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GUIDE TO ARTICLE 74

Comparison with Principles of European Contract Law (PECL)


Match-up of CISG Article 74 with PECL Articles 9:501 through 9:504, 9:509 and 9:510
CISG Article 74

Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract.

PECL Article 9:501 [Right to Damages]
(complete and revised version 1998)

(1) The aggrieved party is entitled to damages for loss caused by the other party's non-performance which is not excused under Article 8:108.

(2) The loss for which damages are recoverable includes: (a) non-pecuniary loss; and (b) future loss which is reasonably likely to occur.

PECL Article 9:502 [General Measure of Damages]

The general measure of damages is such sum as will put the aggrieved party as nearly as possible into the position in which it would have been if the contract had been duly performed. Such damages cover the loss which the aggrieved party has suffered and the gain of which it has been deprived.

PECL Article 9:503 [Foreseeability]

The non-performing party is liable only for loss which it foresaw or could reasonably have foreseen at the time of conclusion of the contract as a likely result of its non-performance, unless the non-performance was intentional or grossly negligent.

PECL Article 9:504 [Loss Attributable to Aggrieved Party]

The non-performing party is not liable for loss suffered by the aggrieved party to the extent that the aggrieved party contributed to the non-performance or its effects.

PECL Article 9:509 [Agreed Payment for Non-Performance]

(1) Where the contract provides that a party which fails to perform is to pay a specified sum to the aggrieved party for such non-performance, the aggrieved party shall be awarded that sum irrespective of its actual loss.

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

PECL Article 9:510 [Currency by which Damages to be Measured]

Damages are to be measured by the currency which most appropriately reflects the aggrieved party's loss.


Definitions

For the PECL definition of "non-performance", go to PECL art. 1:301(4) and the comment and notes that accompany this definition. For the PECL definition of "reasonableness", go to PECL art. 1:302 and the comment and notes that accompany this provision. For a provision that can bear upon the PECL concept of reasonable foreseeability, see PECL art. 1:305 [Knowledge and behaviour of person for whom a party is responsible].


Editorial remarks

Remarks on the Damages Provisions in the CISG, Principles of European Contract Law (PECL) and UNIDROIT Principles of International Commercial Contracts (UPICC) [*]

Friedrich Blase and Philipp Höttler [**]
December 2004

1. Damages in International Sales Law: CISG, PECL and UPICC
2. Matters governed by CISG Art. 74 and expressly settled in it
     (a) Breach of contract: right to damages
     (b) Measure of damages: full compensation
     (c) Foreseeability of loss
3. Matters governed by the Convention, but not expressly settled in it
     (a) Offsetting losses with gains
     (b) Loss partly attributable to aggrieved party
     (c) Proof of non-pecuniary loss
     (d) Currency of damages
     (e) Loss of profit
     (f) Incidental losses
4. Matters not governed by the Convention
     (a) Civil liability for personal injury
     (b) Reliance interest
     (c) Punitive damages and penalty clauses
5. Conclusions

1. Damages in International Sales Law: CISG, PECL and UPICC

Contract law, whether national or international, is -- almost universally and entirely -- at the disposition of the parties when they are modeling their individual contractual situation; very few of its provisions are usually considered mandatory.[1] The latter rules are confined to popular issues of validity due to immorality, illegality or incapacity as well as the rudimentary protection of the balance of the duties owed between the parties. Even in situations where the contract partners actively negotiate the terms of their contract and especially in the manifold situations in which they do not discuss the conditions, the commercial parties of cross-border transactions often do not consider the substantive law applicable to their contract. This holds true not only for the contract drafting stage, but also for the fulfillment by performing the duties owed under the contract. Somewhat prematurely, the parties (and their legal counsel) might even believe that their elaborate contract deals with all the issues of fulfillment and no reference to the underlying law must be made.[2] Whatever the scenario, this view dramatically changes, when the relationship deteriorates and one or both of the parties deliberate about damages. In practice virtually all less extensively negotiated, elaborated and documented contracts -- and thus the vast majority of them [3] -- do not provide any rules of either accounting or awarding damages.[4] The pursuit of compensation almost invariably leads the parties to turn to the applicable law. In more and more cases, such a search will lead to the U.N. Convention on Contracts for the International Sale of Goods (CISG).[5]

The success of the CISG since its creation at a diplomatic conference in Vienna in 1980 has fueled the hopes of uniform law supporters around the world that more global standardization of private law aspects would be possible. Even before the CISG came to see the light of day, various groups had been formed to measure the scope of international harmonization beyond the realm of sales transactions by focusing on nothing less than the general rules applied to all business transactions, i.e., the law of international commercial contracts. Albeit not anticipated, the political changes in Central and Eastern Europe and the former Soviet Union at the verge of the last decade of the last century provided additional stamina for the hard-working groups [6] and made a possible formulation of such general contract law that much more likely -- especially now that the world was to seemingly unite behind the principles of democracy, market forces and capitalism.[7] The 1990's therefore saw the presentation of the results of two such projects: the UNIDROIT Principles of International Commercial Contracts [8] (UPICC [9]) and the Principles of European Contract Law [10] (PECL[11]). The UPICC were released by the Institute for the Unification of Private Law (UNIDROIT)[12] in 1993,[13] were received with considerable laudatio and an unusually high level of promotion.[14] Their first version of 1994 still stands ten years later, due to be updated by an extended version in 2004.[16] The European-focused PECL were released in 1994,[16] thus losing the first race against their global counterpart.[17] However, the PECL were already updated in 1999, now covering more ground than their rival UPICC.[18] Most recently, they have been called on by the European institutions [19] as the centerpiece of a possible European-wide unification of contract law.[20]

Should the CISG apply to a contract, a search for a claim for damages brings to light its Art. 74 and a few further provisions on damages. The result of a first scan, however, can hardly be satisfying, as more questions seem to be raised than answered. Unfamiliar and broad terminology is found in a surprisingly brief description of the legal mechanisms. By comparison, the provisions of the PECL [21] and UPICC [22] both display a higher degree of regulation on the matter of damages. As the latter two instruments deal with contractual agreements in general, not just contracts for the sale of goods, and since it is said that they have often been inspired by the CISG, it has been asserted that the UPICC and PECL could help to interpret certain provisions of the Sales Convention.[23] This may also hold true for the provisions on damages, in particular its central provision contained in Art. 74 CISG. The following remarks will attempt to shed further light on this.

In line with the interpretive canon required by Art. 7(1) and (2) CISG, we will first examine matters that are expressly settled in the Convention (infra at 2). Then we will deal with those matters that are governed by the Convention, but are not expressly settled in it (infra at 3). Finally, we will provide an outlook at those matters that are not governed by the CISG, but may call for an application of the PECL or UPICC (infra at 4).

2. Matters governed by CISG Art. 74 and expressly settled in it

A number of matters that are governed by Art. 74 and expressly settled in the Convention can be reaffirmed by turning to the UPICC and PECL as persuasive authority:

(a) Breach of contract: right to damages

While Art. 74 CISG does not define the term "breach of contract", it can be interpreted as any non-performance of a contractual obligation as reflected in Art. 9:501(1) PECL and Art. 7.4.1 UPICC, each providing that damages can be claimed for by the other party's "non-performance". Also, neither PECL nor UPICC demand that the aggrieved party is only entitled to damages if the non-performing party was at fault.

(b) Measure of damages: full compensation

The general principle of full compensation, which is generally held to be an underlying principle of the CISG,[24] is expressly laid down and defined in Art. 9:502 PECL and Art. 7.4.2(1) UPICC. Hence, both the latter instruments follow the same principle which will be useful when addressing some issues not expressly settled in the CISG.

(c) Foreseeability of loss

A foreseeability test as contained in Art. 74 CISG is also applied in both Art. 9:503 PECL and Art. 7.4.4 UPICC. Like Art. 74 CISG, both other instruments do provide for a subjective and objective test of foreseeability.[25] Art. 9:503 PECL and Art. 7.4.4 UPICC require, however, that the loss suffered is a "likely result" of the non-performance. The CISG seems to apply a wider standard by providing that the loss must have been foreseen as a "possible consequence" of the breach.[26] There is a distinct difference in the wording resulting in a different standard to be applied by the CISG, on the one hand, and the UPICC and PECL, on the other. Hence, the UPICC and the PECL cannot serve as a persuasive authority to clarify a real question concerning a matter which, despite being expressly settled in the Convention, arguably remains ambiguous.[27]

3. Matters governed by the Convention, but not expressly settled in it

Turning to other matters which are governed by the Convention, but are not expressly settled in it, one could find a number of ways in which both PECL and UPICC might aid in the interpretation of CISG Art. 74.

(a) Offsetting losses with gains

The Convention does not expressly stipulate whether the amount of damages should be reduced by any advantages which the breach brings for the promisee.[28] However, by applying the principle of full compensation, which is a general principle underlying the Convention, this question is generally answered in the affirmative. Whereas the UPICC address this issue in Art. 7.4.2(1), second sentence in the same manner, the PECL do not provide for an express rule on the issue. However, the Official Commentary on Art. 9:502 PECL highlights the same principles by stating that "[t]he aggrieved party must bring into account in reduction of damages any compensating gains which offset its loss".[29] Hence the mechanics of both PECL and UPICC can be used as persuasive authority in confirming the solution predominantly favored under the regime of the CISG.

(b) Loss partly attributable to aggrieved party

Another matter not expressly settled in the CISG is that of joint responsibility for losses. Most legal scholars agree that it falls into the scope of the Convention.[30] The correct legal approach is to turn to the underlying principles of the CISG.[31] The amount of damages is thus to be apportioned between the parties in accordance with the degree of causation by the respective parties. This result is also found expressly in both PECL (Art. 9:504) and UPICC (Art. 7.4.7). Both regimes require an apportionment of damages that reflects the parties' contribution to causation. PECL and UPICC are therefore again persuasive authority for resolving this issue.

(c) Proof of non-pecuniary loss

Courts and arbitral tribunals face immense difficulties with claims for non-pecuniary losses. Especially the proof of harm and the extent of it seem to cause problems for judges and arbitrators, in particular when loss of reputation or good will is at stake and the economic disadvantages are not quantifiable.[32] The different approaches taken by legal scholars do not really clear up the problem, but rather contribute to more confusion.[33]

To deny such claims altogether seems to be the wrong approach here. Both PECL (Art. 9:501(2)(a)) and UPICC (Art. 7.4.2(2)) acknowledge the recoverability of such losses, including loss of good will and reputation. The same should apply cases governed by the CISG, especially since the principle of full compensation is underlying the Convention.[34]

As far as the proof of the existence and the extent of the harm is concerned, the foreseeability test contained in Art. 74 CISG could be made more compatible when supplemented with the rules of Art. 7.4.3 UPICC. According to that provision, compensation for harm is only to be granted for such harm that is established with a reasonable degree of certainty. The PECL do not explicitly address the question of proof for harm; Art. 9:501(2) PECL only specifies the foreseeability test for future loss. The test contained in Art. 7.4.3(1) UPICC, however, applies to both the existence and the extent of the harm. It is thus also helpful in cases where the harm is difficult to quantify, e.g., when non-material harm is at stake. Where the amount of damages cannot be established with a sufficient degree of certainty, the assessment is at the discretion of the court (or arbitral tribunal), pursuant to Art. 7.4.3(3) UPICC. The application of Art. 7.4.3 UPICC would thus allow for compensation of commercial damages even in cases where the degree of damages is difficult to quantify and the applicable procedural law does not provide for an abstract sum to be granted.[35] As a consequence, however, domestic procedural rules on proof and certainty of loss would find no application -- a result that is in line with the position taken by most legal scholars. This result is justified if one does not qualify questions of certainty of loss and other similar questions as procedural, but as substantive matters, which are to be settled by substantive rather than procedural law.[36] The application of the UPICC then helps to further the ultimate goal of fostering uniformity in the application of the CISG.

(d) Currency of damages

Art. 74 CISG does not provide for the currency in which the damages are to be paid. The predominant view is that damages are payable in the currency in which the loss was suffered or in which a particular profit would have been made.[37] Art. 9:510 PECL points to the same direction as it provides that damages are to be measured by the currency which most appropriately reflects the aggrieved party's loss. A similar, yet more specific solution is offered by Art. 7.4.12 UPICC which provides that damages are to be assessed either in the currency in which the monetary obligation was expressed or in which the harm was suffered, whichever is more appropriate. This suggests that under the Convention damages should generally be measured in the currency which most appropriately reflects the aggrieved party's loss. This may in single cases be the currency in which the monetary obligation was expressed.

(e) Loss of profit

The CISG does not provide for specific rules as to the degree of probability to be applied when assessing whether a certain profit would have been made and what the amount of that profit would be.[38] As a consequence thereof courts and arbitral tribunals take recourse to the general law of evidence of the lex fori [39] or reject damages for future loss, including the loss of a chance altogether. Here similar problems are faced as in the case of non-pecuniary losses and losses of good will. Again, the approaches taken in both PECL and UPICC suggest that such recourse to domestic law is not necessary. Art. 9:501(2)(b) PECL provides that recoverable loss comprises future loss that is reasonably likely to occur. This means that the judge or arbitrator would have to evaluate both the likelihood that the future loss will occur and its likely amount. Such future loss may also take the form of the loss of a chance.[40] The UPICC apply a similar test by providing in their Art. 7.4.3(1) that was mentioned earlier in the context of proof of existence and extent of harm that had already accrued. The provision applies the same rule to future harm by demanding that it is recoverable only when established with a reasonable degree of certainty. If there is no sufficient degree of certainty, the assessment is at the discretion of the court or tribunal, Art. 7.4.3(3). Moreover, compensation may be due for the loss of a chance in proportion to the probability of its occurrence, Art. 7.4.3(2). As has been shown before, when asked to assess the existence and the extent of loss, including future loss, the user of the CISG is called upon to apply either the UPICC or the PECL to avoid recourse to domestic law for promoting uniformity in the application of the CISG.

(f) Incidental losses

It is widely assumed that incidental losses [41] are only recoverable if they prove to be reasonable.[42] Such restriction, however, is not to be found in the wording of Art. 74 CISG. It is submitted that the artificial bar imposed by the reasonableness test serves no purpose and should be abandoned. This position is supported by looking at the PECL and UPICC counterpart regimes, both of which do not apply a reasonableness test. It is a false concern that without the reasonableness requirement doors would open for the compensation of losses that would otherwise not be recoverable. The foreseeability test, which is entrenched in the CISG, enables the user to achieve the same results as with such a reasonableness test. The inclusion of the reasonableness test stems primarily from the writings of American scholars. However, in American law incidental losses need to pass only the test of reasonableness, but are not subject to a foreseeability test.[43] The requirement of reasonableness makes the foreseeability test redundant as reasonable expenses are always foreseeable.[44] The same, however, can also be said to be true of the reverse situation. Unreasonable expenses must generally be considered as not foreseeable according to Art. 74 CISG. Such analysis of the CISG receives persuasive backing from the PECL and the UPICC. Both instruments only provide for the foreseeability test in Art. 9:503 PECL and Art. 7.4.4 UPICC. Both sets of Principles get by without the additional requirement of a reasonableness test. The same arguably could be held for the CISG.

4. Matters not governed by the Convention

Finally, we turn to matters that are not governed by the CISG, but require to be dealt with in the complete assessment of damage claims. Turning to PECL and UPICC is possible in these cases, when the general conflicts of laws provision allows for the application of "rules of law" to the contract. Conversely, if the application of "law" is required, the courts and tribunals may be barred from applying either set of Principles.

(a) Civil liability for personal injury

The compensation covered by Art. 74 CISG comprises both expectation interest and indemnity interest.[45] However, Art. 5 CISG states that the CISG does not deal with any liability issues for death or personal injury caused by the goods. Damages claims in these circumstances are beyond the scope of the CISG, since the Convention was not intended to intervene with the rules and regulations that signatory states had in place for such situations. In particular, the European Union member States had incorporated an EU directive on defective goods into national law. The PECL and UPICC also do not seem to deal with this matter. Although they govern certain damage claims that some jurisdictions may qualify as tort claims, such as damages for negotiations contrary to good faith, for incorrect information or for fraud and threat during the formation of the contract, neither framework deals with damages for death or personal injury caused by the goods. Neither the wording of the provisions nor the commentaries by either group of authors leads to the assumption that such damage claims should be addressed through the general damages provisions. On the contrary, while the UPICC authors do not even discuss this question in their commentary, the PECL authors state that "[t]he Principles may be applied to claims which arise out of the contract, even if under some national systems the claim might be qualified as delictual rather than contractual".[46] They list the issues which they deem to cover, but that list does not include the situation of a damage claim for personal injury or death from defective goods.[47] Hence, the arbitral tribunal or court will not find grounds in the PECL or UPICC to decide such a claim, but will have to rely on applicable national laws.

(b) Reliance interest

The intensely debated matter of reliance interest [48] may fall outside the scope of the Convention and may thus be addressed by the PECL and UPICC. The two private codifications themselves suggest that damages to compensate for the reliance interest must be seen as different and separate from the damages awarded with respect to a contractual non-performance. Both Art. 4:117 PECL and Art. 3.18 UPICC explicitly deal with damage claims to put the aggrieved party in the same position in which it would have been, if it had not concluded the contract. The authors of both works emphasize the need to differentiate between this claim and those concerning non-performance [49] that are dealt with in very different parts of the codifications. Hence, the PECL and UPICC may -- firstly -- serve as persuasive authority to suggest that a damage claim based on the reliance interest is not covered by the CISG. Following that, both sets of rules will -- secondly -- apply with their respective provisions to cover those claims.

(c) Punitive damages and penalty clauses

It is generally assumed that punitive damages and penalty clauses can be agreed upon by the parties, whereas the admissibility and validity of such clauses is not governed by the CISG.[50] In contrast, both PECL, in Art. 9:509, and the UPICC, in Art. 7.4.13, deal with this matter and both frameworks are coherent as to the way they deal with it. Where the contract provides for a specified sum of damages for non-performance, this sum is to be awarded irrespective of the actual sum that the aggrieved party has suffered. Despite any agreement to the contrary the specified sum may be reduced to a reasonable amount where it is grossly excessive in relation to the loss or harm resulting from the non-performance and the other circumstances. As both the PECL and the UPICC provide a complete set of regulations on the issue of penalty clauses and liquidated damages, both may be applied by the courts and tribunals rather than turning to any domestic law when dealing with agreed arrangements for non-performance.[51]

5. Conclusions

The furtherance of international trade law is no easy business. Despite intense debate and increasing practical use of the CISG, many questions remain unresolved. In fact, it is most likely that more debate and more practice will increase the number of questions in doubt as it will shed light on previously unconsidered situations requiring judgment. The PECL and the UPICC are both very able legal instruments that can be used to fill or to assist in filling some of the gaps of the Convention. With respect to damage claims under the Convention there are several questions, towards the resolution of which the Principles could provide practical assistance.

[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) 465-475.]


FOOTNOTES

* Adapted version of a research paper on the use of the UNIDROIT Principles on International Commercial Contracts (UPICC) and the Principles of European Contract Law (PECL) to help interpret regulations of the Convention on Contracts for the International Sale of Goods (CISG): "Claiming Damages in Export Trade".

** Dr. Friedrich Blase is Rechtsanwalt and Of Counsel at MPK -- Michaelis Pfeifer König Rechtsanwälte, Frankfurt, Germany; Philipp Höttler, LL.M. (Queensland) is Ph.D. candidate at the University of Cologne, Germany.

1. Cf. for these fundamental principles the regulations in the sets of rules discussed here: CISG Art. 6; UPICC Arts. 1.1, 1.4, 1.5; PECL Arts. 1.102, 1.103.

2. See the reference by the arbitral tribunal in ICC Award No. 7375 of 5 June 1996, reprinted in Mealeys Publications, Document # 05-961223-101, at 85: "In many international disputes, the question of the law which is applicable to a contract is of rather peripheral importance only, as the dispute will be decided on the basis of the relevant contract and, as far as necessary an interpretation thereof, such that in most cases it will not be necessary to resort to an underlying applicable law for obtaining 'legal guidance'"; see also Berger, "The Relationship Between the UNIDROIT Principles of International Commercial Contracts and the New Lex Mercatoria", 5 Uniform Law Review (2000), at 153, 164: "The contract becomes the 'substitute law' for the parties by virtue of its self-sufficient character"; Lundmark, Die detaillierte Natur anglo-amerikanischer Kaufverträge, in Festschrift Otto Sandrock, at 623, 625; cf. also Merkt, Grundsatz- und Praxisprobleme der Angloamerikanisierungstendenzen im Recht des Unternehmenskauf, in Festschrift Otto Sandrock, at 657, 659.

3. For an interesting observation on the detailed nature of investment contracts, see Berger, "Renegotiation and Adaptation of International Investment Contracts: The Role of Contract Drafters and Arbitrators", 36 Vanderbilt Journal of Transnational Law (2003), at 153 et seq.

4. Two issues are more frequently dealt with in respect of damages: 1) the inclusion of liquidated penalty clauses and similar concepts of penalties and abstractly calculated damages, on this see also Berger, Vertragsstrafen und Schadenspauschalierungen im Internationalen Wirtschaftsvertragsrecht, Recht der internationalen Wirtschaft (1999), at 401 et seq.; 2) clauses on the method of determining the amount of damages (often through arbitral tribunals or expert reports).

5. For thoughts on a uniform abbreviation see Flessner/Kadner, CISG? -- Zur Suche nach einer Abkürzung für das Wiener Übereinkommen über Verträge über den internationalen Warenkauf vom 11. April 1980, 3 ZEuP (1995), at 347 et seq.

6. However, it should not be forgotten at this point that the political changes also brought a similar project started by representatives of socialist and communist countries to a premature end: the Project of the Former Council for Mutual Economic Assistance for a General Law on International Commercial Contracts, cf. Berger, Creeping Codification of the Lex Mercatoria, at 123 et seq.

7. The fall of communism in Europe and the Soviet Union also meant that a number of legal systems and laws, namely those of the socialist/communist nature, would no longer be significantly taken into consideration. The Chinese, as the only remaining considerable economic power with communist rule, has recently changed its contract law, drawing substantially on the CISG and further international sources", for a brief overview see Will (ed.), CISG and China -- An Intercontinental Exchange, passim; see also for a review of this book Blase, "CISG and China -- An Intercontinental Exchange", 4 Vindobona Journal (2000), at 95 et seq.

8. UNIDROIT (ed.), Principles of International Commercial Contracts, Rome 1994. For various language versions see <http://www.unidroit.org>.

9. The abbreviation for the Principles is not universally applied. However, it conforms to the typical method of abbreviation for many laws and Conventions and is based on the English version of the Principles' name.

10. Lando/Beale (eds.), Principles of European Contract Law -- Parts I and II -- Combined and Revised - Prepared by The Commission on European Contract Law (2000). Other language versions are now available.

11. Supra note 9.

12. For more information on the work of the Institute see <http://www.unidroit.org>.

13. For an extensive description of the UPICC see Bonell, An International Restatement of Contract Law - The UNIDROIT Principles of International Commercial Contracts (2nd ed. 1997).

14. For some observations on support for and activity around the UPICC, see Blase , "Leaving the Shadow for the Test of Practice -- On the Future of the Principles of European Contract Law", 3 Vindobona Journal (1999), at 3 et seq.

15. UNIDROIT Principles 2004 contains 5 new chapters (Authority of Agents; Third Party Rights; Set-off; Assignment of Rights, Transfer of Obligations and Assignment of Contracts; Limitation Periods) as well as an expanded Preamble and new provisions on Inconsistent Behavior and on Release by Agreement. Moreover wherever appropriate the 1994 edition of the Principles was adapted to meet the needs of electronic contracting.

16. For an extensive description of the PECL see Blase, Die Grundregeln des Europäischen Vertragsrechts als Recht grenzüberschreitender Verträge (2000).

17. Experts involved in the drafting of both UPICC and PECL stress the common elements of both sets of rules and the mutual benefit that the drafters received from the work of the other group. See particularly the publications by the two respective chairmen, Ole Lando and Michael Joachim Bonell. Cf. Bonell, "The UNIDROIT Principles of International Commercial Contracts and the Principles of European Contract Law: Similar Rules for the Same Purposes?", 1 Uniform Law Review (1996), at 229, 233. For a detailed comparison of the two sets of rules see Bonell, An International Restatement of Contract Law -- The UNIDROIT Principles of International Commercial Contracts, at 88 et seq.; Blase, Die Grundregeln des Europäischen Vertragsrechts (2000), at 125. On the existence of such a race see Blase, "Leaving the Shadow for the Test of Practice", 3 Vindobona Journal (1999), at 3 et seq.

18. The PECL also contain rules on direct as well as indirect agency in the formation of contracts, whereas the UPICC have not addressed this issue.

19. See the note on European contract law by the European Commission, KOM (2000), at 398 (final), passim, the working paper on the approximation of civil and trade law of the member states by the committee on law and internal markets of the European Parliament, DT\424755EN.doc, passim.

20. For substantive work on this, see the results and ambitions of the Study Group on a European Civil Code (SGEEC) at <http://www.sgeec.net>, which in many ways has inherited the role of the Commission on European Contract Law, drafters of the PECL.

21. The PECL deals with Damages and Interest in Arts. 9:501 -- 9:510.

22. The UPICC deals with Damages and Interest in Arts. 7.4.1 -- 7.4.13.

23. For detailed research on this interaction see Burkart, Interpretatives Zusammenwirken von CISG und UNIDROIT Principles (2000), passim.

24. See relevant case law:

    -     Austria 14 January 2002 Oberster Gerichtshof [Supreme Court], case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/020114a3.html>;
    -     Austria 28 April 2000 Oberster Gerichtshof [Supreme Court], case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/000428a3.html>;
    -     Germany 26 November 1999 Oberlandesgericht [Appellate Court] Hamburg, case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/991126g1.html>;
    -     Austria 15 June 1994 Vienna Arbitration proceeding SCH-4318, case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/940615a4.html>; and
    -     Austria 15 June 1994 Vienna Arbitration proceeding SCH-4366, case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/940615a3.html>;

See also Stoll/Gruber, in Schlechtriem/Schwenzer (ed.), UN-Kaufrecht (2004), Art. 74 para 2; Knapp, in Bianca/Bonell (ed.), The 1980 Vienna Sales Convention (1987), Art. 74, note 3.2; Enderlein/Maskow (ed.), International Sales Law (1992), Art. 74, note 4, also available online at <http://cisgw3.law.pace.edu/cisg/biblio/enderlein-art74.html>;

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

"Generally an objective standard is applied for foreseeability here. The obligor must reckon with the consequences that a reasonable person in his situation (Art. 8(2) CISG) would have foreseen considering the particular circumstances of the case. Whether he actually did foresee this is as insignificant as whether there was fault [...]. Yet, subjective risk evaluation cannot be completely ignored: if the obligor knows that a breach of contract would produce unusual or unusually high losses, then these consequences are imputable to him."

See also Enderlein/Maskow (ed.), International Sales Law (1992), Art. 74, note 8 and 10, also available at <http://cisgw3.law.pace.edu/cisg/biblio/enderlein-art74.html>.

26. Stoll/Gruber, in Schlechtriem (ed.), UN-Kaufrecht (2004), Art. 74, para 35; Ferrari, "Comparative Ruminations on the Foreseeability of Damages in Contract Law", 53 Louisiana Law Review (1993), at 1257, 1268; see also Faust, Die Vorhersehbarkeit des Schadens gemäß Art. 74 Satz 2 UN-Kaufrecht (CISG)(1996), at 50 et seq. and 71, 72, who proves that not only the wording but also historical considerations speak in favor of a wider interpretation.

27. The opposite view -- i.e., that the foreseeability test should be interpreted narrowly as in the case of PECL and UPICC -- is held by Prof. Sieg Eiselen; see Eiselen, "Remarks on the Manner in which the UNIDROIT Principles of International Commercial Contracts May Be Used to Interpret or Supplement Article 74 of the CISG", para h., available at <http://cisgw3.law.pace.edu/cisg/principles/uni74.html#editorial>.

For further points of view on both sides of this issue, see:

    -     Jacob S. Ziegel, Report to the Uniform Law Conference of Canada on Convention on Contracts for the International Sale of Goods (July 1981), available at <http://cisgw3.law.pace.edu/cisg/text/ziegel74.html>: "The test of foreseeability in art. 74 is substantially broader than the test in Hadley v. Baxendale, as refined by the House of Lords in The Heron II (1969 1 A.C. 350. In the latter case Lord Reid expressly rejected the test of 'possible' damages adopted in art 74. Its retention in art. 74 could lead to the admissibility of damage claims that have hither-to been rejected and enlarge the seller's already very substantial exposure to liability."
    -     E. Allan Farnsworth, Damages and Specific Relief, 27 American Journal of Comparative Law (1979) 247-253, available at <http://cisgw3.law.pace.edu/cisg/biblio/farns.html>: "The requirement of foreseeability, known throughout the common law world as 'the rule of Hadley v. Baxendale, appears as the second sentence of art. [74] ... Any such formula is inevitably imprecise. It comes close to blending the [U.S.] Restatement of Contracts § 330, which allows recovery for 'injuries that the defendant had reason to foresee as a possible result of his breach when the contract was made and UCC 2-715(2)(a), which allows the buyer recovery for 'any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know." Although the use in art.[74] of "possible consequences" may seem at first to cast a wider net than the Restatements "probable result", the preceding clause ('in the light of the facts ...') cuts this back at least to the scope of the Code language."

28. Cf. Witz, in Witz/Salger/Lorenz (ed.), International Einheitliches Kaufrecht: Praktiker-Kommentar und Vertragsgestaltung zum CISG (2000), Art. 74, para 14; Magnus, in Staudinger, Wiener UN-Kaufrecht (CISG)(1999), Art. 74, para 22; Neumayer/Ming, Convention de Vienne sur les contrats de vente internationales de merchandises (1993), Art. 74, note 2.

29. Cf. Lando/Beale (ed.), Principles of European Contract Law -- Parts I and II, at 439. Official Comment on Art. 9:502 PECL, Comment C, also available online at <http://cisgw3.law.pace.edu/cisg/text/peclcomp74.html#cnpc>, reads:

"The aggrieved party must bring into account in reduction of damages any compensating gains which offset its loss; only the balance, the net loss, is recoverable. Similarly, in computing gains of which the aggrieved party has been deprived, the cost it would have incurred in making those gains is a compensating saving which must be deducted to produce a net gain [...]."

30. See Tallon, in Bianca/Bonell (ed.), The 1980 Vienna Sales Convention (1987), Art. 80, note 2.5; Herber/Czerwenka, Internationales Kaufrecht (1991), Art. 80, paras 7 and 8; Stoll/Gruber, in Schlechtriem/Schwenzer (ed.), UN-Kaufrecht (2004), Art. 80, para 7; Enderlein/Maskow (ed.), International Sales Law (1992), Art. 80, note 6, available at available at <http://cisgw3.law.pace.edu/cisg/biblio/enderlein-art74.html>; Neumayer/Ming, Convention de Vienne sur les contrats de vente internationales de merchandises (1993), Art. 80, note 3; Magnus, in Staudinger, Wiener UN-Kaufrecht (CISG)(1999), Art. 80, para 14, 15; Magnus, in Honsell (ed.), UN-Kaufrecht (1997), Art. 80, para 12; Rathjen, Haftungsentlastung des Verkäufers und Käufers nach Art. 79, 80 CISG, Recht der Internationalen Wirtschat (1999), at 561, 565; cf. Lüderitz/Dettmeier, in Soergel, CISG (2000), Art. 80, para 4, Art. 77, para 3.

31. Stoll, in Schlechtriem (ed.), UN-Kaufrecht (2000), Art. 80, para 6; for an overview of the different approaches taken to tackle this problem see Stoll/Gruber, in Schlechtriem/Schwenzer (ed.), UN-Kaufrecht (2004), Art. 80, para 7.

32. Courts have rejected claims for loss of good will as no actual loss was proven. See, for instance:

    -     Germany 9 May 2000 Landgericht [District Court] Darmstadt, case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/000509g1.html>

A similar approach is to be found in the following cases:

    -     France 21 October 1999 Cour d'appel [Appellate Court] Grenoble(Calzados Magnanni v. Shoes General International), case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/991021f1.html>; and
    -     Switzerland 10 February 1999 Handelsgericht [Commercial Court] Zürich, case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/990210s1.html>.

33. See, for instance, the different approaches of: Faust, Die Vorhersehbarkeit des Schadens gemäß Art. 74 Satz 2 UN-Kaufrecht (CISG) (1996), at 19 et seq.; Schönle, in Honsell (ed.), UN-Kaufrecht (1997), Art. 74 para 7; Karollus, UN-Kaufrecht, Eine systematische Darstellung für Studium und Praxis (1991), at 218; Honsell, Die Vertragsverletzung des Verkäufers nach dem Wiener Kaufrecht, 88 Schweizerische Juristen-Zeitung (1992), at 361, 364.

34. Cf. Eiselen, "Remarks on the Manner in which the UNIDROIT Principles of International Commercial Contracts May Be Used to Interpret or Supplement Article 74 of the CISG", paras d. and e., available online at <http://cisgw3.law.pace.edu/cisg/principles/uni74.html#editorial>.

35. Such use of the UPICC has also been proposed by Eiselen, op. cit., note k.; Garro, "The Gap-Filling Role of the UNIDROIT Principles in International Sales Law: Some Comments on the Interplay between the Principles and the CISG", Tulane Law Review (1995), p. 1188.

36. Saidov, "Methods of Limiting Damages under the Vienna Convention on Contracts for the International Sale of Goods", available at <http://cisgw3.law.pace.edu/cisg/biblio/saidov.html>.

37. See, for instance, Remien, Die Währung von Schaden und Schadensersatz, 53 Rabels Zeitschrift (1989), at 245, 260 et seq.; Stoll/Gruber, in Schlechtriem/Schwenzer (ed.), UN-Kaufrecht (2004), Art. 74, para 30; Magnus, in Staudinger, Wiener UN-Kaufrecht (CISG) (1999), Art. 74 para 56.

38. Stoll, in Schlechtriem (ed.) UN-Kaufrecht (2000), Art. 74, para 24.

39. See, for instance, United States 6 December 1995 Federal Appellate Court [2nd Circuit] (Delchi Carrier v. Rotorex), case presentation available at <http://cisgw3.law.pace.edu/cases/951206u1.html>, affirming United States 9 September 1994 Federal District Court [New York], case presentation available at <http://cisgw3.law.pace.edu/cases/940909u1.html>.

40.Cf. Land/Beale, Principles of European Contract Law, Parts I and II, at 436.

41. These are qualified as expenditures suffered by the aggrieved party which have occurred as a consequence of the breach of contract.

42. See relevant case law:

    -     Germany 25 June 1997 Bundesgerichtshof [Supreme Court], case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/970625g2.html>;
    -     Germany 8 January 1997 Oberlandesgericht [Appellate Court] Köln, case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/970108g1.html>;
    -     Russia 9 September 1994 Arbitration proceeding, Award No. 375/93, CISG online case No. 450 cited in by Peter Winship, in Ferrari/Flechtner/Brand (ed.), The Draft UNCITRAL Digest and Beyond (2004), at 784 (Fn. 29); case presentation also available at <http://cisgw3.law.pace.edu/cases/940909r1.html>. See case Abstract available on Unilex database at <http://www.unilex.info/case.cfm?pid=1&do=case&id=249&step=Abstract>: The seller performed the contract in accordance with its terms and conditions and delivered the goods to the buyer. The buyer did not present any claims with regard to the goods nor did it pay the price of these goods. The seller requested the buyer to pay for the goods as well as compensation for the loss sustained as a result of the buyer's breach of contract. This loss included the cost of storage of the goods at the port of loading on account of the delay of the ship which was to be provided by the buyer. The seller presented to the tribunal the bills it had paid for storage. The amount indicated on these bills corresponded to the charges usually made for this kind of operation. The Tribunal decided in favor of the seller and ordered the buyer to pay the price of the goods as well as damages as provided in Art. 74 CISG. The Tribunal also awarded, on the basis of Art. 78 CISG, interest on all the sums the seller owed at the rate provided for by the law of the seller's country.

For concrete examples of such expenditures, see Winship, at 784; see also Magnus, in Staudinger, Wiener UN-Kaufrecht (CISG) (1999), Art. 74, para 53; Stoll/Gruber, in Schlechtriem/Schwenzer (ed.), UN-Kaufrecht (2000), Art. 74, para 18.

See also Austria 14 January 2002 Oberster Gerichtshof [Supreme Court], case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/020114a3.html>. See excerpt from case Abstract available on Unilex database at <http://www.unilex.info/case.cfm?pid=1&do=case&id=858&step=Abstract>:

As to the amount of damages claimed by the buyer, the Court held that, according to Art. 74 CISG, the aggrieved party is entitled to full compensation of the losses suffered as a result of the other party“s non-performance, including loss of profit, provided that the losses were foreseeable at the time of the conclusion of the contract. However, in the case at hand the seller“s standard terms expressly excluded the compensability of the so-called consequential damages. As a consequence the buyer was entitled to recover the expenses it had incurred in repairing the goods, but not the other losses it had suffered in its relationship with its costumer as a consequence of the seller“s non-performance.

For the role of reasonableness as a general principle of the Convention, see Kritzer, Editorial remarks, which include further citations and references, at <http://cisgw3.law.pace.edu/cisg/text/reason.html>: "Reasonableness is specifically mentioned in thirty-seven provisions of the CISG and clearly alluded to elsewhere in the Uniform Sales Law. Reasonableness is a general principle of the CISG. [...] Although not specifically defined in the CISG, reasonableness is so defined in the Principles of European Contract Law. Moreover, the PECL definition of reasonableness [Art. 1:302] also fits the manner in which this concept is used in the CISG. This definition can help researchers apply reasonableness to the CISG provisions in which it is specifically mentioned and as a general principle of the CISG. [...] regarding reasonableness as a fundamental principle of the CISG and reading reasonableness into every article of the CISG, whether specifically mentioned in the article or not... is required by virtue of the good-faith and uniform-law mandate recited in Article 7(1) of the CISG."

43. Cf. Anderson, "Incidental and Consequential Damages", 7 Journal of Law & Commerce (1987), at 327, 338 set seq. and 343; Faust, Die Vorhersehbarkeit des Schadens gemäß Art. 74 Satz 2 UN-Kaufrecht (CISG) (1996) at 100.

44. Anderson, op. cit.

45. See Magnus, in Staudinger, Wiener UN-Kaufrecht (CISG) (1999), Art. 74 para 20; Lüderitz/Dettmeier, in Soergel, CISG (2000), Art. 74, para 8; Stoll/Gruber, in Schlechtriem/Schwenzer (ed.), UN-Kaufrecht (2004), Art. 74 para 2.

46. Lando/Beale (ed.), Principles of European Contract Law, Parts I and II, at 97.

47. Lando/Beale (ed.), Principles of European Contract Law, Parts I and II, at xxv.

48. Reliance interest does generally call for placing the party in the position in which it would have been if it had not relied on the due performance of the contract. But not only the recoverability of reliance interest under the CISG is a fairly unresolved issue, but it also seems to be unclear which losses fall under it and what preconditions need to be met for such claims to be successful; see e.g., Stoll, in Schlechtriem (ed.), UN-Kaufrecht (2000), Art. 74, para 3.

49. UNIDROIT (ed.), Principles of International Commercial Contracts, at 87. Lando/Beale (ed.), Principles of European Contract Law, Parts I and II, at 281.

50. See relevant case law:

    -     ICC Arbitration Case No. 7197 of 1992, case presentation available at <http://cisgw3.law.pace.edu/cases/927197i1.html>; see excerpt from case Abstract available on Unilex database at <http://www.unilex.info/case.cfm?pid=1&do=case&id=37&step=Abstract>: In the court's opinion, as CISG does not contain any provision concerning penalty clauses, Austrian law had to be applied pursuant to Art. 7(2) CISG. Applying Austrian law, the court held that the seller had the right to recover all damages suffered notwithstanding the limit fixed by the penalty clause.
    -     Germany 8 February 1995 Oberlandesgericht [Appellate Court] München, case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/950208g1.html>.

51. The opposing view is held by Prof. Eiselen, see Eiselen, "Remarks on the Manner in which the UNIDROIT Principles of International Commercial Contracts May Be Used to Interpret or Supplement Article 74 of the CISG", para o., available online at <http://cisgw3.law.pace.edu/cisg/principles/uni74.html#editorial>.


Comment and notes on PECL 9:501 - 9:504 and 9:509, 9-510

Like the commentary to the UNIDROIT Principles and the U.S. Restatements, the comments to the PECL help explain the text. The PECL notes identify civil law and common law antecedents and related domestic provisions. With the permission of the Commission on European Contract Law, these comments and notes are presented below. The source of this material is Ole Lando & Hugh Beale eds., Principles of European Contract Law: Parts I and II, Kluwer Law International (2000) 435-444, 453-459.


COMMENT AND NOTES: PECL Article 9:501: Right to Damages

(1) The aggrieved party is entitled to damages for loss caused by the other party's non-performance which is not excused under Article 8:108.

(2) The loss for which damages are recoverable includes: (a) non-pecuniary loss; and (b) future loss which is reasonably likely to occur.

Comment

A. No damages without loss

This Article enables the aggrieved party to recover damages whenever it suffers loss from the other party's unjustified failure to perform. The section does not provide for nominal damages for a breach which has caused the aggrieved party no loss.

B. No fault necessary

Where a party's obligation is to produce a given result, its failure to do so entitles the aggrieved party to damages whether or not there has been fault by the non-performing party, except where performance is excused (see Article 8:108 and Comment). Where a party's obligation is not to produce a result but merely to use reasonable care and skill it is liable only if it has failed to fulfill its obligation, that is to say if it has not exercised the care and skill it has promised. In the absence of a clause specifying the required degree of care and skill, this is equivalent to the commission of a fault.

Illustration 1: A contracts to supply and install in B's house a central heating system that will provide a temperature of up to 22 degrees C when the outside temperature is no greater than 0 degrees C. A installs the sytem but despite the exercise of all reasonable care and skill on its part the maximum temperature it can achieve is 18 degrees C. A is liable for damages. [page 434]

Illustration 2: A, a surgeon undertakes to carry out a major operation on B. Despite all reasonable care and skill on A's part, the operation is unsuccessful. A is not liable, for her undertaking was merely to act carefully, not to guarantee a successful outcome.

C. All forms of failure in performance covered

This Article applies to all forms of failure in performance: see Article 1:301(a). There is no requirement that the aggrieved party serve a notice to perform before it can recover damages for delay.

Illustration 3: S agrees to build a boat for B for £100,000. No time for completion is fixed by the contract but a reasonable time would be six months. S takes nine months to complete the boat and make it available to B. S is liable for damages for the delay, whether or not B has given notice requiring the boat to be finished within a given period.

D. Loss that would not have occurred without the failure in performance

The aggrieved party may not recover damages for loss not caused by the failure to perform. However, not every intervening event, even if unforeseeable, which exacerbates the loss falls within this principle. The question in each case is whether that event would have had an impact on the contract if the failure in performance had not occurred. Only if this question is answered in the affirmative will the event in question be treated as breaking the chain of causation.

Illustration 4: S agrees to sell to B machinery which S knows is required by B to manufacture goods in its factory. The machinery is due to be delivered on 1st June but S fails to make delivery. B is losing profit at the rate of £1,000 for each week's delay. This is a normal level of profit for a business of this kind. On 29th June a fire breaks out in B's factory, which is burnt to the ground. On 16th July S delivers the machinery. B, which would not have been able to put the machinery to use elsewhere during this period, can recover £4,000 damages for the loss of profit up to 29th June but nothing for loss suffered beyond that date.

Illustration 5: In June S in London agrees to sell a quantity of machine guns to a weapons dealer, B, in Serbia for £50,000, the guns to be shipped by 30th September against payment. In July S decides that he does not wish to support B's arms business and informs B that he does not intend to ship the guns. In August the British government places an embargo on the exportation of arms to the former Yugoslavian Republics and this is still in force when B's claim for damages is heard 18 months later. B is not entitled to damages.

Illustration 6: In June S in Paris contracts so sell a Seurat painting to B in Hamburg for FF. 1 million, the painting to be shipped to B in Hamburg by the end of August. Because of the delays on the part of its staff S is unable to arrange shipment earlier than 1st October. On 5th September the French government [page 435] impose a ban on the exportation of works of art without a licence, and despite using its best endeavors S is unable to obtain a licence to export the Seurat painting. The value of the painting at the end of August is considered by experts to be FF. 2 millions. B is entitled to damages of FF. 1 million, the difference between the value of the painting and its price, since but for S's delay in shipping the painting its export would not have been affected by the ban.

E. Non-pecuniary loss

Recoverable loss is not confined to pecuniary loss but may cover, for example, pain and suffering, inconvenience and mental distress resulting from the failure to perform.

Illustration 7: A books a package holiday from B, a travel organisation. The package includes a week in what is described as spacious accommodation in a luxury hotel with excellent cuisine. In fact, the bedroom is cramped and dirty and the food is appalling. A is entitled to recover damages for the inconvenience and loss of enjoyment he has suffered.

F. Future loss

The loss recoverable by the aggrieved party includes future loss, that is, loss expected to be incurred after the time damages are assessed. This requires the court to evaluate two uncertainties, namely the likelihood that future loss will occur and its amount. As in the case of accrued loss before judgment (see Article 9:502) this covers both prospective expenditure which would have been avoided but for the breach and gains which the aggrieved party could reasonably have been expected to make if the breach had not occurred. Future loss often takes the form of the loss of a chance.

Illustration 8: E is appointed sales manager of F's business under a three-year service contract. She is to be paid a salary and a commission on sales. After 12 months E is wrongfully dismissed, and despite reasonable efforts to find an alternative post she is still out of work when her action for wrongful dismissal is heard six months later. E is entitled to damages not only for her accrued loss of six months salary but also for the remaining 18 months of her contract, due allowance being made for her prospects of finding another job meanwhile. She is also entitled to damages for loss of the commission she would probably have earned.

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

1. Loss

It is a common feature of the legal systems in the European Communities that damages are awarded only if and to the extent the aggrieved party has suffered a loss as a consequence of the non-performance of the contract. This applies both to pecuniary and to non-pecuniary loss, see on the latter note 4 below. The only exception may be the COMMON LAW where even if the aggrieved party has suffered no loss, nominal damages are allowed in case of breach of contract. In SCOTLAND, while what are described as nominal damages have been awarded, it would appear that in the cases concerned there has been loss in the form of inconvenience, see McBryde § 20-87.

The legal systems seem to agree that damages are not awarded if there has been a gain for the defaulting party but no loss to the aggrieved party. Nor are punitive damages awarded. [page 436]

2. Strict liability or fault liability

Some laws impose strict liability on the defaulting party, others require fault, and others again have a mixed system, where the defaulting party is strictly liable in some cases and where it is liable only for fault in other cases. See on this issue the notes to Article 8:101, above.

3. Notice

(a) Notice of non-performance not required

As in the Principles, notice of the non-performance is not a condition for claiming damages in the COMMON LAW. Performance is due without demand even when no time for performance has been set. The same rule is followed in CISG as far as delay of performance is concerned, see Treitel, Remedies § 115; on defects see (b) below.

(b) Notice of non-performance necessary

Unlike the Principles, several laws require that the aggrieved party gives notice of the non-performance. However, the effects of the notice varies.

In sale of goods between merchants, GERMAN and AUSTRIAN HGB §§ 377 and 378 require notice of defects to be given without delay, or the buyer will lose all remedies, including his claim for damages. The same rule applies for all sales in DENMARK, see Sale of Goods Act § 52, and in CISG, see art. 39. See also DUTCH BW 7:23. (Indeed, FRENCH, BELGIAN and LUXEMBOURG CC art. 1648. AUSTRIAN ABGB § 933 and GERMAN BGB § 477 deprive the buyer of his right to damages for defects if he does not sue the seller within certain time limits, i.e. "dans un bref delai" and within 6 months respectively. In Belgian law this is considered to be an application of a more general rule based on good faith: Cass. 8 April 1988, Arr.Cass. no. 482; Foriers 261 no. 4; M.E.Storme Invloed no. 461 ff. See also GREEK CC arts. 554-558; ITALIAN CC art. 1495.) See also FINNISH and SWEDISH Sale of Goods Act, ss. 29 and 59, see Ramberg, Köplagen 573 f.

Most other rules requiring notice do not deprive the aggrieved party who has not given notice, or sued the other party within certain time limits, of all his rights. However, whether notice has been given has other effects. Damages may not be recovered unless notice has been given. Notice may also increase the defaulting party's liability: damages for delay will start to run, and some losses will be recoverable, only if they occur after notice has been given. On notice, see FRENCH, BELGIAN and LUXEMBOURG CC arts. 1139 and 1146; SPANISH CC art. 1100; ITALIAN CC art. 1219; AUSTRIAN ABGB § 904; DUTCH BW art. 6:82; GERMAN BGB § 284; and GREEK CC art. 340. See also Treitel, Remedies §§ 111-114.

4. Non-pecuniary loss

Non-pecuniary loss may be pain and inconvenience following from physical harm or from disappointment or vexation, and may be due to attacks on a person's personality, reputation or honour or to the death of a spouse or other closely related person. The legal systems differ not only in the extent to which they award damages but also as to which harm they will compensate.

(a) Préjudice moral

Important developments have occurred in FRANCE and BELGIUM. Non-pecuniary damages were formerly seldom awarded, but today damages are allowed for "préjudice moral" which includes damages for attacks on a person's honour or reputation, loss of a closely related person, certain kinds of physical harm which do not entail economic loss (loss of sense of smell, disfiguring scar) and disappointment. See Viney, Conditions nos. 253 ff. and Treitel, Remedies § 156.

PORTUGUESE law also provides rules on damages for non-pecuniary loss, see Telles 383, Jorge 597 and Costa, Obrigações 505 ff. So does SPANISH law, Supreme Court 9 May 1984, 13 December 1984, 16 December 1986, 3 June 1991 (Lacruz-Delgado, II, 1, § 27, 211-212; Diez-Picazo II, 688.

(b) Pain and suffering and disappointment distinguished

In ENGLISH law damages for non-pecuniary loss such as pain and suffering or physical inconvenience may be recovered for breach of contract: e.g. Godley v. Perry [1960] 1 W.L.R. 9, Q.B.; Hobbs v L.S.W.R. (1875) LR 10 Q.B. 111, C.A. However, damages are not awarded for vexation or disappointment unless the contract was specifically meant to provide enjoyment (e.g. a package holiday contract: Jarvis v. Swan Tours Ltd. [1973] Q.B. 233, C.A.) or to give peace of mind (Heywood v. Wellers [1976] Q.B. 446, C.A.): see Bliss v. SETRHA [1985] I.C.R. 700, C.A. These authorities have been followed in IRELAND, see Clark 461. SCOTTISH law seems to be similar to English law, see e.g. Diesen v. Samson 1971 S.L.T. (Sh.Ct.) 49. In AUSTRIAN law, damages for pain and suffering may be recovered in contract as well as in tort (ABGB § 1325; see also § 1331). General recovery of non-pecuniary losses is unrestricted, see (c) below.

(c) Limited recovery for non-pecuniary loss [page 437]

ITALIAN, GERMAN, DANISH, FINNISH, GREEK and DUTCH law will only allow damages for non-pecuniary loss if this is provided for by statute; see, e.g. GERMAN BGB § 253; Treitel, Remedies § 157. ITALIAN CC art. 2059 limits recovery in tort to cases where the defendant's conduct amount to a criminal offence, which excludes non-pecuniary damages for non-performance of contracts, see Cian & Trabucchi arts. 1223 and 2059. In GERMANY the tort rule in BGB § 847 on non-pecuniary damages for bodily harm and false imprisonment has been applied in cases giving rise to liability both in tort and contract, but not where the claim was based on contract only. However, BGB § 651 f entitles a customer to a reasonable compensation for wasted holiday where a supplier of travel facilities through breaking the contract has prevented or seriously prejudiced the customer's journey, see on BGB § 253 etc. Treitel, Remedies § 157. In AUSTRIA, an influential writer has argued that all types of non-pecuniary loss may be recovered if there has been gross negligence: Bydlinski Jbl 1965, 173, 237. In DENMARK and the NETHERLANDS non-pecuniary damages are mostly available in tort but the rules such as BW art. 6:106 and §§ 3 and 26 of the Danish Damages Act 1984 may in certain cases also apply to contracts, see on DUTCH law BW art. 6:95 and 6:106, and on DANISH law, Vinding Kruse 345 ff.; similarly SWEDISH law, see Hellner, Skadeståndsrätt 357 ff. and FINNISH law, see Taxell, Skadestånd 183. On GREEK law, see CC art. 299 (only for tort cases where personality rights have been infringed) and Ligeropoulos, Erm. AK art. vol II/1 299 nos. 2-4, 8 (1994), who criticizes the existing rule.

5. Future loss

All the legal systems will allow damages for loss which will occur after the day damages are assessed provided the loss is not too remote, see notes to Article 9:503 below. Such loss may follow from the death of a breadwinner (spouse or parent) or personal disablement, where recoverable as contract damages, and from loss of future profit. See for instance CISG art. 74 and, on the indemnity which the commercial agent whose contract with the principal has been ended may claim for future commissions, art. 17 of the Council Directive of 18 Dec. 1986 (86/653 EC). In some legal systems damages are awarded even if the loss is to some extent speculative, see on FRENCH and ENGLISH law the notes to Article 9:503. Under AUSTRIAN law, recoverability of loss of future profits is, according to ABGB §§ 1324, 1325 and 1331, dependent on the degree of fault: lost profits may only be recovered if the injury is attributable to the defaulting party's intentional or grossly negligent act. However, the dependants of a person who has been killed may claim compensation for loss of support from the person who caused the death irrespective of the degree of fault.

See generally Treitel, Remedies Chapter IV. [page 438]

Go to PECL Abbreviations || Go to PECL Bibliography || Go to full texts of Parts I & II of Principles of European Contract Law


COMMENT AND NOTES: PECL Article 9:502: General Measure of Damages

The general measure of damages is such sum as will put the aggrieved party as nearly as possible into the position in which it would have been if the contract had been duly performed. Such damages cover the loss which the aggrieved party has suffered and the gain of which it has been deprived.

Comment

A. Nature of interest protected

This Article combines the widely accepted "expectation interest" basis of damages and the traditional rule of "damnum emergens" and "lucrum cessans" of Roman law, namely that the aggrieved party is entitled to compensation of such amount as will give it the value of the defeated contractual expectation. In a contract for the sale of goods or supply of services this is usually measured by the difference between the contract price and the market or current price but where the aggrieved party has made a cover transaction then in the conditions set out in Article 9:506 it can elect to claim the difference between the contract price and the cover price. The sums [page 438] recoverable as general damages embrace both expenditure incurred and gains not made. Damages under this Article are not intended to provide restitution (i.e. restoration of the parties of the status quo ante by mutual surrender of benefits received); this remedy is available in the circumstances described in Article 9:307.

Illustration 1: S sells a Renault car to B for £5,000, warranting it to be a 1990 model. In fact it is a 1988 model, the market value of which is £1,500 less than that of a 1990 model. The contract price is not as such relevant to the computation of damages. S is entitled to damages of £1,500, the difference between the value of the car as warranted and its value as delivered.

B. Other loss

In addition to its primary claim for loss of bargain (that is, the loss which any aggrieved party would be likely to suffer from the non-performance) the aggrieved party can recover for loss resulting from its particular circumstances, so far as foreseeable within Article 9:503. In Anglo-American usage such loss is sometimes termed "consequential loss".

Illustration 2: B buys a washing machine in a sale at a special price of £200. The normal cost is £300. Because of a serious defect in the machine garments put into it for washing, worth £50, are ruined. On rejecting the machine B is entitled to recover not only the price paid and £100 for loss of bargain but also the sum of £50 for consequential loss.

The damages recoverable may include interest upon the amount of the loss from the date at which the loss was incurred to the date of payment.

C. Computation of losses and gains 

The aggrieved party must bring into account in reduction of damages any compensating gains which offset its loss; only the balance, the net loss, is recoverable. Similarly, in computing gains of which the aggrieved party has been deprived, the cost it would have incurred in making those gains is a compensating saving which must be deducted to produce a net gain. Compensating gains typically arise as the result of a cover transaction concluded by the aggrieved party. But it is for the non-performing party to show that the transaction generating the gains was indeed a substitute transaction, as opposed to a transaction concluded independently of the default. A compensating saving occurs where the future performance from which the aggrieved party has been discharged as the result of the non-performance would have involved the aggrieved party in expenditure.

Illustration 3: O, a construction company which owns a piece of equipment for which it has no immediate need, enters into an agreement to lease the equipment to H for a year at a rental of DM 1000 a month. After three months, O terminates the agreement and repossesses the equipment because of H's default in payment of the rent. Two months later, O succeeds in re-letting the equipment [page 439] for seven months at a rent of DM 1200 a month. O is entitled to the rent due and unpaid at the time it terminated the original agreement and to damages for loss of future rental income, but its claim for the two months' loss of rent after termination of the agreement, i.e. DM 2000, is reduced by DM 1400, the additional rental it will receive over the remaining 7 months of the original agreement.

Illustration 4: S, a commodity dealer, contracts to sell to B 50 tonnes of soyabean meal at a price of 300,000 lire a tonne for delivery on 1st August. On that date, when the price of soyabean meal has fallen to 250,000 lire a tonne, B fails to take up and pay for the meal. A week later S sells 50 tonnes of soyabean meal to C at 375,000 lire a tonne. Even if the market price rule (that is to say the rule that, in the case of goods of a kind available on a market, the normal measure of damages is taken to be the difference between contract price and market price) did not apply, S would not have to bring into account in its claim against B the extra profit on its sale to C, in the absence of evidence that its transaction was a substitute for the contract with B.

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

1. Expectation interest

The legal systems seem to agree that the general measure of damages should be such as to put the aggrieved party into the position in which he would have been if the contract had been duly performed. In the COMMON LAW this measure of damages has come to be called the expectation interest (see Fuller & Perdue (1936) 46 Yale L.J. 52), in GERMANY and AUSTRIA "positives Interesse" or "Erfüllungsinteresse". It is contrasted with the reliance interest which aims at putting the aggrieved party into the position in which he would have been if the contract had not been concluded (German "Vertrauensinteresse"). On this distinction see in DENMARK, Gomard, Obligationsret II 153 ff.; ENGLAND, Treitel, Remedies § 82, and on the expectation interest Robinson v. Harman (1848) 1 Ex. 850, 855; FINLAND, Aurejärvi 132-136; GERMANY, Palandt(-Heinrichs) nos. 16-18; AUSTRIA, Kozoil, I 34; ITALY, Visintini 196; SWEDEN, Ramberg. Köplagen 112, 649 f. In FRENCH law writers are generally unfamiliar with the distinction, see Treitel, Remedies § 89; But in SPAIN, it is increasingly accepted (Diez Picazo II, 683; Pantaléon, 1019 ff.).

2. Loss and gain

That damages generally may cover both loss which the aggrieved party has suffered and gain of which he had been deprived is expressly provided in FRENCH, BELGIAN and LUXEMBOURG CC art. 1149, GREEK CC art. 298, GERMAN BGB § 252 cfr. § 249, ITALIAN CC 1223, the DUTCH BW 6:96, PORTUGUESE CC art. 564(1) and SPANISH CC art. 1106; see also CISG art. 74.

3. Consequential loss

Damages for loss due to personal injury and damage to property (other than the thing contracted for) are allowed in most of the legal systems, see for ENGLAND, McGregor, Damages § 57 ff. In GERMANY these damages are awarded for positive breach of contract ("positive Vertragsverletzung"), see notes to Article 8:101, above. Under AUSTRIAN law recovery of "loss of profits" in addition to "positive damage" (loss suffered) is, according to ABGB §§ 1323, 1324, provided only if the party responsible therefor is to blame for gross negligence.

4. "Compenatio lucri cum damno"

It seems to be universally accepted that loss should be offset by the gains which the aggrieved party has made due to the non-performance, see on ENGLISH and GERMAN law Treitel, Remedies §§ 149-50; FINNISH law, Sevón-Wilhelmsson & Koskelo, 87; FRENCH law, Cass. req. 1 Jan. 1927, D.H.27.65; ITALIAN law, Cass. 5 April 1990 no. 2802 in Mass. Foro It. 1990; GREEK law, Georgiadis & Stathopoulos II arts. 297-298 nos. 87-111; PORTUGUESE law, Telles 390 and Costa, Obrigações 688 f; BELGIAN law, Ronse nos. 519 ff.; DUTCH BW art. 6:100; and SPANISH law, Supreme Court 17 February 1925, 19 November 1928, 20 June 1953, 13 May 1965 (Alabaladejo, II, 1, § 33.3). [page 440]

5. Reliance interest

Some laws allow the aggrieved party to claim reliance interest instead of expectation interest. This is possible under DANISH law where the aggrieved party can claim it, even though he would thereby be put into a better position than he would have been had the contract been performed, see Gomard, Obligationsret II 202. In GERMANY reliance interest may be claimed if the aggrieved party terminates the contract and thereby is excluded from getting expectation interest, see Palandt(-Heinrichs) § 325 no. 25. GREECE has a specific provision permitting equitable damages (see notes to Article 8:102 above). The position in SWEDISH law is unresolved, see Ramberg, Avtalsrätt 56 f.

ENGLISH law allows recovery of the reliance interest but this cannot put the aggrieved party in a better position than he would have been if the contract had been performed, see Treitel, Remedies § 94. Thus expenditures which are wasted can be recovered as reliance interest, but if these expenditures would not have been recouped if the contract had been performed they cannot be recovered, for this would put the aggrieved party into a better position than he would have been in: C&P Haulage Ltd. v. Middleton [1983] 1 W.L.R. 1461 (C.A.). For SCOTTISH law see Macgregor.

See generally Treitel, Remedies §§ 75-107. [page 441]

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COMMENT AND NOTES: PECL Article 9:503: Foreseeability

The non-performing party is liable only for loss which it foresaw or could reasonably have foreseen at the time of conclusion of the contract as a likely result of its non-performance, unless the non-performance was intentional or grossly negligent.

Comment

A. Foreseeable consequences of failure to perform

This Article sets out the principle adopted in many jurisdictions by which the non-performing party's liability is limited to what it foresaw or ought to have foreseen at the time of the contract as the likely consequence of its failure to perform. However, the last part of this Article provides a special rule in the case of intentional breach or gross negligence.

Illustration 1: B, a stamp dealer, contracts to buy from S for £10,000 his set of stamps, to be delivered to B on 1st June. S fails to deliver the stamps, which on 1st June have a market value of £12,000. Because of S's breach, B is unable to fulfil a contract to resell the collection to T for £25,000. S, though aware that B required the stamps for resale, was not aware that B would resell the stamps as a collection. B is entitled to recover as damages the sum the £2,000, being the difference between the market value of the stamps on 1st June and the sale price. S is not liable for the remaining £13,000 of B's loss, which S could not reasonably have foreseen at the time he contracted to sell the stamps to B.

Illustration 2: S sells an animal food compound to B for feeding to pigs. B does not tell A for what breed of pigs the food is required. The compound contains a mild toxin which is known to cause discomfort to pigs but no serious harm. B's pigs are, however, of a unusual breed which is peculiarly sensitive to the toxin and after being fed with the compound many of the pigs die. S is not liable for the loss since it could not reasonably have foreseen it. [page 441]

B. Exception in case of intentional breach or gross negligence

Although in general the non-performing party is liable only for loss which it foresaw or ought to have foreseen at the time of the contract, the last part of this Article lays down a special rule in cases of intentional failure in performance or gross negligence. In this case the damages for which the non-performing party is liable are not limited by the foreseeability rule and the full damage has to be compensated, even if unforeseeable.

Illustration 3: A contracts with B to construct and erect stands for a major exhibition at which leading electronic firms will display their equipment, hiring the stands from B. A week before the exhibition is due to open A demands a substantial increase in the contract sum. B refuses to pay, pointing out that A's failure to complete the remaining stands will not only cost B revenue but expose it to heavy liability to an exhibitor, C, which intended to use the exhibition to launch a major new product. A nevertheless withdraws its workforce, with the result that C's stand is not ready in time and it claims substantial compensation from B.

A's breach being intentional and with knowledge of the likely consequences, the court has to award B an indemnity in respect of its liability of C, even though A could not reasonably have foreseen the magnitude of such liability at the time it made its contract with B. The same may be done even if A was not aware of the serious consequences for B of the intentional breach.

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

The presentation in the following covers mainly ENGLISH, FRENCH, GERMAN and DUTCH law.

IRISH, SCOTTISH and DANISH laws seem to follow English law, see on Danish law, Gomard, Obligationsret II 188 ff.; on Irish law Clark 543 ff.; and on SCOTTISH law, MacQueen 295-303.

BELGIAN, LUXEMBOURG, SPANISH and ITALIAN laws are similar to French law, see Spanish CC art. 1107 and on Italian CC art. 1223 and 1225, Visintini 209.

GREEK and (semble) PORTUGUESE laws seem to follow German law. See on Greek law Ligeropoulos, Introd. remarks to arts. 297-300 nos. 44-46 a, 49-50, 53 and Stathopoulos in Georgiadis & Stathopoulos II arts. 297-298 nos. 51-56; on Portuguese law, Varela I 866.

1. Foreseeability

As in Article 9:503, ENGLISH law limits liability to foreseeable losses. The rule was stated in Hadley v. Baxendale (1854) 9 Ex. 431 (Court of Exchequer). The defaulting party is liable for loss which he foresaw or which a reasonable person in his position ought to have foreseen when the contract was made having regard to the facts he knew or ought to have known. If a seller of machinery wrongfully delays delivery with the result that the buyer is unable to reap the profits from using the machinery, the buyer may recover the profits which in the normal course of things he would have made on the machinery. However, he cannot recover the profit which he could have earned on some exceptionally lucrative contracts he had made of which the seller knew nothing, see Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd. [1949] 2 K.B. 528, C.A. See on English law, Treitel, Contracts 870-879. This limitation to the foreseeable loss, which has been adopted in CISG art. 74, must be seen in light of the strict contract liability in English law and in CISG. On CISG see v. Caemmerer & Schlechtriem (-Stoll) § 623 ff..

This foreseeability test is also provided in FRENCH, BELGIAN and LUXEMBOURG law, see CC art. 1150. In Belgium and France the test is applied broadly: only the possibility of the particular kind of damage needs to have been foreseeable, see respectively Cass., 23 Feb. 1928, Pas. 85 and Cass. com. 1965, D. 1965.449. [page 442]

2. "Immediate and direct" consequences

In addition to the foreseeability test of art. 1150, FRENCH, BELGIAN and LUXEMBOURG CC art. 1151 provides that liability for damages is limited to losses which are the "immediate and direct" consequences of the non-performance. It has been questioned whether this additional test adds anything to the foreseeability test, see Treitel, Remedies §§ 140 and 141. In FRENCH law, however, it is considered that a loss may be direct yet unforseeable, see Malaurie and Aynès, Obligations no. 839-842. In Belgium it is held to add nothing, Cass. 24 June 1977, Pas. 1087. On ITALIAN law see Realmonte.

3. The principle of "adequate causation"

GERMAN law has rejected the foreseeability test and applies instead the theory of "adequate causation". The loss must have been caused by the non-performance and only such kind of loss which occurs in the ordinary course of things are recoverable. However, if there is causation the principle will make the defaulting party liable if the default appreciably increased the possibility of the loss that in fact occurred. In determining whether this was the case the court will apply the standard of an experienced observer at the time of the non-performance.

The rule puts the plaintiff in a better position than under the foreseeability test, as the experienced observer may foresee more than a reasonable person would have at the time the contract was made. The German rule must be seen in the light of the fault principle governing German contract law, see notes to Article 8:101. On German law, see Treitel, Remedies §§ 137-138, Dölle (-Weitnauer), Introd. to arts. 82-89, 525 ff., particularly 534-535.

AUSTRIAN law (see Kozoil, 140) and SWEDISH law (see Rodhe, Obligationsrätt 121) resemble GERMAN law. FINNISH law also uses "adequate causation" but in practice elements of forseeability appear, see Taxell, Skadeständ 178 and Hemmo.

4. "Imputability"

DUTCH law applies an imputability test, see BW art. 6:98. Damages can only be recovered for loss which is related to the event which made the obligor liable in such a way that the loss, having regard to its kind and that of the liability, can be imputed to the obligor as a consequence of the event.

5. Intentional non-performance

In FRENCH and ITALIAN law the foreseeability requirement - but not the "directness" requirement - is excluded in case of intentional non-performance (dol), see French CC art. 1150 and 1151 and Italian CC art. 1225. However, in French law gross negligence is regarded as dol. SPANISH CC art. 1107(2) is similar to French CC art. 1150 (see Pantaléon, (1991) 1019-1091 and (1993) 1719-1745).

Under AUSTRIAN law the degree of fault affects the extent of damage to be recovered, since loss of profit is only compensated in the case of gross negligence and intentional wrongdoing, as well as the method of computation (whether based on objective or on subjective criteria).

The degree of the defaulting party's fault is not taken into account as a general rule for the purpose of awarding damages in the COMMON LAW systems, in SCOTLAND or in GERMAN law, see Treitel, Remedies §§ 123-126.

6. Certainty

The systems generally require a sufficient degree of "certainty" of loss in order to award damages, but this is not to be taken literally. In FRANCE, BELGIUM, GERMANY, ENGLAND and SCOTLAND the courts have awarded damages for loss of future profit, which is not always "certain", see notes to Article 9:501, and damages for the loss of a chance, e.g. to win a beauty contest, have also been awarded, see the English case of Chaplin v. Hicks [1911] 2 K.B. 786, C.A. and, on SCOTTISH law, Hogg. GREEK CC art. 298 sent. 2 provides for the recovery of lost profit which probably could have been made in the ordinary course of events or according to the special circumstances.

See generally Treitel, Remedies, Chapter IV; Dölle (-Weitnauer) Introd. to arts. 82-89, 525 ff., esp. 531-549. [page 443]

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COMMENT AND NOTES: PECL Article 9:504: Loss Attributable to Aggrieved Party

The non-performing party is not liable for loss suffered by the aggrieved party to the extent that the aggrieved party contributed to the non-performance or its effects. [page 443]

Comment

A. Loss caused by unreasonable action or inaction

This Article embodies the principle that an aggrieved party should not recover damages to the extent that its loss is caused by its own unreasonable behaviour. It embraces two distinct situations. The first is where the aggrieved party's conduct was a partial cause of the non-performance; the second, where the aggrieved party, though not in any way responsible for the non-performance itself, exacerbated its loss-producing effects by its behaviour. A third situation, where the loss resulting from the non-performance could have been reduced or extinguished by appropriate steps in mitigation, is covered by Article 9:505.

The reason for the division between this and the next Article is that some legal systems distinguish these situations, at least in some degree. Thus in English law the first two situations fall within the concept "contributory negligence" and the third involves a "failure to mitigate". Most continental European legal systems do not distinguish the two concepts, though they reach similar results by using concepts such as causation.

B. Conduct contributing to the non-performance

To the extent that the aggrieved party contributed to the non-performance by its own act or omission he cannot recover the resulting loss. This may be regarded as a particular application of the general rule set out in Article 8:101 (3).

Illustration 1: B orders a computer system from S which is to be specially designed to allow B to send to prospective property buyers details of houses coming on to the market which appear to meet their requirements. The computer system fails to operate properly, due partly to a design defect and partly to the fact that B's instructions to S were incomplete. B's loss is irrecoverable to the extent that it results from its own inadequate instructions.

C. Conduct contributing to the loss-producing effects of non-performance

Where the aggrieved party, though not in any way responsible for the non-performance, exacerbates its adverse effects he cannot recover damages for the additional loss which results.

Illustration 2: A leases a computer which under the terms of the contract is to be ready for use in England where the voltage is 240v. The computer supplied is capable of operating on various voltages and, in breach of contract, is actually set for 110v. A prominent sign pasted on the screen warns the user to check the voltage setting before use. A ignores this and switches on without checking. The computer is extensively damaged and repairs will cost A £1,500. The court may take the view that the loss was at least half A's fault and award only £750 damages. [page 444]

NOTES

See Notes to Article 9:505 [Reduction of Loss (PECL Article 9:505 is compared with CISG art. 77)]. [page 445]

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COMMENT AND NOTES: PECL Article 9:509: Agreed Payment for Non-performance

(1) Where the contract provides that a party which fails to perform is to pay a specified sum to the aggrieved party for such non-performance, the aggrieved party shall be awarded that sum irrespective of its actual loss.

(2) However, despite any agreement to the contrary the specified sum may be reduced to a reasonable amount where it is grossly excessive in relation to the loss resulting from the non-performance and the other circumstances. [page 453]

Comment

A. Stipulation as to agreed payment binding

It is common for the parties to a contract to specify a sum to be paid for non-performance, with a view to avoiding the difficulty, delay and expense involved in proving the amount of loss in a claim for unliquidated damages. Such a clause may also prompt the debtor to perform voluntarily, when the penalty is heavy. To perform is then cheaper than paying the penalty. Paragraph (1) gives effect to such a provision, so that except as provided by paragraph (2) the court must disregard the loss actually suffered by the aggrieved party and must award it neither more nor less than the sum fixed by the contract. It follows that the aggrieved party is under no obligation to prove that it has suffered any loss.

Illustration 1: B agrees to build a house for A and to complete it by April 1st. The contract provides that for every week's delay in completion B is to pay A the sum of £200. B completes the house on April 29th. A is entitled to £800 as agreed damages, whether his actual loss (e.g., the cost of renting alternative accommodation during the four week period of delay) is greater or less than that sum.

Illustration 2: A agrees to sell his house to B, from whom he obtains a deposit of 20 per cent of the price to secure B's performance of the contract. B refuses to complete the transaction. A may forfeit the deposit.

Where, however, the contract specifies merely the minimum sum payable by the non-performing party, the aggrieved party may recover a higher figure if it can prove that its loss exceeds the minimum sum. In this case the aggrieved party may elect to sue for damages at large instead of invoking the provision for agreed damages.

B. Court's power to reduce grossly excessive stipulations

To allow the parties complete freedom to fix the sum payable for non-performance may lead to abuse. If there is a gross disparity between the specified sum and the actual loss suffered by the aggrieved party the court may reduce the sum even if at the time of the contract it seemed reasonable. Since the purpose is to control only those stipulations which are abusive in their effect, the court's reducing power is exercisable only where it is clear that the stipulated sum substantially exceeds the actual loss. This power of the court has a limit: it should respect the intention of the parties to deter default and therefore should not reduce the award to the actual loss. The court has to fix an intermediate figure.

Illustration 3: A supplies equipment to B on lease for five years at a rent of £50,000 a year. The agreement provides that if the lease is terminated because of default by B in performing its obligations B shall pay A by way of agreed damages a sum equal to 80% of the future rentals. In the light of circumstances existing at the time of the contract this stipulation is not unreasonable. After a year the agreement is terminated because of B's default in payment. As the result [page 454] of an unexpected increase in the demand for the type of equipment in question A, having secured the return of the equipment, is able to re-let it at twice the rent payable under the original lease. The court may reduce the agreed damages payable so as to take account of this fact.

C. "Excessive" sum

In deciding whether the stipulated sum is excessive the court should have regard to the relationship between that sum and the loss actually suffered by the aggrieved party, as opposed to the loss legally recoverable within the foreseeability principle embodied in Article 9:503. On the other hand, the computation of actual loss should take into account that element of the loss which has been caused by the unreasonable behaviour of the aggrieved party itself, e.g. in failing to take reasonable steps in mitigation of loss.

D. Genuine options not covered

Article 9:509 does not apply to a genuine option to pay a sum of money instead of performing, since Article 4.509(1) deals with non-performance, not with alternative performance (forfait clause, "clause de dédit"). On Alternative Performance see Article 7:105.

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

1. Stipulated payment clause valid

As is provided in Article 9:509, the laws of the CIVIL LAW countries will enforce a stipulation in a contract under which the debtor undertakes to pay a fixed sum of money in the event of his non-performance. The stipulated payment clause will be enforced whether its purpose was to coerce the debtor to perform his principal obligation (penalty clause) or to serve as a pre-estimate of the loss suffered by the creditor in case of non-performance (liquidated damages clause). See also Unidroit art. 7.4. As we shall see in note 4 below the COMMON LAW countries will not enforce a penalty clause.

The civil law codes confirm the validity of stipulated payment clauses either expressly or impliedly, see AUSTRIAN ABGB § 1336(1); BELGIAN CC art. 1152 and 1229; FRENCH CC arts. 1152 (as amended in 1975 and 1985) and 1229; LUXEMBOURG CC arts. 1152 and 1226 ff. (as amended in 1987); GERMAN BGB §§ 339-345; GREEK CC art. 405(2); ITALIAN CC art. 1382-1384; NETHERLANDS BW arts. 6:91-6:94; PORTUGUESE CC art. 810(1); and SPANISH CC art. 1152. The same holds true of DANISH law, see Gomard, Obligationsret II 239 ff.; FINNISH law (see Taxell, Avtal och rättsskydd 441); and SWEDISH law (see Ramberg, Avtalsrätt 309).

Unless otherwise agreed the stipulated payment is not payable if the non-performance is excused, see expressly DUTCH BW art. 6: 92(3); GREEK CC art. 405(1); and by implication LUXEMBOURG CC arts. 1152 and 1226 ff. (as amended in 1987); GERMAN BGB § 339. On the other hand, and subject to the rules on reduction, see note 3 below, the stipulated payment is due irrespective of whether the aggrieved party suffered any loss, and irrespective of how great the loss was.

2. Stipulated payment replaces damages

In most of the Civil law systems the stipulated payment replaces the damages for non-performance which the aggrieved party would have recovered. This means that the defaulting party cannot claim damages instead of the stipulated payment. Nor can the aggrieved party claim damages in addition to the stipulated payment, unless, as provided in the ITALIAN CC art. 1382(1), PORTUGUESE CC art. 811(2) and (3) and SPANISH CC art. 1153, the parties have agreed on such payment. In AUSTRIAN law, damages over and above the stipulated sum may be claimed in respect of commercial transactions (4. EVHGB Art. 8 No. 3). By contrast, under GERMAN law the aggrieved party may claim damages for non-performance or improper performance in addition to stipulated payment (BGB §§ 340(2), 341(2)). If payment is stipulated for a failure to perform properly (as opposed to a [page 455] performance which is not tendered), the aggrieved party is entitled to claim both performance and the agreed payment (BGB § 341(1)). These latter rules also apply in GREECE, see CC arts. 406(2) and 407 sent. 2. In ITALY a payment stipulated for delay in performance may be recovered together with a claim for performance, CC art. 1383. On DENMARK, see Gomard, Obligationsrett II, 239 f. In FINNISH law the solution depends on the interpretation of the term Aurejärvi 151.

3. Reduction

Under several Civil law systems the court may reduce the stipulated payment if it is manifestly excessive, see AUSTRIAN ABGB § 1336(2); DANISH, FINNISH and SWEDISH Contract Acts § 36; DUTCH BW 6:94; ITALIAN CC art. 1384; FRENCH and LUXEMBOURG CC art. 1152(2); GREEK CC art. 409, even if the parties have agreed otherwise; and GERMAN BGB § 343. However in Germany and Austria a payment stipulated in contracts between merchants cannot be reduced, see HGB § 348. At first sight the same rule appears to apply in BELGIUM, see CC art. 1152, which is not restricted to merchants. In GERMANY, however, the payment may be set aside or modified if it would be unconscionable to enforce it, see BGB § 242 and Baumbach & Duden & Hopt HGB § 348 note B. And in BELGIUM the Supreme court has held that if a stipulated payment is so excessive in relation to the loss which was forseeable at the time the contract was made that it loses its function as a pre-estimate of the loss suffered and becomes a mere private penalty, it should be set aside as violating public policy, see Cass 24 Nov. 1972, R.C.J.B. 1973 302. Even if this is not the case, the stipulated payment may still be reduced if it is manifestly unreasonable at the moment of non-performance, see law of 23 November 1998, in effect confirming Cass. 18 Feb. 1988, Arr. Cass. 1987-88, 790 no. 375; T.B.H./R.D.C. 1988, 636 note Dirix. Under the SPANISH CC art. 1154 the court may reduce payment to an equitable amount if the principal obligation has been performed partly or irregularly. In PORTUGAL reduction is also possible; however, in a decision of the Supreme Court it has been held that the payment may only be reduced if it was stipulated as a pre-estimate of the loss suffered and not if it was made to coerce the defaulting party to perform his principal obligation, see on STJ 3 Nov. 1983, Pinto Monteiro 474 ff. See also Unidroit art. 7.4.13(2).

4. Penalty clauses in the common law

In the COMMON LAW stipulated payment clauses are divided into penalty and liquidated damages clauses. The former are invalid, the latter are valid. Penalty clauses are clauses stipulated "in terrorem" in order to coerce the debtor to perform the principal obligation. Liquidated damages clauses are clauses by which an attempt is made to pre-estimate the loss suffered by a breach of contract. The latter clauses cannot be modified. A clause will be regarded as a penalty clause if it is extravagant and unconscionable in amount in comparison with the greatest loss that could be proved to follow from such a breach, see Dunlop Pneumatic Tyre Co. Ltd v. New Garage and Motor Co. Ltd. [1915] A.C. 79, 87 (H.L.). A stipulation is a liquidated damages clause if the circumstances were such that an accurate or precise pre-estimate of the loss was impossible and the stipulated payment was a genuine attempt to make a pre-estimate of the loss, ibid. SCOTTISH law is the same; a clause has been upheld when precise assessment of damages was not possible: Clydebank Engineering & Shipbuilding Co. Ltd. v. Castaneda (1904) 7 F 77 (H.L.).

5. Clauses setting a sum less than the likely loss

On clauses which though drafted as penalty or liquidated damages clauses in effect limit the liability of the non-performing party, see note 4 to Article 8:109, above.

See generally ICC Guide to Penalty and Liquidated Damages Clauses no. 478; Fontaine, Contrats 127-170; Treitel, Remedies §§ 164-181. [page 456]

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COMMENT AND NOTES: PECL Article 9:510: Currency by which Damages to be Measured

Damages are to be measured by the currency which most appropriately reflects the aggrieved party's loss. [page 456]

Comment

A. General remarks

1. Economic context

Exchange rates between individual currencies are subject to more or less heavy fluctuations. Consequently, the question in which currency damages have to be measured is relevant. Over or under-compensation must be avoided by fixing damages measured by reference to the correct currency.

2. Legal context

This provision fixes the currency in which contractual damages are to be measured. Technically speaking, the currency of account for damages is laid down.

By contrast, Article 7:108 deals in a general way with the currency of payment. If damages (or interest) have arisen in a currency other than the local currency of the place of payment, any conversion into the latter currency is governed by Article 7:108.

B. Purpose

Since damages have the purpose of putting the aggrieved party into the same position in which it would have been upon performance (Article 9:502) they have to be expressed in the currency which is most appropriate to achieve that result. Damages therefore should not automatically be measured in the local currency of the court; in most countries judgments in foreign currency are allowed. Even if they are not allowed, but the damages had arisen in a foreign currency and are measured in that currency, the conversion into the local currency at current exchange rates will lead to an appropriate result.

C. Explanation

In view of the vast variety of the facts of international commercial intercourse, the currency of the damages which is most appropriate to compensate the aggrieved party cannot generally be determined with precision. In many cases it will be the contractual currency of account. But where this is not the currency which the aggrieved party had to utilize in order to make good its loss, e.g. by making a cover transaction, the latter currency may be more appropriate, especially if the creditor utilizes the currency of its home country for this purpose. Generally this will be the currency in which it makes its business deals.

Illustration 1: Austrian machine manufacturer C has made a contract for delivery of certain machinery with French importer F. F wrongfully cancels the contract. C's damages have arisen in Austrian Schilling.

However, the factors may be different. [page 457]

Illustration 2: As in Illustration 1, but C is an internationally active company stipulating that payments for its export sales are to be made on a US-Dollar bank account in New York. C's lost profits are to be calculated in US dollars.

It is also possible for loss to arise in several currencies.

D. Derived claims

Where a party is entitled to interest, such interest is usually measured and payable in the same currency as the principal. This is so in particular where the interest is expressed as a percentage of the principal sum.

The same is true if the amount of damages is fixed in the contract as a percentage of the price.

Illustration 3: In a construction contract, the parties have agreed on a penalty of 1% of the price for every week of default in completion of the construction, the price being expressed in Deutsche Mark. The penalty will be due in DM as well.

E. Autonomy of the parties

Of course, the parties are free to fix the currency of damages or interest by reference to any currency they like.

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

1. Case law

Article 9:510 follows the modern ENGLISH and SCOTTISH rule on the currency of damages, which has been developed in The Despina R. & the Folias [1979] A.C. 685 (H.L.) (see also Goode, Commercial Law 1133; Goode, Payment Obligations 136 ff.). Also in some GERMAN and ITALIAN cases it has been accepted by the courts that a foreign currency may reflect the aggrieved party's loss more appropriately (Germany: especially OLG Hamburg 7 Dec. 1978, Versicherungsrecht 1979, 833; Italy: Cass. 6 June 1981 n. 3656, Mass. Foro It. 1981; see also Trib. Udine 24 Dec. 1987, Foro It. 1989, I p. 1618). However, in Germany the Bundesgerichtshof still accepts that damages may be awarded in DM provided that the debtor does not object (BGH 9 Feb. 1977, WM 1977, 478 (479); BGH 10 July 1954, BGHZ 14, 212 (217)). In FRANCE, judgment is mostly given in French francs, but as the tendency is to use the rate of exchange of the date of payment for the conversion (see Réponse Ministerielle No. 949, JCP 1982, IV, 166; Derrida no. 919 ff.; Chartier no. 442) the result is practically the same as in case of a proper foreign currency judgment. In SPAIN a decision of the Tribunal Supremo (TS 26 Nov. 1987) has calculated damages in foreign currency but converted in pesetas according to the official rate of exchange of the day of the definitive judgment. The same holds true in GREECE under CC art. 291 which, however, focusses on the official rate of exchange at the date of payment. Claims for damages in foreign currency are accepted by the courts in AUSTRIA; the relevant time for converting is the time when the obligation is due (see e.g. Ehrenzweig (Mayrhofer) Schulderecht AT, 49-53).

Under DUTCH BW art. 6:121 when, pursuant to an obligation, payment must be made in a currency other than that of the country where the payment must be made, the debtor is entitled to pay in the currency of the place of payment.

2. Legal writers

The position of legal writers in Europe appears not to be uniform. Whereas in ITALY judgments awarding damages in foreign currency have been criticized (Ascarelli 416, Campeis & De Pauli 412 ff.), there is support for awarding damages in foreign currency not only in ENGLAND and in BELGIUM (Fallon, Annal. dr. Liège 33 (1988) 77-89; Niyonzima 206 ff. no. 233, 214 no. 239), but the same is true also for GERMANY, where some authors advocate a more careful analysis of the currency of the loss and propose following either the very wide English formula (Alberts, NJW 1989, [page 458] 609-615 (612); idem, Währungsschwankungen 48 f., 135, 137, 166) or, more precisely, recommend the creditor's currency (von Hoffmann 125-141) or the currency of the assets of the creditor (Remien, RabelsZ 53 (1989) 245-292). See also in GREECE Kallimopoulos 130-138, 350-375. In SPAIN, traditional doctrinal analysis and case law (TS 7 November 1957, 6 April 1963) favoured payment in the national currency but more recent scholarship would allow the debtor the choice: Paz-Ares.

3. Currency of the contract

It is sometimes thought that damages for breach of contract should be measured in the currency of [account of] the contract (Staudinger (-K. Schmidt) § 244 no. 17), but such a rule is not accepted in ENGLISH practice (see The Despina R and the Folias, ibid. 700-701) and also disputed in GERMANY (see Remien, RabelsZ 53 (1989) 245, 276-280: only where contractual claims for damages take the place of a contractual claim for the price). See also Unidroit art. 7.4.12. [page 459]

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