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Use of the UNIDROIT Principles to help interpret CISG Article 78


Match-up of CISG Article 78 with counterpart provisions of UNIDROIT Principles


UNIDROIT Principles
Article 7.4.9 - Interest for Failure to Pay Money

CISG
Article 78

(1) If a party does not pay a sum of money when it falls due the aggrieved party is entitled to interest upon that sum from the time when payment is due to the time of payment whether or not the non-payment is excused.

(2) The rate of interest shall be the average bank short-term lending rate to prime borrowers prevailing for the currency of payment at the place for payment, or where no such rate exists at that place, then the same rate in the State of the currency of payment. In the absence of such a rate at either place the rate of interest shall be the appropriate rate fixed by the law of the State of the currency of payment.

(3) The aggrieved party is entitled to additional damages if the non-payment caused it a greater harm.

If a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it, without prejudice to any claim for damages recoverable under article 74.

Article 7.4.10 - Interest on Damages

Unless otherwise agreed, interest on damages for non-performance of non-monetary obligations accrues as from the time of non-performance.

Article 7.4.13 - Agreed Payment for Non-Performance

(1) Where the contract provides that a party who does not perform is to pay a specified sum to the aggrieved party for such non-performance, the aggrieved party is entitled to that sum irrespective of its actual harm.

(2) However, notwithstanding any agreement to the contrary the specified sum may be reduced to a reasonable amount where it is grossly excessive in relation to the harm resulting from the non-performance and to the other circumstances.

[The UNIDROIT articles displayed above are to be read in conjunction with the Official Comments on them 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

Remarks on the Manner in which the UNIDROIT Principles
of International Commercial Contracts May Be Used to
Interpret or Supplement Article 78 of the CISG

Sieg Eiselen [*]
September 2004

a. The right to claim interest on amounts due and not paid by a contractual party under the CISG is governed by Articles 78 and 84(1).[1] The issue of interest was one of the topics on which no real consensus could be reached in the drafting of the CISG.[2] One commentator has remarked that "Art. 78 is more conspicuous for the questions it fails to answer than the questions it answers."[3] The fact that such a right was included at all represents a compromise between the various interests groups which followed from incompatible views on interest.[4] It was achieved with great difficulty in the final phases of the Conference.[5]

b. Article 78 is formulated in general terms leaving the following issues open or unresolved: the rate of interest; whether interest is payable when the breach of the defaulting party is excused under Article 79; whether the amount due need to be liquidated before interest accrues; whether interest is payable on any amount of damages due and whether compound interest may be claimed. The determination of the rate of interest was intentionally left open in the drafting process of the CISG as no agreement could be reached on the approach to be adopted.[6]

c. Due to the controversies and uncertainties which surrounds Article 78 the provisions of the UNIDROIT Principles must be considered as one appropriate way of solving these issues. This has been suggested by some commentators [7] and has even been used by arbitral tribunals to justify a certain approach to the awarding of interest and referred to by others.[8] Whether the use of the UNIDROIT Principles in these cases were justified will be considered below.

d. The principle of full compensation is the basic principle underlying the provisions of the CISG in respect of damages where the damages have been caused by a breach of contract that is not excused under article 79. In the interpretation and filling of the gaps left in article 78 regard should therefore be had to the underlying principle of full compensation.[9] There is a considerable difference of opinion especially amongst commentators on whether the gap left in art 78 in respect of the rate of interest is a gap praeter legem, i.e., one being governed by, but not expressly settled in the CISG, or whether it is an issue falling outside the scope of application of the CISG, i.e. a gap intra legem.[10] The protagonists of the former view lay emphasis on the overall objective of the CISG, namely to create a uniform law,[11] whereas the supporters of the latter view refer to the legislative history of art 78 as the dominant principle in interpreting art 78.[12]

e. If it is accepted that a uniform the uniform approach should be adopted in the filling of the gap in article 78, the gap should be filled using the principles contained in article 7.[13] Eberstein and Bacher [14] quite correctly points out that even proponents of the uniform approach are not agreed on the method to be adopted. Some authors and cases are of the opinion that the rate should be based on the loss suffered by the non-defaulting party and that the place of business of the creditor should therefore be decisive.[15] However, this approach would make art 78 superfluous as actual loss can be claimed under article 74 in any event.[16] Other writers conclude that article 78 is aimed at providing compensation for benefits unjustifiably received and therefore argues that the rate of interest should be based on the debtor's place of business.[17] A further approach suggests that a more objective approach should be used namely linking the rate of interest to the currency in which the debt is to be paid and not the place of business of either party.[18] However this approach may be problematic in respect of currencies like the Euro which is not linked to only one country [19] A fourth approach takes its lead from the Uniform Principles, namely that the place of payment should determine the applicable rate of interest.[20] Despite precedent for each of these approaches, it would seem that the general tendency in the decided cases is to regard the issue as one not regulated by the CISG and therefore that it consists of a gap that should be filled by local law.[21]

f. The conclusion that the rules of private international law should determine the proper law of the contract and that that law should determine the rate of interest applicable, seems inescapable in the light of the legislative history of Article 78.[22] The right to claim interest clearly falls within the scope of the CISG, the determination of the rate of interest, however, clearly falls outside its scope and is to be determined by domestic law.[23] This seems to be the dominant view amongst commentators and courts, even if it is not the unanimous view as stated by some German courts.[24]

g. The UNIDROIT Principles have been used in two instances to fill the gap in article 78.[25] The sole arbitrator in an Austrian case for example referred to Art 7.4.9(2) of the UP to justify his decision to award a commercially reasonable interest.[26] However, these remain isolated cases and the decisions cannot be justified in the light of the principles concerned. As a result of the clear intention of the drafters of the CISG to leave the rate of interest outside the scope of the CISG, the UNIDROIT Principles can play no role in filling this gap and is therefore only of interest for any future development or change of the CISG.[27]

h. Article 7.4.9(2) of the UNIDROIT Principles makes provision for the payment of interest at the average bank short-term lending rate to prime borrowers prevailing for the currency of payment at the place of payment. Where no such rate exists at that place then the same rate in the state of the currency of payment will apply. In the event that neither such rates are available the impasse is resolved by applying the rate fixed by the law of the state of the currency of payment.[28] The Comments to Art 7.4.9 indicate that this solution seems to be best suited to the needs of international trade and most appropriate to ensure an adequate compensation of the harm sustained. The rate in question is the rate at which the aggrieved party will normally borrow the money which it has not received from the non-performing party. As such it represents a mixture of the first and fourth approaches discussed in paragraph e. above. It links the rate of interest both to the currency of payment and the place of payment. However, it is not directly linked to the place of business of either party as payment will not necessarily always be made at the place of business of the seller.

i. Article 7.4.9(1) of the UNIDROIT Principles determines that interest is payable whenever a party fails to pay that sum when it is due even if the non-payment is excused.[29] This provision confirms the interpretation of commentators of Article 78 CISG read with Article 79(5), namely that interest is payable even if the breach of contract is excused in terms of Article 79.[30] Although the primary aim of Article 78 is to provide the non-defaulting party with an easily quantifiable claim in the case of non-payment of money due, it goes further in that it requires no proof of a loss, clearly distinguishing it from the provisions of art 74.[31] However it is not clearly stated in the CISG whether interest is payable in the event of a breach that is excusable in terms of Article 79. The clear wording of Article 79(5) ("exercising any right other than to claim damages") seems to suggest that this should be the case.[32] The provisions of Article 7.4.9(1) of the UNIDROIT Principles confirms this interpretation as they clearly makes provision for payment of interest even in cases where the non-payment is excused.

j. The UNIDROIT Principles contain specific provisions dealing with the payment of interest on damages that are due. Article 7.4.10 provides that unless the contract excludes such a right, a party is entitled to claim interest on damages that are due for the non-performance of non-monetary obligations as from the time of the non-performance.[33] This provision contains two clear underlying principles, namely that payment of damages are due from the time of non-performance (or by implication from the time the damages are actually suffered [34]) and that the damages need not be liquidated at the time of their accrual.[35] This provision and its underlying principles may be helpful in the interpretation of Article 78 where these issues are not clearly addressed. It confirms the interpretation placed on Article 78 by most commentators on the CISG namely that interest is due from the date that the liability for damages accrue and that the amount of the damages need not be liquidated.[36] This has also been confirmed in case law.[37]

k. Neither the CISG nor the UNIDROIT Principles contain any provision on whether a party may be entitled to compound interest on any amounts due unlike the Uniform Law on Sales (ULIS) drafts.[38] There certainly is no right to compound interest in terms of the CISG.[39] However, if a party is entitled to compound interest in terms of the domestic law which governs the rate of interest, a party should probably be entitled to claim compound interest in cases otherwise governed by the CISG.[40] Although there is a perception that compound interest can generally not be claimed in international transactions, Gotanda shows very convincingly that compound interest may be awarded in many jurisdictions and is even being awarded in some international tribunals.[41]

[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) 231-236.]


FOOTNOTES

* Professor in Private Law, University of South Africa; Advocate of the High Court of South Africa.

1. Enderlein F. & Maskow D., International Sales Law United Nations Convention on Contracts for the International Sale of Goods (1992 New York) 310-311, also available online at <http://cisgw3.law.pace.edu/cisg/biblio/enderlein.html>; Magnus U., in Martinek M. (ed) J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetze: Wiener UN-Kaufrecht (1999 Berlin) Art 78 Rn 2-4; Witz W., Salger H.C. & Lorenz M., Internationales Einheitliches Kaufrecht (2000 Heidelberg) Art 78, Rn 1-4; Eberstein H. & Bacher K. in Schlechtriem P.H. & Bacher K. (eds), Kommentar zum einheitlichen UN Kaufrecht 3rd ed (2000 Munich) Art 78, Rn 1-4.

2. Schlechtriem/Eberstein/Bacher Art 78 Rn 2; Ferrari F., "Specific Topics of the CISG in the Light of Judicial Application and Scholarly Writing" 1995 (15) J of Law & Comm 1-126 also available online at <http://cisgw3.law.pace.edu/cisg/biblio/2ferrari.html>; Liu C., 'Recovery of Interest' 2003 Nordic Journal of Commercial Law of the University of Turku Issue 1, also available online at <http://cisgw3.law.pace.edu/cisg/biblio/chengwei.html>.

3. Ziegel J. & Samson C., 'Report to The Uniform Law Conference of Canada on the Convention on Contracts for the International Sale of Goods' (1981) 149 also available online at <http://cisgw3.law.pace.edu/cisg/wais/db/articles/english2.html>.

4. Corterier A., 'A New Approach to Solving the Problem of the Interest Rate Under Art 78 CISG' 5 (2002) International Trade and Business Law Annual 33-42 also available online at <http://cisgw3.law.pace.edu/cisg/biblio/corterier.html>; Ferrari at fn 39-48; Liu at fn 13-15.

5. Schlechtriem/Eberstein/Bacher Art 78 Rn 2.

6. Schlechtriem/Eberstein/Bacher Art 78 Rn 2; Corterier at 39. See Ferrari at fn 827-847 for a brief history of this article with reference also to its predecessor in the 1964 Uniform Law on the International Sale of Goods (ULIS).

7. Corterier 41; Liu at fn 246-250.

8. ICC Arbitration Case No. 8769 of December 1996 available online at <http://cisgw3.law.pace.edu/cases/968769i1.html>; ICC Arbitration Case No. 8128 of 1995 available online at <http://cisgw3.law.pace.edu/cases/958128i1.html>; Austria 15 June 1994 Vienna Arbitration proceeding SCH-4366 available online at <http://cisgw3.law.pace.edu/cases/940615a3.html>.

9. Honnold para 417 at 456; Enderlein/Maskow Notes 1 & 4, at pp 297-298; Witz/Salger/Lorenz Art 74, Rn 12 & 19; Staudinger/Magnus, Art 74, Rn 12, 16 & 19; Bonell 112; Behr V., 'The Sales Convention in Europe: From Problems in Drafting to Problems in Practice' (1998 (17) J of Law & Comm 281 available online at http://cisgw3.law.pace.edu/cisg/biblio/behr.html; Koneru P., "The International Interpretation of the UN Convention on Contracts for the International Sale of Goods: An Approach Based on General Principles' 1997 (6) Minnesota Journal of Global Trade 105-152 at fn 90 and 102-120, also available online at <http://cisgw3.law.pace.edu/cisg/biblio/koneru.html>; Ferrari at fn 883; Thiele C., "Interest on Damages and Rate of Interest Under Article 78 of the U.N. Convention on Contracts for the International Sale of Goods' 2 Vindobona Journal of International Commercial Law and Arbitration (1998) 3-35, also available online at <http://cisgw3.law.pace.edu/cisg/biblio/thiele.html>, at fn 84.

10. See Ferrari at fn 853-858; Liu at fn 133-136; Behr at 280;Thiele fn 49-58; Austria 15 June 1994 Vienna Arbitration proceeding SCH-4366 available online at <http://cisgw3.law.pace.edu/cases/940615a3.html>; Switzerland 5 November 2002 Commercial Court des Kantons Aargau, available online at <http://cisgw3.law.pace.edu/cases/021105s1.html>; Italy 31 March 2004 District Court Padova, available online at <http://cisgw3.law.pace.edu/cases/040331i3.html>; United States 21 May 2004 Federal District Court (Chicago Prime Packers, Inc. v. Northam Food Trading Co., et al), available online at <http://cisgw3.law.pace.edu/cases/040521u1.html>.

11. Koneru at fn 89 ff; Thiele at fn 112-119; Liu 134-136; Honnold 525-526; ICC Arbitration Case No. 6653 of 26 March 1993 available online at <http://cisgw3.law.pace.edu/cases/936653i1.html>; Schlechtriem/Eberstein/Bacher Art 78 Rn 21.

12. Herber/Czerwenka, Internationales Kaufrechts, (1991), 347; Germany 13 June 1991 Appellate Court Frankfurt 591, available online at <http://cisgw3.law.pace.edu/cases/910613g1.html>; Austria 15 June 1994 Vienna Arbitration proceeding SCH-4366, available online at <http://cisgw3.law.pace.edu/cases/940615a3.html>; Schlechtriem/Eberstein/Bacher Art 78 Rn 21.

13. Koneru fn 89 ff; Liu fn 147-153; Austria 15 June 1994 Vienna Arbitration proceeding SCH-4366, available online at <http://cisgw3.law.pace.edu/cases/940615a3.html>; Belgium 19 March 2003 District Court Veurne, available online at <http://cisgw3.law.pace.edu/cases/030319b1.html>; Germany 25 November 2002 District Court Saarbrücken, available online at <http://cisgw3.law.pace.edu/cases/021125g1.html>.

14. Schlechtriem/Eberstein/Bacher Art 78 Rn 23; Honnold para 421; Behr 296; Switzerland 15 January 1998 Appellate Court Lugano, Cantone del Ticino, available online at <http://cisgw3.law.pace.edu/cases/980115s1.html>; ICC Arbitration Case No. 9448 of July 1999, available online at <http://cisgw3.law.pace.edu/cases/999448i1.html>; Italy 29 December 1999 District Court Pavia (Tessile v. Ixela), available online at <http://cisgw3.law.pace.edu/cases/991229i3.html>. See also the case law discussed by Ferrari at fn 875.

15. Behr at fn 286; Corterier at 35; Honnold 421; Staudinger / Magnus Art 78 Rn 1; Germany 13 April 2000 Lower Court Duisburg, available online at <http://cisgw3.law.pace.edu/cases/000413g1.html> ; Belgium 17 October 2002 Appellate Court Gent, available online at <http://cisgw3.law.pace.edu/cases/021017b1.html>.

16. Staudinger/Magnus Art 78 Rn 34; Behr 266, 283; Germany 24 April 1990 Lower Court Oldenburg in Holstein, available online at <http://cisgw3.law.pace.edu/cases/900424g1.html>; Germany 18 January 1994 Appellate Court Frankfurt, available online at <http://cisgw3.law.pace.edu/cases/940118g1.html>.

17. Behr 295-296; Corterier at 35-36; Liu 8.3.2 at fn 184-202; 8.4 at fn 206-215; Belgium 17 February 2000 District Court Hasselt (J.F. in liquidation v. L.), available online at <http://cisgw3.law.pace.edu/cases/000217b1.html>. However, this approach has been specifically rejected in case law: see Germany 18 January 1994 Appellate Court Frankfurt, available online at <http://cisgw3.law.pace.edu/cases/940118g1.html>.

18. Belgium 25 April 2001 District Court Veurne (BV BA G-2 v. AS C.B.), available online at <http://cisgw3.law.pace.edu/cases/010425b1.html>; Germany 10 October 2001 Appellate Court Rostock, available online at <http://cisgw3.law.pace.edu/cases/011010g1.html>; Belgium 18 February 2002 District Court Ieper (L. v. SA C.), available online at <http://cisgw3.law.pace.edu/cases/020218b1.html>.

19. Liu 8.6 at fn 221; 8.73 at fn 237 ff; Behr 286; Hungary, Arbitration Court attached to the Hungarian Chamber of Commerce and Industry VB./94131, December 5, 1995 CLOUT Case 164; Corterier 37; Hungary 5 December 1995 Budapest Arbitration proceeding Vb 94131, available online at <http://cisgw3.law.pace.edu/cases/951205p.html>.

20. Corterier at fn 26; Koneru at fn 140 ff; Zoccolillo "Determination of the Interest Rate under the 1980 United Nations Convention on Contracts for the International Sale of Goods: General Principles vs. National Law", 1 Vindobona Journal of International Commercial Law and Arbitration (1997) 3-43, also available online at <http://cisgw3.law.pace.edu/cisg/biblio/zoccolillo.html>; Liu at fn 138; Netherlands 9 August 1995 District Court Almelo (Wolfgang Richter Montagebau v. Handelsonderneming Euro-Agra and Te Wierik), available online at <http://cisgw3.law.pace.edu/cases/950809n1.html>; ICC Arbitration Case No. 7153 of 1992, available online at <http://cisgw3.law.pace.edu/cases/927153i1.html>.

21. Behr at fn 266 and 296; Ferrari fn 856-868; Magnus U., 'Aktuelle Fragen des UN Kaufrechts' 1993 ZEup 90; Germany 17 September 1993 Appellate Court Koblenz, available online at <http://cisgw3.law.pace.edu/cases/930917g1.html>; Germany 8 February 1995 Appellate Court Hamm, available online at <http://cisgw3.law.pace.edu/cases/950208g3.html>; Belgium 17 October 2002 Appellate Court Gent, available online at <http://cisgw3.law.pace.edu/cases/021017b1.html>; Italy 31 March 2004 District Court Padova, available online at <http://cisgw3.law.pace.edu/cases/040331i3.html>.

22. Italy 31 March 2004 District Court Padova, available online at <http://cisgw3.law.pace.edu/cases/040331i3.html>.

23. Schlechtriem/Eberstein/Bacher Art 78 Rn 9 and 25; Staudinger/Magnus Art 78 Rn 11. See case law cited by Ferrari at fn 874; Thiele 99.

24. Germany 5 April 1995 District Court Landshut, available online at <http://cisgw3.law.pace.edu/cases/950405g1.html>; Germany 5 November 1997 Appellate Court Hamm, available online at <http://cisgw3.law.pace.edu/cases/971105g1.html>. The aberrant decisions since 2000 have been referred to in footnotes 13 to 19 above. Most of the decisions since 2000 however, followed the, in our view, correct approach. The following examples from diverse jurisdictions reflect the trend: Bulgaria 12 March 2001 Arbitration Case 33/98, available online at < http://cisgw3.law.pace.edu/cases/010312bu.html>; France 28 November 2002 Appellate Court Grenoble (SA AZ I... v. Entreprise Em... de Su... In...), available online at <http://cisgw3.law.pace.edu/cases/021128f2.html>; Netherlands 28 November 2002 Appellate Court 's-Hertogenbosch (Hagenuk Telecom GmbH v. Analog Devices Nederland B.V.), available online at <http://cisgw3.law.pace.edu/cases/021128n1.html>; Russia 2 December 2002 Arbitration proceeding 18/2002, available online at <http://cisgw3.law.pace.edu/cases/021202r1.html>; Switzerland 12 December 2002 District Court Zug, available online at <http://cisgw3.law.pace.edu/cases/021212s1.html>; Belgium 25 February 2004 District Court Hasselt (K BVBA v. BV), available online at <http://cisgw3.law.pace.edu/cases/040225b1.html>; Italy 31 March 2004 District Court Padova, available online at <http://cisgw3.law.pace.edu/cases/040331i3.html>; Germany 20 July 2004 Appellate Court Karlsruhe, available online at <http://cisgw3.law.pace.edu/cases/040720g1.html>.

25. ICC Arbitration Case No. 8769 of December 1996, available online at <http://cisgw3.law.pace.edu/cases/968769i1.html>; ICC Arbitration Case No. 8128 of 1995, available online at <http://cisgw3.law.pace.edu/cases/958128i1.html>; Austria 15 June 1994 Vienna Arbitration proceeding SCH-4366, available online at <http://cisgw3.law.pace.edu/cases/940615a3.html>.

26. ICC Arbitration Case No. 8769 of December 1996, available online at <http://cisgw3.law.pace.edu/cases/968769l1.html>.

27. See abstracts 13, 14, 16,17,19, 22, 23 and 25 in Behr at 275 ff; Liu 8.2.1 at fn 156-169; Schlechtriem/Eberstein/Bacher Art 78 Rn 26. For a contrary view, see Bonell M.J., An International Restatement of Contract Law The UNIDROIT Principles of International Commercial Contracts (1994 New York).

28. The provisions of the Principles of European Contract Law is similar, although not quite as detailed and providing no fall-back provision if no rate of interest exists for the currency of payment at the place of payment. Corterier 40 proposes a similar solution. See also Liu 7.2 at fn 137-139.

29. See also Comment 1 to this article.

30. Belgium 4 April 2001 District Court Kortrijk (H. v. D.), available online at <http://cisgw3.law.pace.edu/cases/010404b1.html>; Switzerland 12 December 2002 District Court Zug, available online at <http://cisgw3.law.pace.edu/cases/021212s1.html>; Belgium 8 October 2003 Appellate Court Gent, available online at <http://cisgw3.law.pace.edu/cases/031008b1.html>.

31. Behr at fn 267 and 296; Schlechtriem/Eberstein/Bacher Art 78 Rn 9; Liu 3.2 at fn 31-39; Germany 17 September 1993 Appellate Court Koblenz, available online at <http://cisgw3.law.pace.edu/cases/930917g1.html>.

32. Schlechtriem/Eberstein/Bacher Art 78 Rn 14; Liu 3.3 at fn 40-46; Enderlein/Maskow 311.

33. Liu at fn 76.

34. See Comment on the UNIDROIT Principles Art 7.4.10.

35. Schlechtriem/Eberstein/Bacher Art 78 Rn 14; Liu at fn 76.

36. Schlechtriem/Eberstein/Bacher Art 78 Rn 12-14 and 15. See also Karolus UN Kaufrecht (1991 Vienna); Staudinger/Magnus Art 78 Rn 8; Koneru at fn 129 ff; Thiele at fn 38; Liu at fn 66.

37. Germany 14 June 1994 Lower Court Nordhorn, available online at <http://cisgw3.law.pace.edu/cases/940614g1.html>; Germany 5 April 1995 District Court Landshut, available online at <http://cisgw3.law.pace.edu/cases/950405g1.html>; Switzerland 21 October 1999 District Court Zug, available online at <http://cisgw3.law.pace.edu/cases/991021s1.html>.

38. See Comment on the UNIDROIT Principles Art 7.4.10; Schlechtriem/Eberstein/Bacher Art 78 Rn 35.

39. Schlechtriem/Eberstein/Bacher Art 78 Rn 35.

40. Schlechtriem/Eberstein/Bacher Art 78 Rn 35.

41. Gotanda J.Y., 'Compound Interest in International Disputes' 2004 (2) Oxford U Comparative L Forum available online <http://ouclf.iuscomp.org/articles/gotanda/shtml>.


Official Comments on Articles of the UNIDROIT Principles cited

Comments reprinted with permission from UNIDROIT

 

ARTICLE 7.4.9

(Interest for failure to pay money)

(1) If a party does not pay a sum of money when it falls due the aggrieved party is entitled to interest upon that sum from the time when payment is due to the time of payment whether or not the non-payment is excused.

(2) The rate of interest shall be the average bank short-term lending rate to prime borrowers prevailing for the currency of payment at the place for payment, or where no such rate exists at that place, then the same rate in the State of the currency of payment. In the absence of such a rate at either place the rate of interest shall be the appropriate rate fixed by the law of the State of the currency of payment.

(3) The aggrieved party is entitled to additional damages if the non-payment caused it a greater harm.

COMMENT

1. Lump sum compensation for failure to pay a sum of money

This article reaffirms the widely accepted rule according to which the harm resulting from delay in the payment of a sum of money is subject to a special regime and is calculated by a lump sum corresponding to the interest accruing between the time when payment of the money was due and the time of actual payment.

Interest is payable whenever the delay in payment is attributable to the non-performing party, and this as from the time when payment was due, without any need for the aggrieved party to give notice of the default.

If the delay is the consequence of force majeure (e.g. the non-performing party is prevented from obtaining the sum due by reason of the introduction of new exchange control regulations), interest will still be due not as damages but as compensation for the enrichment of the debtor as a result of the non-payment as the debtor continues to receive interest on the sum which it is prevented from paying.

The harm is calculated as a lump sum. In other words, subject to para. (3) of this article, the aggrieved party may not prove that it could have invested the sum due at a higher rate of interest or the non-performing party that the aggrieved party would have obtained interest at a rate lower than the average lending rate referred to in para. (2).

The parties may of course agree in advance on a different rate of interest (which would in effect subject it to Art. 7.4.13).

2. Rate of interest

Para. (2) of this article fixes in the first instance as the rate of interest the average bank short-term lending rate to prime borrowers. This solution seems to be that best suited to the needs of international trade and most appropriate to ensure an adequate compensation of the harm sustained. The rate in question is the rate at which the aggrieved party will normally borrow the money which it has not received from the non-performing party. That normal rate is the average bank short-term lending rate to prime borrowers prevailing at the place for payment for the currency of payment.

No such rate may however exist for the currency of payment at the place for payment. In such cases, reference is made in the first instance to the average prime rate in the State of the currency of payment. For instance, if a loan is made in pounds sterling payable at Tunis and there is no rate for loans in pounds on the Tunis financial market, reference will be made to the rate in the United Kingdom.

In the absence of such a rate at either place, the rate of interest will be the "appropriate" rate fixed by the law of the State of the currency of payment. In most cases this will be the legal rate of interest and, as there may be more than one, that most appropriate for international transactions. If there is no legal rate of interest, the rate will be the most appropriate bank rate.

3. Additional damages recoverable

Interest is intended to compensate the harm normally sustained as a consequence of delay in payment of a sum of money. Such delay may however cause additional harm to the aggrieved party for which it may recover damages, always provided that it can prove the existence of such harm and that it meets the requirements of certainty and foreseeability (para. (3)).

Illustration

A concludes a contract with B, a specialised finance company, for a loan which will permit the renovation of its factory in Singapore. The loan specifically mentions the use of the funds. The money lent is transferred three months later than agreed. During that period the cost of the renovation has increased by ten percent. A is entitled to recover this additional sum from B.

ARTICLE 7.4.10

(Interest on damages)

Unless otherwise agreed, interest on damages for non-performance of non-monetary obligations accrues as from the time of non-performance.

COMMENT

This article determines the time from which interest on damages accrues in cases of non-performance of obligations other than monetary obligations. In such cases, at the time of non-performance the amount of damages will usually not yet have been assessed in monetary terms. The assessment will only be made after the occurrence of the harm, either by agreement between the parties or by the court.

The present article fixes as the starting point for the accrual of interest the date of the occurrence of the harm. This solution is that best suited to international trade where it is not the practice for businesspersons to leave their money idle. In effect, the aggrieved party's assets are diminished as from the occurrence of the harm whereas the non-performing party, for as long as the damages are not paid, continues to enjoy the benefit of the interest on the sum which it will have to pay. It is only natural that this gain passes to the aggrieved party.

However, when making the final assessment of the harm, regard is to be had to the fact that damages are awarded as from the date of the harm, so as to avoid double compensation, for instance when a currency depreciates in value.

The present article takes no stand on the question of compound interest, which in some national laws is subject to rules of public policy limiting compound interest with a view to protecting the non-performing party.

 

ARTICLE 7.4.13

(Agreed payment for non-performance)

(1) Where the contract provides that a party who does not perform is to pay a specified sum to the aggrieved party for such non-performance, the aggrieved party is entitled to that sun irrespective of its actual harm.

(2) However, notwithstanding any agreement to the contrary the specified sum may be reduced to a reasonable amount where it is grossly excessive in relation to the harm resulting from the non-performance and to the other circumstances.

COMMENT

1. Agreed payment for non-performance defined

This article gives an intentionally broad definition of agreements to pay a specified sum in case of non-performance, whether such agreements be intended to facilitate the recovery of damages (liquidated damages according to the common law) or to operate as a deterrent against non-performance (penalty clauses proper), or both.

2. Agreed payment for non-performance in principle valid

National laws vary considerably with respect to the validity of the type of clauses in question, ranging from their acceptance in the civil law countries, with or without the possibility of judicial review of particularly onerous clauses, to the outright rejection in common law systems of clauses intended specifically to operate as a deterrent against non-performance, i.e. penalty clauses.

In view of their frequency in international contract practice, para.(1) of this article in principle acknowledges the validity of any clauses providing that a party who does not perform is to pay a specified sum to the aggrieved party for such non-performance, with the consequence that the latter is entitled to the agreed sum irrespective of the harm actually suffered by it. The non-performing party may not allege that the aggrieved party sustained less harm or none at all.

Illustration

1. A, a former Brazilian international player, is recruited for three years to train the players of B, an Australian football team, at a monthly salary of 10,000 Australian dollars. Provision is made for a severance allowance of 200,000 Australian dollars in the event of unjustified dismissal. A is dismissed without any justification after six months. A is entitled to the agreed sum, even though A was immediately recruited by another team at double the salary received from B.

Normally, the non-performance must be one for which the non-performing party is liable, since it is difficult to conceive a clause providing for the payment of an agreed sum in case of non-performance operating in a force majeure situation. Exceptionally, however, such a clause may be intended by the parties also to cover non-performance for which the non-performing party is not liable.

In the case of partial non-performance, the amount may, unless otherwise agreed by the parties, be reduced in proportion.

3. Agreed sum may be reduced

In order to prevent the possibility of abuse to which such clauses may give rise, para. (2) of this article permits the reduction of the agreed sum if it is grossly excessive "in relation to the harm resulting from the non-performance and to the other circumstances". The same paragraph makes it clear that the parties may under no circumstances exclude such a possibility of reduction.

The agreed sum may only be reduced, but not entirely disregarded as would be the case were the judge, notwithstanding the agreement of the parties, to award damages corresponding to the exact amount of the harm. It may not be increased, at least under this article, where the agreed sum is lower than the harm actually sustained (see however comment 4 on Art. 7.1.6). It is moreover necessary that the amount agreed be "grossly excessive", i.e. that it would clearly appear to be so to any reasonable person. Regard should in particular be had to the relationship between the sum agreed and the harm actually sustained.

Illustration

2. A enters into a contract with B for the purchase of machinery which provides for 48 monthly payments of 30,000 French francs. The contract contains a clause allowing immediate termination in the event of non-payment by A of one instalment, and authorises B to keep the sums already paid and to recover future instalments as damages. A fails to pay the eleventh instalment. B keeps the 300,000 francs already paid and claims, in addition to the return of the machinery, the 1,140,000 francs representing the 38 outstanding instalments. The court will reduce the amount since A's non-performance would result in a grossly excessive benefit for B.

4. Agreed payment for non-performance to be distinguished from forfeiture and other similar clauses

The type of clauses dealt with in the present article must be distinguished from forfeiture and other similar clauses which permit a party to withdraw from a contract either by paying a certain sum or by losing a deposit already made. On the other hand a clause according to which the aggrieved party may retain sums already paid as part of the price falls within the scope of this article.

Illustrations

3. A undertakes to sell real estate to B for 900,000,000 Italian lire. B must exercise the option to purchase within three months and must pay a deposit of 50,000,000 lire, which A is entitled to retain if B does not exercise the option. Since this is not an agreed payment for non-performance it does not fall under the present article and the sum cannot be reduced thereunder even if grossly excessive in the circumstances.

4. A enters into a contract with B for the lease of a machine. The contract provides that in the event of A's failure to pay one single rental the contract will be terminated and that the sums already paid will be retained by B as damages. The clause falls under the present article and the agreed amount may be subject to reduction.


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