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

Sieg Eiselen [*]
September 2004

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

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

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

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

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

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

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

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

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

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

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


FOOTNOTES

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

29. See also Comment 1 to this article.

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

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

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

33. Liu at fn 76.

34. See Comment on the UNIDROIT Principles Art 7.4.10.

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

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

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

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

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

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

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


Pace Law School Institute of International Commercial Law - Last updated October 6, 2004
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