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2008 UNCITRAL Digest of case law on the United Nations Convention on the International Sale of Goods

Digest of Article 77 case law [reproduced with permission of UNCITRAL] [*]

[Text of article
Introduction
Relation to other articles
Measures to mitigate
   -   Measures by aggrieved buyers
   -   Measures by aggrieved sellers
Reduction of damages
Notice of steps to mitigate
Pleading: burden of proof]

Article 77

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.

INTRODUCTION

1. Article 77 requires an aggrieved party claiming damages to take reasonable steps to mitigate losses; if he fails to do so, the breaching party may claim a reduction in the damages recoverable in the amount by which the loss should have been mitigated. If an aggrieved party does not request damages, whether by way of an affirmative claim or by way of set-off, article 77 does not apply.[1]

[See also the overview comments UNCITRAL has prepared to introduce the provisions of the CISG dealing with Damages (articles 74 through 77). They discuss Relation to Other Articles, Burden of Proof, Set-off, Jurisdiction, and Place of Payment of Damages.]

Relation to other articles

2. Article 77 appears in Section II (Damages) of Chapter V of Part III, and therefore does not expressly apply to remedies other than damages that are available under the Convention.

3. Other articles of the Convention may require parties to take specific measures to protect against losses. Articles 85 to 88 provide, for example, that buyers and sellers must take reasonable steps to preserve goods in their possession following breach.[2]

4. Pursuant to article 6, the seller and buyer may agree to derogate from or vary the formula set out in article 77. One decision concluded that if an aggrieved party seeks to enforce a penalty clause in the contract, article 77 does not require the aggrieved party to reduce the penalty in order to mitigate the loss.[3]

5. Article 77 does not state at what point in a legal proceeding the issue of mitigation must be considered by a court or tribunal. One decision concluded that the question of whether mitigation should be considered in a proceeding on the merits or in a separate proceeding to determine damages is a procedural issue governed by domestic law rather than by the Convention.[4]

Measures to mitigate

6. An aggrieved party claiming damages must mitigate them by taking those steps that a reasonable creditor acting in good faith would take under the circumstances.[5] If a contract has already been avoided, an aggrieved party's notice to the breaching party of a proposed act to mitigate does not revoke the earlier avoidance.[6] In some circumstances the aggrieved party may be excused from taking such measures (see paragraphs 11 and 14 below).

7. Article 77 does not expressly state when the aggrieved party must take measures to mitigate. Several decisions state that an aggrieved party is not obligated to mitigate in the period before the contract is avoided (i.e. at a time when each party may still require the other to perform).[7] If an aggrieved party does take mitigation measures, however, he must do so within a reasonable time under the circumstances. One decision found that the seller's resale of goods to a third party two months after they had been rejected was reasonable within the context of the fashion industry.[8] Another decision found that the buyer's purchase of substitute goods approximately two weeks after the seller declared that it would not perform was not a failure to mitigate even though the price in a volatile market had risen sharply.[9]

-- Measures by aggrieved buyers

8. Decisions have found the following measures by aggrieved buyers to be reasonable: paying another supplier to expedite delivery of already-ordered compressors that could be substituted for defective compressors;[10] contracting with a third-party supplier because of the inability of the breaching party to deliver moulds in time;[11] contracting with a third party to treat leather goods when the seller refused to return tanning machines that it had sold to the buyer and then taken back for adjustments;[12] continuing to print on purchased fabric notwithstanding the discovery of problems with the fabric;[13] requesting special permission from a Government authority to permit re-exportation if the goods proved non-conforming, and proposing to test milk powder in the Free Trade Zone prior to import;[14] using the buyer's own buffer stocks of coal when the seller made late deliveries;[15] proposing to a sub-buyer that the goods the seller delivered late should be accepted with a 10 per cent reduction in price;[16] selling perishable goods even though not required to do so by articles 85 to 88.[17]

9. The aggrieved buyer was found to have failed to mitigate damages in the following circumstances: buyer failed to inspect goods properly and to give documents setting out its claims of non-conformity;[18] buyer failed to examine shipments of aluminium hydroxide before mixing the shipments together;[19] buyer failed to stop the use of vine wax after discovering the wax to be defective;[20] buyer failed to look for replacement goods in markets other than the local region;[21] buyer failed to cancel its contract of sale with sub-buyer or to conclude a substitute purchase;[22] buyer failed to provide evidence of the price it received on its sale of non-conforming goods to a sub-buyer;[23] buyer failed to provide evidence as to whether the her could buy the same product from the wholesaler newly-designated by the seller.[24]

10. Several decisions have denied an aggrieved buyer's claim for reimbursement of expenditures because the expenditures did not have the effect of limiting the buyer's loss. One decision declined to award the buyer damages to compensate for the expenses of adapting a machine to process defective wire delivered by the seller because the cost of the adaptation was disproportionate to the purchase price of the wire.[25] An aggrieved buyer was also denied recovery for the costs of translating a manual to accompany the goods when the buyer resold them because the buyer failed to notify the seller, which was a multinational company that would already have had manuals in the language into which the manual was translated.[26] A few decisions have denied the aggrieved party's claim for the cost of enforcing its claim through a collection agent or lawyer.[27]

11. Several decisions have found that the buyer's failure to act did not violate the mitigation principle. One tribunal found that an aggrieved buyer's failure to buy substitute goods from another supplier was justified by the short delivery time in the contract and the alleged difficulty in finding another supplier.[28] A court has also concluded that a buyer did not violate the mitigation principle by its failure to inform the seller that the buyer's sub-buyer needed the goods without delay because it was not established that the buyer knew of the sub-buyer's production plans.[29]

-- Measures by aggrieved sellers

12. Decisions have found the following measures by aggrieved sellers to be reasonable: incurring expenses to transport, store, and maintain the undelivered machinery;[30] reselling goods to a third party.[31]

13. An aggrieved seller was found to have failed to mitigate damages in the following circumstances: seller drew on a guaranty before avoiding the contract;[32] seller resold the goods at a price below the price offered by the breaching buyer when the latter sought unsuccessfully to amend the contract.[33] Where a buyer breached by refusing to take delivery of goods, a court has reserved decision on the amount of damages, pending receipt of an expert opinion, where the seller's claim for lost profit and the cost of raw materials used to produce the goods might have been reduced if the seller had been able to resell or reuse the goods, or if the investments seller had made to produce the goods were valued or depreciated in a different fashion.[34]

14. An aggrieved seller was excused from taking steps to mitigate in the following circumstances: the seller did not resell the goods during the period when the breaching party was entitled to demand performance, but was excused on the ground that resale during that period would have make it impossible for the seller to perform the contract;[35] the seller did not resell stockings made to the buyer's particular specifications.[36]

15. One court has stated that an aggrieved seller's damages are not to be reduced under article 77 by the price received in a resale of the goods where the seller had the capacity and market to make multiple sales. The court reasoned that to treat the resale as a substitute transaction under article 75 meant that the seller would lose the profit from a sale that it would have made even if the buyer had not breached.[37]

Reduction of damages

16. A breaching party may claim a reduction in the damages to be awarded to the aggrieved party in the amount by which reasonable mitigation measures would have reduced the loss to the aggrieved party. Several decisions have calculated the reduction without specific reference to the loss that could have been avoided. One decision found that the aggrieved buyer who failed to mitigate should be entitled only to 50 per cent of the difference between the contract price and the price the buyer received when it resold the non-conforming goods to its customers.[38] An arbitral tribunal divided the loss caused by the buyer's failure to mitigate damages between the aggrieved buyer and the breaching seller who was claiming payment for partial delivery.[39]

Notice of steps to mitigate

17. Article 77 does not explicitly require an aggrieved party to notify the other party of proposed steps to mitigate losses. One decision, however, denied a buyer compensation for the cost of translating a manual where the buyer failed to notify the seller that it intended to take this step, reasoning that if the buyer had provided such notice the seller could have supplied existing translations.[40]

Pleading; burden of proof

18. The second sentence of article 77 states that the breaching party may claim a reduction in damages for failure to mitigate losses. Decisions divide on which party bears the burden of pleading the failure to mitigate. An arbitral tribunal has stated that the tribunal should review ex officio whether the aggrieved party had complied with the mitigation principle, but that the breaching party had the burden of establishing failure to comply.[41] A court decision, on the other hand, stated that no adjustment to damages will be made if the breaching party fails to indicate what steps the other party should have taken to mitigate.[42] Another decision, however, requires the aggrieved party to indicate the offers for substitute transactions it had solicited before putting the breaching party to the burden of establishing the loss due to failure to mitigate.[43]

19. Decisions on who has the ultimate burden of establishing failure to mitigate consistently place the burden on the breaching party to establish such failure as well as the amount of consequent loss.[44]


NOTES

* This presentation of the UNCITRAL Digest is a slightly modified version of the original UNCITRAL text at <http://www.UNCITRAL.org/pdf/english/clout/CISG_second_edition.pdf>. The following modifications were made by the Institute of International Commercial Law of the Pace University School of Law:

   -    To enhance access to contents by computer search engines, we present in html rather than pdf;
 
   -    To facilitate direct focus on aspects of the Digests of most immediate interest, we inserted linked tables of contents at the outset of most presentations;
 
   -    To support UNCITRAL's recommendation to read more on the cases reported in the Digests, we provide mouse-click access to (i) CLOUT abstracts published by UNCITRAL (and to UNILEX case abstracts and other case abstracts); and also (ii) to full-text English translations of cases with links to original texts of cases, where available, in [bracketed citations] that we have added to UNCITRAL's footnotes; and
 
   -    To enable researchers to themselves keep the case citations provided in the Digests constantly current, we have created a series of tandem documents, UNCITRAL Digest Cases + Added Cases. The new cases and other cases that are cited in these updates are coded in accordance with UNCITRAL's Thesaurus.

In addition, this presentation introduces each section of the UNCITRAL Digest with a Google search button. This is to help you access doctrine (relevant material from the over 1,200 commentaries, monographs and books on the CISG and related subjects that we present on this database) as well as the texts of the cases that UNCITRAL cites in its Digests and that we present in our updates to UNCITRAL's Digests.

1. [AUSTRIA Oberster Gerichtshof 9 March 2000 (Roofing material case)] (see full text of the decision).

2. [CHINA CIETAC Arbitration Award of 6 June 1991 (Cysteine Monohydrate case)] (cost of freight for return of goods split between buyer who failed to return goods in a reasonable manner and seller who did not cooperate in return).

3. [NETHERLANDS Hof Arnhem 22 August 1995 (Live lambs case)] (validity of penalty clause determined under national law).

4. [GERMANY Bundesgerichtshof 24 March 1999 (Vine wax case)] (applying German law).

5. [AUSTRIA Oberster Gerichtshof 6 February 1996 (Propane case)] (see full text of the decision).

6. [GERMANY Landgericht Berlin 15 September 1994 (Shoes case)].

7. [GERMANY Oberlandesgericht Braunschweig 28 October 1999 (Frozen meat case)] (requiring seller to resell would make it impossible for seller to perform the original contract during period when breaching party was entitled to demand performance); [GERMANY Oberlandesgericht Düsseldorf 14 January 1994 (Shoes case)].

8. [GERMANY Oberlandesgericht Düsseldorf 14 January 1994 (Shoes case)] (finding that, in August most retailers in Italian market have filled their stock for the coming season and have no reason to buy more goods for the winter season).

9. [GERMANY Oberlandesgericht Hamburg 28 February 1997 (Iron molybdenum case)] (transaction characterized as highly speculative).

10. [UNITED STATES Federal District Court, Northern District of New York, 9 September 1994 (Delchi Carrier, S.p.A. v. Rotorex Corp.)], affirmed, [UNITED STATES Federal Court of Appeals for the Second Circuit 6 December 1995 (Delchi Carrier, S.p.A. v. Rotorex Corp.)].

11. [CANADA Ontario Court of Appeal 26 January 2000 (Nova Tool & Mold Inc. v. London Industries Inc.)].

12. [GERMANY Oberlandesgericht Köln 8 January 1997 (Tannery machines case)].

13. [UNITED STATES Federal Circuit Court of Appeals, 4th Circuit, 21 June 2002 (Schmitz-Werke v. Rockland)] (buyer continued to attempt to print on the fabric both at the urging of seller and to mitigate damages; article 77 not cited).

14. [NETHERLANDS Rechtbank 's-Hertogenbosch 2 October 1998 (Malaysia Dairy Industries v. Dairex Holland) (Powdered milk case)].

15. [ICC International Court of Arbitration, Award 8740 of October 1996 (Russian coal case)] (seller bore risk that buyer's buffers were insufficient in light of the unreliability of suppliers).

16. [ICC International Court of Arbitration, Award 8786 of January 1997 (Clothing case)].

17. [ICC International Court of Arbitration, Award 7197 of 1992 (Failure to open letter of credit and penalty clause case)] (see full text of the decision).

18. [RUSSIA Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, Award 54/1999 of 24 January 2000].

19. [GERMANY Oberlandesgericht Köln 21 August 1997 (Aluminium hydroxide case)].

20. [GERMANY Bundesgerichtshof 24 March 1999 (Vine wax case)].

21. [GERMANY Oberlandesgericht Celle 2 September 1998 (Vacuum cleaners case)].

22. [RUSSIA Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, Award 406/1998 of 6 June 2000 (Goods case)].

23. [ICC International Court of Arbitration, Award 7331 of 1994 (Cowhides case)].

24. [FINLAND Helsingin hoviokeus (Helsinki Court of Appeals) 26 October 2000 (Plastic carpets case)]

25. [GERMANY Bundesgerichtshof 25 June 1997 (Stainless steel wire case)].

26. [GERMANY Landgericht, Darmstadt 9 May 2000 (Video recorders case)] (see full text of the decision).

27. [GERMANY Amtsgericht Berlin-Tiergarten 13 March 1997] (refusing to permit recover when the aggrieved party employed a debt collection agency in breaching party's jurisdiction rather than bringing suit in aggrieved party's jurisdiction and enforcing this judgment in breaching party's jurisdiction); [GERMANY Landgericht Alsfeld 12 May 1995 (Flagstone tiles case)] (denying recover when the aggrieved party hired collection lawyer in the aggrieved party's jurisdiction rather than the breaching party's jurisdiction); [GERMANY Landgericht Düsseldorf 25 August 1994 (Fashion goods case)] (holding that employment of agent was reasonable only if it was established that the agent had more effective means of recovery than the aggrieved party itself); [GERMANY Landgericht Berlin 6 October 1992 (Wine case)] (hiring collection agency deemed contrary to mitigation principle because it was foreseeable that buyer would refuse to pay and the additional expenses of hiring an attorney would have been included in trial costs recoverable from defaulting buyer).

28. [GERMANY Arbitration-Schiedsgericht der Handelskammer Hamburg, 21 March 1996 and 21 June 1996 (Chinese goods case)] (no manifest violation of mitigatation principle) (see full text of the decision).

29. [GERMANY Amtsgericht München 23 June 1995 (Tetracycline case)].

30. [ICC International Court of Arbitration, Award 7585 of 1992 (Foamed board machinery case)] (need to mitigate because of size and specifications of machinery) (see full text of the decision).

31. [GERMANY Oberlandesgericht Düsseldorf 14 January 1994 (Shoes case)]; [AUSTRIA Arbitration-Internationales Schiedsgericht der Bundeskammer der gewerblichen Wirtschaft Wien, 15 June 1994 (SCH-4366) (Rolled metal sheets case)] (resale by seller not only justified but may have been obligatory under article 77); [GERMANY Oberlandesgericht Hamm 22 September 1992 (Frozen bacon case)]; [IRAN-US CLAIMS TRIBUNAL 28 July 1989 (Watkins-Johnson v. Islamic Republic of Iran) (Electronic communications equipment case)] (seller's right to sell undelivered equipment in mitigation of its damages is consistent with recognized international law of commercial contracts).

32. [GERMANY Oberlandesgericht München 8 February 1995 (Automobile case)] (aggrieved seller drew on guaranty following breach without taking steps to mitigate).

33. [SPAIN Tribunal Supremo 28 January 2000 (Jute case)].

34. [FRANCE Cour d'appel de Colmar 12 June 2001 (Polyurethane foam covers for air conditioners case)].

35. [GERMANY Oberlandesgericht Braunschweig 28 October 1999 (Frozen meat case)].

36. [CHINA CIETAC Arbitration Award dated post-1989 (Thai-made emulsion case)].

37. [AUSTRIA Oberster Gerichtshof 28 April 2000 (Jewelry case)] (see full text of the decision).

38. [RUSSIA Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, Award 54/1999 of 24 January 2000].

39. [HUNGARY Arbitration Court attached to the Hungarian Chamber of Commerce and Industry 25 May 1999 (Sour cherries case)].

40. [GERMANY Landgericht, Darmstadt 9 May 2000 (Video recorders case)].

41. [ICC International Court of Arbitration, Award 9187 of June 1999 (Coke case)].

42. [SWITZERLAND Bundesgericht 15 September 2000 (FCF S.A. v. Adriafil Commerciale S.r.l.) (Egyptian cotton case)].

43. [GERMANY Oberlandesgericht Celle 2 September 1998 (Vacuum cleaners case)] (although burden of establishing failure to mitigate is on breaching party, that was irrelevant in case because buyer was obliged to indicate which offers for a substitute transaction she obtained and from which companies) (see full text of the decision).

44. [GERMANY Oberlandesgericht Celle 2 September 1998 (Vacuum cleaners case)] (see full text of the decision); [AUSTRIA Oberster Gerichtshof 6 February 1996 (Propane case)] (breaching party had to establish how other party had violated the mitigation principle, the possible alternative courses of action, and the loss that would have been prevented; issue was raised on appeal without specific reference to facts that might be relevant) (see full text of the decision).


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