parties,[16] as well as commercial customs and the principle of good faith.'[17] The obligation imposed by Art. 77 is also to be interpreted in light of the words 'reasonable in the circumstances'.[18] There is no definition of 'reasonable' in the CISG or the UNIDROIT Principles.[19]

The assessment of reasonableness is a question of fact and will take into account circumstances such as the time within which action was undertaken to diminish an avoidable loss [20] and whether a substitute transaction was conducted on an arm's length basis.[21] Conversely, 'loss caused by a breach of contract is not recoverable if it could have been reduced by taking reasonable measures. A potential measure to mitigate damages is reasonable, if in good faith it could be expected under the circumstances. This is to be determined according to the actions of a reasonable person in the same circumstances.'[22]

Given the case-by-case assessment which is necessarily undertaken for a reduction of damages pursuant to Art. 77, the types of factors to be considered (such as perishability of goods, fluctuation in market price, availability of a market, third party obligations) and the measures taken by the party not in breach is not exhaustive.[23] However, in determining reasonableness of action in a particular set of circumstances, guidance may be sought from the commentary accompanying Art. 7.4.8(1) UNIDROIT Principles.[24] It states:[25]

The purpose of this article is to avoid the aggrieved party passively sitting back and waiting to be compensated for harm which it could have avoided or reduced. Any harm which the aggrieved party could have avoided by taking reasonable steps will not be compensated.

Evidently, a party who has already suffered the consequences of non-performance of the contract cannot be required in addition to take time-consuming and costly measures. On the other hand, it would be unreasonable from the economic standpoint to permit an increase in harm which could have been reduced by the taking of reasonable steps.

'The creditor should attempt to undertake everything possible in order to diminish the loss or at least to prevent its increase'.[26]

IV. Reimbursement of expenses

Article 7.4.8(2) UNIDROIT Principles expressly provides that an 'aggrieved party is entitled to recover any expense reasonably incurred in attempting to reduce the harm'. This entitlement is implied from the wording of Art. 77 CISG, which provides an example of loss which might be recouped by the party relying on breach of contract (i.e. loss of profit). A literal reading of this Article is that this example of loss is non-exhaustive. Any loss is limited to that loss which is reasonable in the circumstances, and foreseeable.[27]

In dealing with recovery of expenses separately from liability for harm suffered, Art. 7.4.8(2) UNIDROIT Principles appears to sever an obligation of the aggrieved party (mitigation of harm) from a right of the aggrieved party (recovery of expenses). Article 77 CISG, however, imposes the obligation to mitigate both loss and loss of profits (thereby including expenses). To this extent, Art. 77 CISG appears to place a broader obligation on the aggrieved party to mitigate than the UNIDROIT Principles.

V. Burden of Proof

The non-performing party has to prove that the aggrieved party failed to comply with its obligation to mitigate its loss (including loss of profit) pursuant to Art. 77 CISG.[28] As noted above, there are two elements separately provided for under Art. 7.4.8 UNIDROIT Principles: (i) the obligation to mitigate and (ii) the right to be compensated for reasonable expenses. Pursuant to Art. 7.4.8 UNIDROIT Principles, the burden of proof will rest on the non-performing party to demonstrate that the aggrieved party has failed to reduce the harm by taking reasonable steps. As it is the aggrieved party who will assert that the expenses incurred as part of its actions to mitigate harm were reasonable in the circumstances, then the burden on proving this will rest on the aggrieved party.[29]

If the above comments on the breadth of the obligation to mitigate under Art. 77 CISG are accepted, then the onus would rest with the non-performing party under this Article in relation to both the loss and expenses incurred in mitigating that loss. That is, burden will not lie with the aggrieved party to prove that measures taken to mitigate expenses were reasonable. There is a rebuttable presumption which lies in favor of the aggrieved party.

VI. Conclusion

The above comparative analysis between Art. 77 CISG and Art. 7.4.8 UNIDROIT Principles demonstrates a number of differences in both the drafting and interpretation of these Articles. Most notably, Article 77 CISG does appear to be drafted in favor of the aggrieved party, whereas Art. 7.4.8 UNIDROIT Principles takes into account the interests of both the non-performing and the aggrieved party. In spite of these differences, Art. 7.4.8 UNIDROIT Principles and its accompanying commentary do facilitate the interpretation of Art. 77 CISG, and confirm that an obligation (by whatever name) is placed on an aggrieved party to reduce any damage caused by the non-performing party if it is reasonable to do so in the circumstances.

[See also commentary by the author on this subject in: John Felemegas ed., An International Approach to the Interpretation of the United Nations Convention on Contracts for the International Sale of Goods (1980) as Uniform Sales Law, Cambridge University Press (2006) 226-231.]


FOOTNOTES

* Elisabeth Opie is Senior Legal Counsel for the Commonwealth Scientific and Industrial Research Orgnisation, Australia, and Editor-in-Chief of the Vindobona Journal of International Commercial Law and Arbitration.

1. See generally, Kritzer, A., 'Reasonableness' at <http://cisgw3.law.pace.edu/cisg/text/reason.html#view>.

2. It is noted that the United Kingdom disagreed with the Commentary that the principle of mitigation applies to anticipatory breach: Legislative History, 1980 Vienna Diplomatic Conference, 'Analysis of Comments and Proposals by Governments and International Organizations on the Draft Convention on Contracts for the International Sale of Goods, and on Draft Provisions Concerning Implementation, Reservations and Other Final Clauses' prepared by the Secretary-General, Document A/CONF.97/9 ('Legislative History'), original in English, 21 February 1980; available at <http://cisgw3.law.pace.edu/cisg/Fdraft.html>. Article 73 in the Text of [1978] Draft Convention on Contracts for the International Sale of Goods approved by the United Nations Commission on International Trade (see Official Records of the General Assembly, Thirty-third Session, Supplement No. 17 (A/33/17) chap. II, para. 28) was the precursor to Art. 77 and is substantively similar to Art. 77. For a general discussion on the principle of mitigation and anticipatory breach, see Saidov, D., 'Methods of Limiting Damages under the Vienna Convention on Contracts for the International Sale of Goods' December 2001, at Part 4(c); available at <http://cisgw3.law.pace.edu/cisg/biblio/saidov.html#iv>.

3. For use of the UNIDROIT Principles to assist in the interpretation on CISG, see Kritzer, A, 'General Observations on Use of the UNIDROIT Principles to Help Interpret the CISG, available at <http://cisgw3.law.pace.edu/cisg/text/matchup/general-observations.htm>. It is noted that other UNIDROIT Principles may be relevant to the interpretation of Art. 77 CISG, including Art. 7.4.1. This paper does not include a discussion of these articles, but does note that the use of the term 'harm' in the UNIDROIT Principles is given the same meaning as 'damages' under the CISG. Nor does this paper deal with other relevant provisions in the CISG, such as Art. 74 which requires that any damages sought under the CISG must be foreseeable and arise as a consequence of the breach for which damages are sought.

4. Sutton notes that, '[a] subspecies of the many remedial provisions found in the Convention, the measurement of damages rules are located in articles 74-78. These sections address the following issues: (1) a general rule for the measurement of damages [Article 74] (2) the measurement of damages in contract avoidance situations by substitute transactions [Article 75] or by current price [Article 76], (3) the mitigation of damages [Article 77], (4) and the interest on money damages [Article 78]. See Sutton, J.S., 'Measuring Damages Under the United Nations Convention on the International Sale of Goods, 50 Ohio State Law Journal (1989) 737-752, at Section IIIA; also available online at <http://cisgw3.law.pace.edu/cisg/biblio/sutton.html>.

5. See Kritzer, A. H., extract from Guide to Practical Applications of the United Nations Convention on Contracts for the International Sale of Goods, Kluwer Law International (1994); also available at <http://cisgw3.law.pace.edu/cisg/biblio/kritzer2.html#loss>.

6. During the drafting of the Convention, the proposal by the United States of America in respect of Art. 58 of the draft Convention [which became CISG article 62] that the mitigation principle be extended to a corresponding modification or adjustment of other remedies than damages was rejected. See Legislative History, fn 3. Domestic doctrines of mitigation may, however, come into play in the case of specific performance by virtue of Art. 28 CISG.

7. McMahon, J.P., 'Guide for Managers and Counsel: Drafting CISG Contracts and Documents and Compliance Tips for Traders', <http://cisgw3.law.pace.edu/cisg/contracts.html#a77>.

8. See Sutton, J.S., 'Measuring Damages Under the United Nations Convention on the International Sale of Goods', 50 Ohio State Law Journal (1989) 737-752, at Part B, Section 5; also available at <http://cisgw3.law.pace.edu/cisg/biblio/sutton.html>.

9. See Vilus, J., 'Provisions Common to the Obligations of the Seller and the Buyer', in Sarcevic, P & Volken P (eds.), International Sale of Goods: Dubrovnik Lectures, Oceana (1986) at p. 250; also available at <http://cisgw3.law.pace.edu/cisg/biblio/vilus.html>.

10. See Austria 24 January 2002 Oberlandesgericht [Appellate Court] Graz, case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/020124a3.html>, citing Karollus, UN-Kaufrecht, at p. 225.

11. 1 Cf. Saidov, D., 'Methods of Limiting Damages under the Vienna Convention on Contracts for the International Sale of Go' December 2001, at Part 4(a); available at <http://cisgw3.law.pace.edu/cisg/biblio/saidov.html#iv>.

12. The requirement is imposed on a party relying on breach by the words 'must take such measures [...] to mitigate the loss [...]'.

13. The second sentence of Art. 77 states that 'the party in breach may claim a reduction in the damages in the amount by which the loss should have been mitigated'.

14. Although these words are not contained in Art. 7.4.8(1) UNIDROIT Principles, the author considers that this Principle only makes sense if the harm has not been reduced when it could have been.

15. This comment is based on a literal interpretation of Art. 77; see infra fn 13. Cf. Arbitration (ICC) June 1999, Case 9187, available at <http://www.cisg-online.ch/cisg/urteile/705.htm>, where it was held that, '[t]he party claiming damages has an obligation to mitigate the loss (Art. 77 CISG), else it loses its right to damages. Whether the claiming party has complied with this duty has to be considered by the Arbitral Tribunal ex officio, whereby the burden of proof for the fact that a loss could have been avoided lies with the party owing damages (Stoll in V Caemmerer/Schlechtriem, op. cit., N 12 to Art. 77 CISG) [citations included in decision]'.

16. For this reason, it would appear contrary to the underlying principles of the Art. 77 to permit a party relying on a breach to fail to take into account the cost of the mitigating measures to the party in breach. '[M]itigation principles do not appear to require the injured party to choose the remedy which would be least expensive to the party in breach', but the measures taken must be reasonable in the circumstances; (see Text of Secretariat Commentary on Art. 73 of the 1978 Draft [draft counterpart of CISG article 77], presentation available at <http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-77.html>). Arguably, the duty to mitigate does apply to the cost of measures employed to mitigate the loss: see 'IV. Reimbursement of expenses' below.

17. See Austria 24 January 2002 Appellate Court Graz, citing Karollus, UN-Kaufrecht, at p. 225.

18. Secretariat Commentary, op.cit., Comment 1. Article 7(1) CISG also 'suggests that the international character of the Convention and the need to promote uniformity in its application and the observance of good faith in international trade are to be taken into account in the interpretation process': Netherlands 15 October 2002 Netherlands Arbitration Institute, Case No. 2319 at paragraph 104; available at <http://cisgw3.law.pace.edu/cases/021015n1.html>. For an online presentation of Art. 7 CISG, which provides the Convention's in-built interpretative mechanism, see <http://cisgw3.law.pace.edu/cisg/text/e-text-07.html>.

19. See Kritzer, A.H., 'Reasonableness'; available at <http://www.cisg.law.pace.edu/cisg/text/reason.html>; and Borisova, B., 'Remarks on the Manner in which the UNIDROIT Principles May Be Used to Interpret or Supplement Article 75 of the CISG', May 2004, (including commentary and cases cited at fn 10); available at <http://www.cisg.law.pace.edu/cisg/biblio/borisova1.html#10>.

20. See Switzerland 12 December 2002 Kantonsgericht [District Court] Zug, case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/021212s1.html>, where the seller sold goods to an alternate buyer two days after seller knew with certainty that the original buyer would not take delivery of the goods the subject of the agreement. The court held that the two days was not too long a period for the seller to enter into a substitute transaction, despite the fact that the market price of the goods had fallen in the meantime. The calculation of damages was therefore calculated by taking into account the benefit received from the substitute transaction, with the difference in price being payable by the original buyer (including interest from date of payment under the contract). See also Denmark 31 January 2002 Sø og Handelsretten [Maritime Commercial Court] (Dr. S. Sergueev Handelsagentur v. DAT-SCHAUB A/S), case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/020131d1.html>.

21. Netherlands 15 October 2002 Netherlands Arbitration Institute, Case No. 2319 at paragraph 151; case presentation and English text available at <http://cisgw3.law.pace.edu/cases/021015n1.html>; Austria 24 January 2002 Oberlandesgericht [Appellate Court] Graz, case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/020124a3.html>.

22. See Austria 14 January 2002 Oberster Gerichtshof [Supreme Court], case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/020114a3.html>.

23. Saidov notes that there are a wide range of measures which might be undertaken to mitigate damages under Art. 77: see Saidov, D., 'Methods of Limiting Damages under the Vienna Convention on Contracts for the International Sale of Goods' December 2001, at Part 4(b); available at <http://cisgw3.law.pace.edu/cisg/biblio/saidov.html#iv>.

24. It is noted that the words 'in the circumstances' do not appear in Art. 7.4.8 UNIDROIT Principles. Nonetheless, the assessment of reasonableness will still be done a case-by-case basis under that Article.

25. UNIDROIT Principles of International Commercial Contracts [1994], full text in English available online at <http://www.unidroit.org/english/principles/contracts/principles1994/fulltext.pdf>.

26. See Vilus, J., 'Provisions Common to the Obligations of the Seller and the Buyer', in Sarcevic, P & Volken P (eds.), International Sale of Goods: Dubrovnik Lectures, Oceana (1986) at p. 251; also available at <http://cisgw3.law.pace.edu/cisg/biblio/vilus.html>. Similar comments have been made in relation to Art. 7.4.8(1). The Official Commentary to Art. 7.4.8 of the UNIDROIT Principles, which is available online at <http://cisgw3.law.pace.edu/cisg/principles/uni77.html#official>, Comment 1 states that:

The steps to be taken by the aggrieved party may be directed either to limiting the extent of the harm, above all when there is a risk of it lasting for a long time if such steps are not taken (often they will consist in a replacement transaction: see Art. 7.4.5), or to avoiding any increase in the initial harm.

27. See Art. 74 CISG. It is noted that other provisions in the CISG also place obligations on the party relying on breach to do certain things to, for example, preserve delivered, non-conforming goods at the cost of the non-performing party (Art. 85 CISG).

28. Arbitration (ICC) June 1999, Case 9187, available at <http://www.cisg-online.ch/cisg/urteile/705.htm>.

29. It is generally accepted that the burden of proof rests with the party making the assertion.


Official Comments on Articles of the UNIDROIT Principles cited

Comments reprinted with permission from UNIDROIT

 

ARTICLE 7.4.8

(Mitigation of harm)

(1) The non-performing party is not liable for harm suffered by the aggrieved party to the extent that the harm could have been reduced by the latter party's taking reasonable steps.

(2) The aggrieved party is entitled to recover any expenses reasonably incurred in attempting to reduce the harm.

COMMENT

1. Duty of aggrieved party to mitigate harm

The purpose of this article is to avoid the aggrieved party passively sitting back and waiting to be compensated for harm which it could have avoided or reduced. Any harm which the aggrieved party could have avoided by taking reasonable steps will not be compensated.

Evidently, a party who has already suffered the consequences of non-performance of the contract cannot be required in addition to take time-consuming and costly measures. On the other hand, it would be unreasonable from the economic standpoint to permit an increase in harm which could have been reduced by the taking of reasonable steps.

The steps to be taken by the aggrieved party may be directed either to limiting the extent of the harm, above all when there is a risk of it lasting for a long time if such steps are not taken (often they will consist in a replacement transaction: see Art. 7.4.5), or to avoiding any increase in the initial harm.

Illustrations

1. On 2 May, A requests B, a travel agency, to reserve a hotel room in Paris for 1 June, at a cost of 500 French francs. On 15 May, A learns that B has not made the reservation. A waits however until 25 May before making a new reservation and can only find a room costing 700 francs, whereas accommodation could have been secured for 600 francs if A had already taken action on 15 May. A can recover only 100 francs from B.

2. A, a company which has been entrusted by B with the building of a factory, suddenly stops work when the project is nearing completion. B looks for another company to finish the building of the factory but takes no steps to protect the buildings on the site whose condition deteriorates as a result of bad weather. B cannot recover compensation for such deterioration as it is attributable to its failure to take interim protective measures.

2. Reimbursement of expenses

The reduction in damages to the extent that the aggrieved party has failed to take the necessary steps to mitigate the harm must not however cause loss to that party. The aggrieved party may therefore recover from the non-performing party the expenses incurred by it in mitigating the harm, provided that those expenses were reasonable in the circumstances (para. (2)).

Illustrations

3. The facts are the same as in Illustration 2, the difference being that B has the necessary work carried out to ensure the interim protection of the buildings. The cost of such work will be added to the damages due by A for non-performance of the contract on condition that those costs were reasonable. If they were not, they will be reduced.

4. The facts are the same as in Illustration 1, the difference being that A takes a room costing 2,000 French francs in a luxury hotel. A may only recover the hundred franc difference in respect of the room which A could have obtained for 600 francs.


Pace Law School Institute of International Commercial Law - Last updated January 5, 2007
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