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Reproduced with the permission of Oceana Publications

excerpt from

INTERNATIONAL SALES LAW

United Nations Convention on Contracts for the International Sale of Goods

Convention on the Limitation Period in the International Sale of Goods

Commentary by
Prof. Dr. jur. Dr. sc. oec. Fritz Enderlein
Prof. Dr. jur. Dr. sc. oec. Dietrich Maskow

Oceana Publications, 1992

Article 78 [Interest] [1]

[TEXT OF THE UNIFORM LAW]

If a party fails to pay [3] the price or any other sum that is in arrears [4], the other party is entitled to interest [2] on it, without prejudice to any claim for damages recoverable under article 74 [5].

[WORDS AND PHRASES, CONCEPTS

1. unsuccessful efforts to determine the rate of interest at the 1980 diplomatic conference
2. if a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it
3. interest on price claims and other claims; interest on liquidated sums, on sums not yet specific
4. if a party fails to pay the price or any other sum that is in arrears
5. the other party is entitled to interest without prejudice to any claim for damages recoverable under article 74 ]

[COMMENTARY]

[1] [unsuccessful efforts to determine the rate of interest at the 1980 diplomatic conference]

The regulation of interest has caused considerable difficulties, both in preparing and holding the diplomatic conference. Those difficulties are reflected in the modesty of the results. In ULIS there was a rule for interest in arrears in the event of payment in arrears of the price which provided for one per cent above the official discount rate in the creditor's country (Article 83). No agreement could be achieved in preparing the draft CISG, however, so that the interest is mentioned only in what is now Article 84, paragraph 1, hence interest on the price to be paid back (Nicholas/BB, 568).

The subject was taken up repeatedly at the diplomatic conference. Religiously motivated prohibition or restriction of interest in Islamic countries played a role in the debates, but by no means a decisive one (O.R., 416 fol). The main contentious issue was rather how the interest rate should be calculated. Given the considerable movement in the money market, there were only few delegations which, like that of the FRG, were in favour of a fixed interest rate, as a minimum (O.R., 416). But flexible interest rates were only possible through reference to an existing interest level. Insofar the discussion revolved around the question of whether the interest level in the creditor's country or the one in the debtor's country should be decisive. At the time of the diplomatic conference there were serious differences between the Western industrialized countries, where the amount of interest is formed in the market (naturally influenced by political measures) and had at that time reached considerable amounts, and most of the at that time called socialist countries where the interest was fixed by law and relatively low. It was against this background that the Western industrialized countries aimed towards interest to be set according to the level of the creditor's country. This would have meant that debtors from those countries would have had to pay low interest to creditors from Eastern countries, but by contrast, debtors from the latter countries high interest. It was pointed out in favour of this variant that the creditor would have to procure financing in replacement in his [page 310] country.The Eastern countries, and also many developing countries, opted for the reverse solution pointing to the fact that they would have to procure the means needed in their commercial relations with Western partners in high-interest countries (c. in regard to the overall subject O.R., 223 fol; 388 fol, 415 fol, 429 fol). These differences of opinion caused by the differing interests could not be overcome even by compromise proposals (O.R., 138). Furthermore, in light of the divergent methods used in forming interest in the countries involved, difficulties of a substantive and legal, technical kind become apparent in concretely determining the level of interest by reference. It was impossible, in the end, to come to a basic rule.

[2] [if a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it ]

      [2.1] One of the main ideas of this article is the general entitlement to interest which is rather far-reaching (note 3) in substance. The entitlement to interest under the CISG is, in our view, characterized above all by two features: its normativity and its absoluteness.

Its normativity consists in that the amount of interest (however not by the Convention itself - note 2.2) is fixed a priori and irrespective of the damage which is caused by the arrears in payment. Insofar the interest is comparable to a penalty. There seems to be far-reaching agreement on this principle.

Absoluteness means that the existence of grounds for release cannot remove the entitlement to interest. But, a reservation has to be made here, namely that this is not true of a failure caused by the other party's act or omission (Article 80). The impediments under Article 79, however, do not free from the obligation to pay interest (see also Schlechtriem, 94, and following him somewhat restrainedly, Nicholas/BB, 571, and Stoll/Freiburg, 279). A point in favour of this is that the entitlement to interest is not mentioned in Article 79, paragraph 5, but could be explained with the genesis of the Convention. We believe, however, that the economic background is also justification for such a solution. The party who does not pay a debt that is due, disposes of the sum of money required for it and/or does not have to procure it. He thus has an advantage vis-à-vis the other party which is compensated by the entitlement to interest of that party. This applies, in particular, to restrictions in the transfer of currency, often cited as an example, which shall not have the effect of a reason for exemption here.

But there are also voices who, assuming that interest is a part of the damages, want to permit an exemption on the ground of impediments (van der Velden, 405). But, for the reasons given above, we cannot join them. [page 311]

      [2.2] Since the amount of interest is not determined, this shortcoming is to be compensated above all by agreement between the parties. These cannot, because of the CISG, be countered anymore by national prohibitive rules for interest, which in many Islamic countries have been considerably relaxed in regard to the economic sector (e.g. Article 455 fol, Algerian Civil Code). Insofar a specific rule of the Convention supersedes the general rule of Article 4, sub-para. (a) according to which the Convention does not cover questions of validity (c. also Honnold, 424; for a similar consideration see Article 68, note 5.4.).

The entitlement to interest in abstract terms is not limited by a ceiling so that in our view also, national restrictions in regard to the amount of interest do not prevail over farther-reaching party agreements. But these could be measured against relevant general provisions of national law which are aimed against unfair (immoral) behaviour (Article 4, notes 5 and 6).

When the parties have agreed the amount of interest, only in regard to specific claims for payment, e.g. delay in paying the price, it is in our view recommendable, because of the difficulties in determining the amount of interest (which we will discuss in the following) to apply this solution analogously to other financial claims. Hence, the agreements between the parties should, so to speak, serve as the general basis for taking a decision (Article 7, paragraph 2) by analogy, insofar as there are no other clues.

Where the parties have agreed nothing, the amount of interest will have to be calculated on the basis of the applicable domestic law (Schlechtriem, 94; Nicholas/BB, 570; Magnus, 140 fol). This is, in general, the subsidiary law applicable to the sales contract. No special connecting points seem to have developed for the entitlement to interest. When the applicable law does not provide for the calculation of the amount of interest, as can be the case in countries which do not generally forbid an entitlement to interest, e.g. Algeria, the claim does not in our view become unenforceable as Schlechtriem thinks (94, Note 414). Rather, recourse should be had to the level of interest applied in the respective country to similar transactions. This may seem formal, in particular when the parties have agreed to invoke a neutral law as the subsidiary law applicable. Such approach corresponds, as we believe, best to the structures founded in the CISG. Besides, the way pointed to by Nicholas (BB, 570) to take into consideration the cost of credit at the creditor's place of business, without examination of the concrete costs incurred, does not seem practicable because the solution aspired to by the Western industrialized countries, which was not adopted at the diplomatic conference, would in part be introduced by way of [page 312] interpretation. Other countries could then be inclined to interpret into the Convention their own rejected proposals. This would give rise to disharmony in the taking of decisions. The suggestion by Stoll (Freiburg, 279 fol), who seeks to provide grounds for special connecting factors leading to the law of the seller's country, is aiming towards a similar solution. The seller is the typical but not exclusive creditor. Therefore, the reasoning of Stoll is not conclusive, in particular not in the case where the buyer demands refunding of the price (Article 84, paragraph 1). Where a way is really to be sought via special connecting factors, and when account is taken of the arguments expounded in Vienna, more speaks in favour of following the proposal by Basedow (Freiburg, 288 fol) and relying on the statute of currency.

Toward a similar direction tends the proposal by Honnold (424), with which van der Velden (406 fol) obviously sympathizes, namely to take into account the cost of credit at the place where the creditor has indeed gotten his supplies. Better account could so be taken of the interests of those countries which do not have their own domestic currency markets. But, as the author notices himself, the fact that the interest claim would thereby move very near a claim for damages speaks against it. This could be further objectivized insofar as the interest that is customary at the international level in relation to currency could serve as a basis where such is in existence. The proposal in this regard includes ideas worth reflecting on where the filling of the gaps of domestic law is concerned. But it is conceived still further and makes reliance on national law superfluous.

[3] [interest on price claims and other claims; interest on liquidated sums, on sums not yet specific]

Of greatest practical relevance is interest on price claims. It was, however, useful to go beyond ULIS and mention other claims, if only to avoid reverse conclusions. In this context, however, the question arose among authors from the Anglo-Amencan legal family whether other sums were only meant to be such which are already liquidated, for which interest could be claimed under that legal system, or sums that have not yet been specified (in particular Honnold, 424 fol - see note 4).

[4] [if a party fails to pay the price or any other sum that is in arrears ]

      [4.1] From the formulation that interest is to be paid on sums in arrears we draw the conclusion that interest is to be paid from the time when the respective sum is due. For lack of deviating agreements the becoming due is, in the event of price claims, determined by Article 58. [page 313]

      [4.2] It is less clear when most of the other claims become due. It could be reflected on whether this can be determined by analogy to Article 10 of the Limitation Convention. Such a complex interpretation of conventions which relate to one another is desirable even when it comes across difficulties where the States Parties are not identical. In the present case, however, it does not seem to be of great help because, in the context of limitation, the becoming due has to be determined in such a way that it becomes effective when the parties do not call in their claims, whereas the assertion of claims is to be demanded under the aspect of interest.

Without being able to enter into detail in respect of each concrete claim, we believe that in regard to claims for damages, reimbursement of expenses and reduction of the price, hence secondary claims which emerge only when primary obligations under the contract are breached, from the aspect of interest, one should proceed on the assumption that they become due when they have been liquidated vis-à-vis the other party and in the amount in which later they turn out to be justified. Another aspect is that they should have accrued at the time when they were charged and were not just expected in the future.

It should be admitted, however, that a general principle of this substance, in the meaning of Article 7, cannot simply be deduced from the Convention. Indicators for it are offered in general by the reverse conclusion from Article 59 as well as, more specifically, in Articles 39, 43 and 46, which are limited, however, to non-conformity or lack of freedom from third party rights or claims.

We wish to bring the developed principle up for discussion. It places the decisive time between others that are possible or practiced, like the time of the breach of contract and of the assertion of a claim, and does in a way also consider the liquidation requirement of the Anglo-American law.

The principle developed here for secondary claims is, in our view, also applicable to primary claims whose becoming due is not determined otherwise, like claims for reimbursement of auxiliary/additional expenses which are not included in the price, hence expenses for packaging, transport and insurance, as well as customs duties and taxes. They would become due with the issuance of the invoice.

      [4.3] Article 84, paragraph 1 expressly stipulates that on a price to be refunded, interest must be paid from the date on which the price was originally paid. The same should apply to the refunding of the reduced price under Article 50. [page 315]

      [4.4] The obligation to pay interest ends with the time of payment which is relatively uncomplicated. The same rules apply for the payment of interest as for the payment of the principal claim. To the latter in turn Articles 56, 57 and 58 should apply directly or by analogy. Since the payment in many cases is considered as effected only at a later date than that on which the debtor has caused it, a guess will have to be made as to the actual time of payment in calculating interest if the transfer of the principal claim and the interest is made simultaneously.

      [4.5] Interest is usually calculated on an annual basis. Hence the question arises whether it should be capitalized respectively after one year, or whether the annual interest rate should be used as the multiplying factor and be multiplied by the entire delay period. In other words: whether compound interest can be claimed, in our view, this is not the case because, among other things, it is not customary in international sales law. There would have to be specific clues for it.

[5] [ the other party is entitled to interest without prejudice to any claim for damages recoverable under article 74]

      [5.1] Another important aspect under the provision on interest in the Convention (Vilus/Dubrovnik, 252) is to clarify that the entitlement to interest does not preclude claims for damages. This clarification indicates that damage which exceeds interest can be claimed (Rudolph/Moscow, 92), hence interest can be counted towards the damages even when the two claims have different features.

A claim for damages presupposes a breach of contract, as is the case in regard to the entitlement to interest when one assumes, as we do, that an excusable breach of contract is nonetheless a breach. The main difference, however, is that exemption under Article 79 is possible in respect of the obligation to pay damages. Hence, it may happen that there is an entitlement to interest and a damage exceeding interest can be proved, but there will be no right to claim damages because there is an impediment, such as restriction of the transfer of currency. However, as the entitlement to interest and the claim for damages both exist, the claim for damages can compensate for the lack of an interest rate in the CISG, as proves the ruling in a case before the Landgericht Aachen (Judgment of Apri1 3, 1990 - 41 O 189/89, in: RIW, 1990/6, p. 491 fol).

      [5.2] The reference to Article 74 here is unfortunate as it suggests the reverse conclusion. Article 77 is not be applied in cases where the calculation of the amount of damages is concerned. This would be completely unjustified and can, therefore, not be meant in our view. A party who had to provide himself with a bridging loan has of course done so at low cost. We hold that the right to claim damages [page 315] generally follows from Article 45, paragraph 1, subpara. (b) and Article 61, paragraph 1, subpara. (b), and not from Article 74.

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Pace Law School Institute of International Commercial Law - Last updated September 25, 2002
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