Excerpt from John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, 3rd ed. (1999), pages 449-455. Reproduced with permission of the publisher, Kluwer Law International, The Hague.
§409 Articles 75 and 76 state alternative methods for measuring damages that may be recovered by a seller or buyer who avoids the contract. As we have seen (Arts. 49 and 64, supra at §301 and §353), the typical settings for avoidance are these: (a) The seller fails to deliver the goods or delivers seriously defective goods; (b) The buyer fails to pay the price. In these cases the aggrieved party may free itself from duties under the contract by notifying the other party that the contract is avoided (Arts. 26, 81). Thereupon an aggrieved buyer need not accept goods and must return goods that it has received and an aggrieved seller need not deliver goods to the buyer.
The Convention’s alternative methods for measuring the damages on avoidance (Arts. 75 and 76) need to be considered together. As we shall see, Article 75 bases damages on a repurchase by the buyer or a resale by the seller while Article 76 looks to the "current" (or market) price for the goods in question.
§410 A. Damages Established by Substitute Transaction: Article 75
"If the contract is avoided and if, in a reasonable manner and within a reasonable time after avoidance, the buyer has bought goods in replacement or the seller has resold the goods, the party claiming damages may recover the difference between the contract price and the price in the substitute transaction as well as any further damages recoverable under article 74."
The crucial feature of Article 75 is this: Resale by an aggrieved seller or repurchase by an aggrieved buyer establishes damages; the aggrieved party "may recover the difference between the contract price and the price in the substitute transaction" and need not prove the "current" or [page 449] market price for the goods. Making (and identifying) a substitute transaction will be especially important when the goods have been specially manufactured or for some other reason are so unique that it will be difficult to establish a "current" price under Article 76. See §410.1, infra.
Professor Treitel summarizes the availability of such "concrete" methods of damage assessment in France, Germany and Switzerland, and notes that in many legal systems this approach constitutes the preferred basis for recovery. Cf. USA, UCC §2-706.
As Professor Knapp observes, if the aggrieved party is constantly in the market for goods of the type in question it may be difficult to determine which purchase or sale was the substitute transaction under Article 75. B-B Commentary 554. Since avoidance calls for a declaration made by notice to the other party (Art. 26, §187 supra) the aggrieved party may avoid dispute by including in the notice a statement of plans for a substitute transaction. If this statement is not provided, reference to the aggrieved party’s first purchase or sale of comparable goods following the notice of avoidance seems consistent with the concern to avoid delay shown by the "reasonable time" requirement of Article 75.
Decisions: Substitute Transaction. (1) RUSS. FED., Int. Comm. Arbn. Ch. of Comm. 155/1994, 16 March 1995. S contracted to deliver chemical products to B, but failed to deliver within the agreed time, or within the time extended by B. (S claimed excuse based on failure of supplier; this aspect of the case appears infra at Art. 79, Case #3.) Because of S’s failure to deliver, B avoided the contract and purchased the needed materials at a higher price. B recovered the difference between the substitute purchase and the agreed price. CLOUT 93, UNILEX D.1995-10.0.1. (2) ARB. Int. Sch., B-k, Vienna, SCH-4366, 15 June 1994. B failed to pay S for a substantial part of an order of rolled-metal sheets. S sold the undelivered material at a lower price. S was awarded the loss incurred in the substitute transaction. CLOUT 93, UNILEX D. 1994–14. (3) [page 450] GER. OLG Düssseldorf, 17 U 146/93, 14 January 1994. On B’s failure to pay for shoes ordered from S, S avoided the contract and resold the shoes at a lower price. S recovered the difference. CLOUT 130, UNILEX D.1994-1.
§ 411 B. Damages Based on Current Price: Article 76
If the aggrieved party does not fix its damages under Article 75 by a substitute transaction damages may be based on "current" (market) price:
"(1) If the contract is avoided and there is a current price for the goods, the party claiming damages may, if he has not made a purchase or resale under article 75, recover the difference between the price fixed by the contract and the current price at the time of avoidance as well as any further damages recoverable under article 74. If, however, the party claiming damages has avoided the contract after taking over the goods, the current price at the time of such taking over shall be applied instead of the current price at the time of avoidance.
"(2) For the purposes of the preceding paragraph, the current price is the price prevailing at the place where delivery of the goods should have been made or, if there is no current price at that place, the price at such other place as serves as a reasonable substitute, making due allowance for differences in the cost of transporting the goods."
When an aggrieved party avoids the contract prior to or at the time the goods are handed over, damages are based on "the current price at the time of avoidance" (Para. (1) of Art. 76). This reference-point is applicable in the following situations: (a) The contract is avoided based on anticipatory breach (Art. 72); (b) The seller avoids the contract because the buyer fails to pay (or make the required arrangements for payment, e.g., [page 451] by establishing a letter of credit) prior to or at the time for delivery; (c) The buyer avoids the contract on rejecting a tender of seriously defective goods.
(a) Avoidance after Taking Over the Goods
Under the second sentence of paragraph (1) damages are not based on the price at the time of avoidance when a party avoids the contract "after taking over the goods". In these cases the reference-point is the current price at a date prior to avoidance—when the goods were taken over.
The first sentence of Article 76(1) was amended and the second sentence was added in the closing days of the Diplomatic Conference (See note 7, supra). Under the UNCITRAL draft, damages were based on the current price at the time the aggrieved party "first had the right to declare the contract avoided"—a point of reference that many delegates feared would be subject to dispute. Consequently, this language was replaced by a reference to "the time of avoidance". However, there was concern lest this reference-point might be subject to abuse, e.g., by buyers who had received goods and who might be tempted to delay a decision on avoidance to take advantage of changes in the market price. In response, a second sentence was added: "If, however, the party claiming damages has avoided the contract after taking over the goods" damages would be based on the current price "at the time of such taking over"—a definite earlier time not subject to unilateral postponement. In cases of avoidance by buyers who have received goods this provision seems clear.
The special time for measuring damages provided by the second sentence of Article 76(1) will seldom apply to sellers: sellers seldom avoid the contract "after taking over the goods". Avoidance by sellers usually occurs while the seller still has possession of the goods when the buyer commits a fundamental breach by failing to pay or (in more cases) failing to establish a letter of credit. If a seller delivers goods to the buyer on credit (e.g., payment due 60 days after delivery) the buyer’s failure to pay will empower a seller to avoid the [page 452] contract (Art. 64(1)) and "claim restitution" of the goods (Art. 81(2), §444, infra). However, in these cases the second sentence does not apply since avoidance will occur before rather than "after taking over the goods". In all these cases damages under Article 76 would be based on "the current price at the time of avoidance".
Paragraph (2) of Article 76 points to "the price prevailing at the place where delivery of the goods should have been made." This invokes the rules on delivery in Article 31, supra at §207; in the most common international sale this is the place for "handing the goods over to the first carrier for trans mission to the buyer"; this is a convenient place for a seller to measure market price when the buyer’s repudiation or breach prevents shipment. On the other hand, when a buyer rightfully rejects ("avoids the contract") after arrival and inspection (Arts. 38, 58) it may be awkward and inadequate for the buyer to prove damages based on market levels in the seller’s country. Fortunately, in most situations the injured party can avoid these problems by making a substitute purchase or a resale under Article 75.
Decisions: Damages based on Market Price. GER. OLG Hamm, 19 U 97/91, 22 September 1992. S and B contracted for the sale to B, in instalments, of 200 tons of bacon. B refused to accept delivery of the last instalment. S resold this instalment at such a low price (25%) that S’s damages were based, under Article 76, on the current (higher) market price. UNILEX D. 1992–18.
§414 C. Election Between Articles 75 and 76
If an aggrieved party does not make a substitute transaction under Article 75 only the "current" (or market) price formula of Article 76 will be available. And the "current" price formula of Article 76 is applicable only if the aggrieved party "has not made a purchase or resale under Article 75"—a rule that was designed to add certainty and prevent abuse.
Under Article 75 the substitute transaction determines damages only if it is effected "in a reasonable manner and within a reasonable time after [page 453] avoidance." If the aggrieved party’s substitute transaction fails to meet these standards it may be appropriate to adjust the price received to remove the effect of the anomaly. If an adjustment is not feasible damages may be based on the "current price" formula of Article 76; there is no reason to suppose that an aggrieved party who makes an unsuccessful attempt to comply with Article 75 completely loses the right to recover damages.
§ 415 D. Recovery of Further Damages: Loss of Profit
Both Article 75 and Article 76 provide that the aggrieved party may also recover "any further damages recoverable under Article 74", i.e., "the loss, including loss of profit...suffered...as a consequence of the breach."
A seller’s volume of output may be reduced because of the buyer’s repudiation, and a buyer’s volume of production may be reduced because of the seller’s wrongful failure to supply necessary materials. In these situations the reduced level of production may cause loss for which Articles 75 and 76 provide no redress. This problem does not arise when there is ample demand to keep the seller’s production at full capacity or when the buyer can procure available supplies elsewhere. In other situations breach of contract may lead to loss of volume which may cause acute loss even when there is little or no change in the level of prices—a setting in which Articles 75 and 76, alone, would not provide adequate redress. Determining the amount of loss of profit may call for accounting procedures to ascertain the contribution that due performance of the contract would have made to the overhead costs of the aggrieved party.
Decisions: Loss of Profit. (1) AUSTRIA, Ob GH (Sup.Ct.), Ob 518/95, 6 February 1996. S agreed to sell propane gas to B; S failed to deliver. B had contracted to sell the propane to T in a third country at a higher price. Held, under Art. 74, that B could recover this loss of profit from S. UNILEX D. 1996-3.1. (Similar: GER. ARB., Hamburg, 21 March 1996. CLOUT 166, UNILEX 1996-3.4.) (2) USA, Fed. Dist. Ct., ND.NY, 9 Sept. 1994, appealed to US Ct. of Appeals, 2d Cir., decided 6 December 1995. Rotorex v. Delchi Carrier. S contracted to deliver to B 10,800 compressors for air conditioners. The compressors did not conform to specifications; B avoided the contract. Held (Ct. of App.): B could recover, inter alia, lost profit for variable costs for labor [page 454] expenses from B’s production-line shutdown, caused by defects in the compressors; the case was remanded to determine whether B would have had to pay the labor expenses regardless of the shut-down. CLOUT 85, 138, UNILEX D.&E. 1994–22, 1995–31. (71 Fed. 3d 1024, 2d Cir.1995); LEXIS 12820, 1994 Westlaw 495787. (3) GER. LG Paderborn, 7 O 147/94, 25 June 1996. S sold plastic to B; B sold the plastic to manufacturer (M). B became subject to damage claims from M’s customers because of defects in the plastic. S was liable to B for damages based, inter alia, on B’s losses resulting from M’s claims. UNILEX D.1996-8. (4) QUERY: Possibly similar, but unclear, decision: CHINA, Xiamen Int. People’s Court, 31 December 1990. UNILEX D. 1990-8.
Comment: Lookofsky, J., Measuring Damages, A Comparison (of Amer, Scan., CISG), Kobenhavn (Junst-og 1989) 330; Sutton, J., 50 Ohio St. L. J. 737–752 (1989); Schlechtriem, Com. (1998) 574–578, 580–584.[page 455]
FOOTNOTES: Chapter on Articles 75 and 76
1. As we have seen, avoidance is also possible in more specialized situations. See Art. 72; (anticipatory breach) and Art. 73 (breach with respect to an instalment).
2. Art. 75 is the same as Art. 71 of the 1978 Draft and is similar to ULIS 85.
3. Prices that were available on the market may be relevant if a dispute arises as to whether the substitute transaction was effected "in a reasonable manner."
4. Treitel, Remedies (Int. Enc.) §69, Treitel, Remedies (1988) 115–122. A "concrete" method based on actual loss is distinguished from an "abstract" measurement based on market price (Art. 76). In some systems, the "concrete" approach (e.g., the buyer acquires substitute goods at the expense of the seller) is regarded as a species of specific enforcement. See Arts. 28, 46, 62, supra.
[Editor's note: Footnotes 5 and 6 not present in the text]
7. Cf. ULIS 84. Article 76 was based on Article 72 of the 1978 Draft. However, at the Diplomatic Conference changes of substance were made in paragraph (1): A reference to the time the aggrieved party "first had the right to declare the contract avoided" was replaced by "the time of avoidance" and the second sentence was added. Proposals to amend draft Article 72 were rejected by the First Committee. O.R. 132–133, 394–396, Docy. Hist. 704–705, 615–617. Later, in Plenary, a modified amendment, leading to the present text, was approved. O.R. 172, 222–223, Docy. Hist. 730, 757–758.
8. Knapp, B-B Commentary 556. A drop in the market might tempt a buyer to avoid in order to re-purchase goods for less than the contract price; however, the buyer would recover little or no damages under Article 76 by a reference to the later low price. A rise in the market would augment a buyer’s damage claim but avoidance would deprive the buyer of goods purchased at a lower price. Unnecessary delay could nullify avoidance under the time limits set by Article 49(2)(b)(i) .
9. Flechtner, Pittsburgh Symposium, 99, n. 213, notes that the second sentence could apply to a seller whose goods were wrongfully rejected by the buyer and who took over the goods before avoiding the contract. Favoring damage measurement as of the time of avoidance: Hellner, 22 Scan. Stud. 53, 74–75.