CROSS-REFERENCES AND EDITORIAL ANALYSIS
Eric C. Schneider [*]
Measuring Damages under the CISG
General rules for measuring damages are recited in Article 74 of the United Nations Convention for the Sale of Goods.[1] Cross-references to this provision include:
Articles 4 and 5 can also affect claims for damages: Article 4 (sentence one) limits such claims to those of the buyer and the seller;[7] Article 4(a) by virtue of its validity proviso can, in certain cases, permit domestic law to determine the validity of exculpatory clauses such as contract clauses that exclude liability for damages;[8] and Article 5 indicates that the Convention does not apply to damage claims "for death or personal injury caused by the goods to any person."[9]
Other general provisions of the Convention that can have a bearing on claims for damages include: Article 6 (primacy of the contract); Article 7 (interpretation of the Convention, applicability of its general principles); Article 8 (intent of the parties); and Article 9 (usages and practices) [10]. See also, Article 66 (loss or damage after risk passed to buyer) and Article 80 (failure of performance caused by the other party).[11] The Convention also imposes requirements such as those regarding the preservation of the goods (Articles 85 through 88) under which claims for damages can arise.[12]
The provisions discussed in this analysis are, first and foremost, Article 74; to a lesser extent, Articles 75 through 79; and, to a limited extent, certain of the other articles cited above. Although the analysis concentrates on cross-references to other provisions of the CISG, persons who research CISG Article 74 can also profit from consideration of a Hague Convention antecedent to this provision and from an interpretive guide that was prepared by the Secretariat of UNCITRAL to aid the delegates to the Diplomatic Conference at which the text of this and other provisions of the CISG was set in place.
In a contract governed by the CISG, a failure to perform any obligation [15] entitles the injured party to seek, under Articles 45 and 61, various remedies, all of which include consequential damages under Article 74.[16]
Seller's remedies. In addition to money damages under Article 61(1)(b),[17] an aggrieved seller may require performance under Article 62,[18] fix an additional time for performance under Article 63,[19] avoid or cancel the contract under Article 64,[20] or have goods identified to the contract under Article 65.[21] In addition to any of these remedies, seller may seek consequential damages under Article 74.[22]
Buyer's remedies. An aggrieved buyer, in addition to damages under Article 45(1)(b), may require performance or substitute performance under Article 46(2),[23] demand repair of defective goods under Article 46(3),[24] fix an additional period of time for performance under Article 47,[25] accept seller's cured performance under Articles 48 and 37,[26] avoid or cancel the contract under Article 49,[27] or reduce the sales price under Article 50.[28] In addition to these remedies, buyer may seek consequential damages under Article 74.[29] The right to all remedies for lack of conformity of the goods, including claims for damages, is related to the inspection requirement recited in Article 38 and subject to compliance with the notice requirement recited in Article 39.[30]
Under CISG Article 74, only foreseeable consequential damages are recoverable. There is no mention of incidental damages.[31] Nothing in the legislative history of the CISG suggests an intention to abolish incidental damages.[32] Damages which would be characterized as incidental in other legal systems should be recoverable as consequential damages under the CISG. It seems, however, that only foreseeable incidental damages are recoverable under Article 74 as consequential damages.[33]
Article 75 states the measure of damages in situations where there has been an avoidance or cancellation of the contract by an aggrieved buyer or seller and damages are to be measured by the difference between the cost of the substitute transaction and the contract price.[34] Article 76 provides for situations where an aggrieved buyer or seller has avoided the contract but has not effected a substitute transaction.[35] The measure of damages under Article 76 is the difference between current price and market price.[36] Articles 75 and 76 also allow the aggrieved party consequential damages under Article 74.[37]
Article 74 damages are based on the principle that damages should provide the injured party with the benefit of the bargain, including expectation and reliance damages.[38] Arguably, Article 74 authorizes the awarding of lost profits where, under Articles 75 and 76, a lost-volume seller has resold the goods in a market where demand exceeds supply.[39] This argument has not been tested in a court and it has been suggested that the parties to a contract include a "clause which" specifies whether lost volume damages are recoverable and how they should be recovered."[40]
A major limitation to CISG damage recovery is the lack of a separate provision for breach of warranty.[41] Instead, Article 74 applies to all breaches of contract and is further limited by Article 5 [42] which disallows "claims for damages in the case of death or bodily injury caused by the goods, irrespective of whether or not the buyer himself or a third person is involved."[43]
Article 74 contains its own limitation on consequential damages; that they are recoverable so long as they "do not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract."[44] Article 74 contains both an objective and subjective test, limiting damages to the "loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in light of the facts and matters of which he then knew or ought to have known."[45] In situations where the breaching party was informed of unusual losses which might occur in case of a later breach, there is little difference between the objective and the subjective standard.[46]
Although lost re-sale profits should be recoverable by a buyer who was known or should have been known to the seller to be a purchaser for resale, it is not certain that courts will award damages for less direct lost profits, such as profits lost by a manufacturer-buyer when goods necessary for production are defective, late or not delivered, or when profits are lost due to customer dissatisfaction which resulted from a seller's breach of contract (loss of good-will). In these situations it is most likely that the law of the forum will determine the extent to which Article 74 damages for lost profits will be allowed.[47]
The CISG does not contain the limitation found in some jurisdictions (for example, the United States) that damages must be proved with reasonable certainty. This limitation may, however, be applied as part of the domestic law of the forum. The one decision by a court in the United States which deals directly with Article 74 held that damages under the CISG must be proved with reasonable certainty.[48] Since the reasonable certainty limitation is not mentioned by the CISG, it is arguably proper for a court to apply the law of the forum. One commentator has stated that, "problems of proof and certainty of loss are procedural matters which remain within the province of national law, and procedural conceptions may still serve as covert limitations on CISG consequential awards."[49]
The CISG contains two explicit references to interest, Articles 78 and 84(1).[50] Under Article 84(1), "[i]f the seller is bound to refund the price, he must also pay interest on it, from the date on which the price was paid."[51] Under Article 78, "[i]f 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."[52] CISG Article 84(1) refers solely to interest that can be collected by the buyer on the price (a liquidated amount).[53] CISG Article 78 refers to interest that can be collected by the seller or the buyer and to interest on the price or any other sum that is in arrears.[54] Article 78, which is silent on whether it applies to unliquidated as well as liquidated damages,[55] provides no guidance for calculating such interest and gives no indication of the circumstances under which pre-judgment interest should be awarded.[56]
Article 7(2) directs that all matters not expressly settled in the CISG, "be settled in conformity with the general principles on which [the CISG] is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law."[57] It has been argued that pre-judgment interest on unliquidated damages should be allowed under the CISG's general principle of full compensation stated in Article 74.[58] Whether to give pre-judgment interest on unliquidated damages is also arguably an issue the drafters believed should be resolved by resort to the conflict of law rules of the forum.[59] This approach will, of course, confirm the criticism of the CISG that "[a]bsent a specific provision dealing with interest, differences in application could occur by each country reading Article 74 as allowing its own position on interest."[60]
In the case of Delchi Carrier, S.p. A. v. Rotorex, a US District Court in 1994 held that a buyer was entitled to pre-judgment interest under CISG Article 78.[61] The District Court decision, which was affirmed on this issue on appeal,[62] awarded plaintiff pre-judgment interest on its unliquidated damages (reliance damages and consequential damages for lost profit) under the law of the forum, the United States Code.[63]
The federal court in Delchi Carrier had diversity jurisdiction over a case involving a contract between US and Italian corporations. "In diversity cases federal courts must follow the conflict of laws rules prevailing in the states in which they sit."[64] Since this case did not involve the foreign relations of the United States, federal common law should arguably not have been applied.[65] The Federal District Court in Delchi Carrier , if it found the CISG silent on the issue of awarding pre-judgment interest on unliquidated damages, could have looked to the conflict of laws rules of New York to determine whether New York or Italian law controlled on this issue. The Court might have determined that under New York conflicts rules, New York had a greater interest [66] in this matter than Italy and might also have concluded that the matter of pre-judgment interest is procedural rather than substantive [67] and thus might have based its recovery on the New York Code which allows pre-judgment interest on unliquidated damages for breach of contract.[68] The court engaged in no discussion about these issues.
The Convention does not contain explicit directions on rate of interest. A considerable amount of CISG case law has emerged on this subject and it is inconsistent. Tribunals have staked out at least three different theories as to the law that governs rate of interest in a contract that is subject to the CISG.
(1) The CISG itself determines rate of interest by recourse to its general principles;[69]
(2) Rate of interest is determined in conformity with the law applicable by virtue of the rules of conflicts of law of the forum;[70]
(3) Rate of interest is determined by the law of the forum without reference to its rules of conflicts of law.[71]
These approaches have led to rate of interest determined by the law of the place of payment, the law of the place of actual loss, the law of the creditor, the law of the debtor or creditor, or simply the law of the forum (in accordance with approach (3)) without regard to any of the above.[72]
The CISG takes the position of those countries in which interest is not necessarily a component of damages.[73] Article 78 states that interest is recoverable "without prejudice to any claim for damages recoverable under Article 74." This separation of interest from damages will allow a party to recover interest when there is no other evidence of damage suffered [74] or when impediments under Article 79 have excused the other party from being liable for damages.[75]
The conclusion is: "[A]bsent a specific [contract] provision dealing with interest, differences in application could occur by each country reading [the CISG] as allowing its own position on interest."[76]
Article 77 limits Article 74 damages by placing an obligation to mitigate damages on the aggrieved party.[77] CISG Article 77 provides:
"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."[78]
Because the first sentence of Article 77 is worded in terms of a duty to mitigate, courts may require such mitigation, and allow a set-off in favor of the breaching party for failure of the non-breaching party to mitigate. The second sentence seems to take the approach that CISG Article 77 was not intended to place liability on the injured party for failing to avoid damages [79] but is meant to simply precluded an injured party from recovering damages which could have reasonably been avoided.[80] A third interpretation of Article 77 takes the position that mitigation of loss can become a sword as well as a damages shield -- by drawing on the "general principles" provision of the CISG, Article 7(2) to create a duty of "loyalty to the other party to the contract".[81] Failure to mitigate damages may be a breach of this duty and result in recoverable damages.
FOOTNOTES
2. CISG, supra note 1, arts. 45(1)(b) and 61(1)(b).
7. CISG, supra note 1, art. 4.
13. Convention Relating to a Uniform Law on International Sales of Goods July 1, 1964, 834 U.N.T.S. 107 [hereinafter ULIS]. That article 82 ULIS is the source of and substantively similar to CISG article 74, see Pace Internet Database, Article 74: Legislative History.
14. For text of this commentary, see Article 74: Legislative History, supra note 13.
"[Under the Convention] [t]he remedy of damages is entirely separated from that of avoiding the contract. . . . A breach of contract may entitled the aggrieved party to declare the contract avoided or give him a right to damages, but these remedies are independent of each other. This means inter alia that even if a contract is still in force insofar as the party aggrieved can claim damages, the only exception being when the party in breach is 'exempted' according to Article 79 of the Convention. On the other hand, the fact that a party is exempted from liability to pay damages does not deprive the other party of his right to declare the contract avoided, provided that the special prerequisites for this remedy are fulfilled." Jan Hellner, The UN Convention on International Sale of Goods -- an Outsider's View, Ius Internationales: Festschrift für Stefan A. Riesenfeld 81 (Jayme, Kegel & Lutter eds., 1983).
17. See CISG, supra note 1, art. 61(1)(b).
22. See CISG, supra note 1, art. 74.
27. See CISG, supra note 1, art. 49.
30. See discussion supra note 15.
31. See CISG, supra note 1, art. 74.
34. See CISG, supra note 1, art. 75.
39. "Given the language and juxtaposition of [Articles 74, 75 and 76], a tribunal could view Articles 75 and 76 as specific applications of the sweeping language of the first sentence of Article 74 and not as limitations placed on it. Moreover, Article 74 could be read within the context of its previously stated purpose- to put the 'injured party in the same economic position he would have been in if the contract had been performed.' The 1978 Commentary to the predecessor of Article 74 may also suggest a lost volume and lost overhead damage award." Sutton, supra note 38, at 747. See also Flechtner, supra note 37, at 102.
40. Sutton, supra note 38, at 748.
42. CISG, supra note 1, art. 5.
43. Fritz Enderlein & Dietrich Maskow, supra note 15, at 298.
45. Sutton, supra note 38, at 743-44.
46. See White & Summers, supra note 33, at 514-518, and Enderlein & Maskow, supra note 15, at 744.
49. Joseph M. Lookofsky, Consequential Damages in Comparative Context, 181-187 (1989).
ULIS Article 81(1) provides that: "[w]here the seller is under an obligation to refund the price he shall also be liable for the interest thereon at the rate fixed by Article 83, as from the date of payment." Id. art. 81(1).
ULIS Article 83 provides that: "[w]here the breach of contract consists of delay in the payment of the price, the seller shall in any event be entitled to such a sum as is in arrear at a rate equal to the official discount rate in the country where he has his place of business or, if he has no place of business, his habitual residence, plus 1%." Id. art. 83.
51. See CISG, supra note 1, art. 84(1).
53. ULIS, supra note 13, art. 81(1) has the same effect.
54. See CISG, supra note 1, art. 78.
"In some quarters . . . the Convention's legislative 'history' . . . ranks high on the list of sources of law: perhaps the next best thing to an official commentary, the traveaux are seen as evidence of the founding fathers' collective intent. And indeed, a fair number of the CISG decisions already rendered by certain national courts justify their rulings, inter alia, by reference to this 'process' by which the Convention text came to be. . . ." Joseph Lookofsky, Under the CISG in the USA (1995). It has also been noted, "Our experience with legislative history at the national . . . and . . . international . . . levels gives grounds for a certain measure of skepticism. We might not expect the proposals, counter-proposals and comments made by various national delegates during years of drafting (and re-drafting) of the CISG text to provide simple solutions to complex questions of Convention interpretation." Id. at 17.
Another basis to surmise that it is not the intent of the CISG to award interest on unliquidated amounts is that, wherever practical, the CISG seeks to balance buyer's and seller's remedies. See, e.g., the format of Articles 45 and 61. To balance Article 84(1), which limits interest to a liquidated amount, perhaps Article 78 should also be limited to a liquidated amount. Enderlein and Maskow argue against awarding interest on unliquidated damages, but Honnold and Sutton argue that the issue may depend on whether the court looks to its own legal traditions in awarding damages. See Fritz Enderlein & Dietrich Maskow, supra note 4, at 313-314; John O. Honnold, Uniform Law for International Sales Under the 1980 United Nations Convention, 527 (1991); and Sutton, supra note 38, at 750.
57. See CISG, supra note 1, art. 7(2).
61. Delchi Carrier, 1994 WL 495787.
64. See Klaxon Co. v. Stentor Co., 313 U.S. 487, 494 (1940).
69. See, e.g., the following ruling in Arbitral Proceeding SCH-4318 of 15 June 1994 at the Internationales schiedsgericht der bundeskammer der gewerb of Austria:"One of the general principles underlying the CISG is that of 'full compensation' of the loss (cf. Art. 74 of the CISG). It follows that, in the event of failure by the debtor to pay a monetary debt, the creditor, who as a business person must be expected to resort to bank credit as a result of the delay in payment, should therefore be entitled to interest at the rate commonly practiced in its country. . . ." Id. For the full text of this decision. (English translation of German text), see Pace Internet Database, Case Presentation 940615s1. law of place of payment: ICC award no. 7153 (1992), (1992) J.D.I. 1005 law of creditor: LG Stuttgart September 5, 1989, (1990) IPRax (1991) 317; LG Frankfurt September 16, 1991, (1991) RIW 952; KG Berlin January 24, 1994, (1994) RIW 683; OLG München March 2, 1994, (1994) RIW 545: ICC award no. 7197 (1992), (1993) J.D.I. 1028. law of place of actual loss: LG Aachen April 3, 1990, (1990) RIW 491. proper law of contract: AG Oldenburg April 24, 1990 (1991) IPRax 336; LG Hamburg September 26, 1990, (1991) IPRax 400; Belgian Cass., November 29, 1990, (1990) RW 1270. law of debtor or creditor: OLG Frankfurt June 13, 1991, (1991) RIW 591; OLG Frankfurt April 20, 1994, (1994) RIW 593. For related data on each of these cases, see Pace Internet Database on the CISG, <http://www.cisg.law.pace.edu.> See also, Comment, Interpretive Decisions Applying CISG, 14 J.L. & Com. 201, 205-207 (1995). 74. Lookofsky cites the decision of the Landgericht Frankfurt am Main, No 3/11 O 2/91, decided 16 September 1991, reported in UNILEX (1992-94). Lookofsky, supra note 58 at 100 n.153. For related data on this case, see Pace Internet Database on the CISG, supra note 72, at Case Presentation 910916g1. 76. Eva Diederichsen, Comment, Recent Development: CISG 14 J.L. & Com. 177, 180-81 (1995). 78. See CISG, supra note 1, art. 77. 79. E. Allan Farnsworth, Damages and Specific Relief, 27 Am. J. Comp. L. 247, 251 (1979)