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Excerpt from John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, 3rd ed. (1999), pages 456-464. Reproduced with permission of the publisher, Kluwer Law International, The Hague.

Article 77

Mitigation of Damages

Text of Article
A. Varying Concepts of Domestic Law
B. Mitigation following Failure of Performance
C. Mitigation prior to Date for Performance
      (1) Goods Purchased for Resale
      (2) Materials Needed for Current Production
      (3) Mitigation and the Right to Require Performance
            (a) A Failed Proposal and the Vienna Conference

§416 This article in some situations modifies the remedies provided by other provisions of the Convention.

Article 77 [1]

"A party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach. If he fails to take such measures, the party in breach may claim a reduction in the damages in the amount by which the loss should have been mitigated."

§417 A. Varying Concepts of Domestic Law

The principle that a party must mitigate loss that reasonably can be avoided is generally recognized but is expressed in different ways and is applied with varying degrees of emphasis. Many codes do not explicitly speak of a "duty" to "mitigate" loss. Instead, statutory language that a party is responsible for the damage it "causes" often provides a basis for concluding that some of the damage was caused by the plaintiff rather than the party in breach. Similarly, some systems limit the plaintiff’s recovery by principles akin to what other legal systems call contributory negligence—e.g., the French doctrine of faute de la victime. [2]

As we have seen, in common-law systems one who breaks a contract is responsible for damages without regard to "fault" or "negligence"; in this setting there seems to be a tendency to speak (perhaps imprecisely) of the aggrieved party’s "duty" to mitigate loss. Under the Convention, a party is responsible for nonperformance of the contract without regard to fault (Arts. 30, 45(1)(b), 53, 61(1)(b); cf. Art. 79); consequently, it is not surprising that the Convention states, with some emphasis, that the other party "must take" measures to "mitigate the loss...resulting from the breach."[3] [page 456]

Mitigation problems arise in a wide variety of circumstances. In Part B we shall consider mitigation by an aggrieved party (Party A) following failure of performance by the other party (X)—a seller’s non-delivery, or the delivery of seriously defective goods, or a buyer’s failure to receive or pay for goods. In Part C we shall examine the more complex problems of mitigation that arise prior to the time when performance becomes due, as when X repudiates the contract.

§418 B. Mitigation following Failure of Performance

When breach by X leads to avoidance by A, Articles 75 and 76, supra at §409, restrict the time as of when A’s damages may be measured. Resale or repurchase by A (Art. 75) must occur "within a reasonable time after avoidance"; the "current price" (Art. 76) must be ascertained as of the "time of avoidance" or (in some circumstances) at the time of "taking over" the goods. These restrictions prevent an avoiding seller from shifting to the buyer the loss resulting from a subsequent drop in the market-price; similarly, an avoiding buyer may not shift a subsequent rise in price to the seller. Thus, claims based on Articles 75 or 76 seldom raise "mitigation" problems under Article 77.

Article 77, enunciating a duty to mitigate loss, becomes important when A relies on the general rule (Art. 74) that damages include loss suffered "as a consequence of the breach." For example, suppose seller X fails to deliver raw materials for use in the buyer A’s factory and A fails to purchase substitute materials that are available on the market, with the result that A’s production is interrupted. Jurists familiar with the "causation" approach (§417, supra) might find it more natural to conclude that Article 74 would suffice: the shut-down by buyer A was a "consequence" of A’s conduct rather than X’s breach; the explicit mitigation principle in Article 77 strengthens results that some could reach by another route. Thus, buyer A could face either the "causation" approach or the mitigation principle when defective materials or machinery cause "consequential" damages.[page 457]

Decision:  USA, US Dist.Ct. ND NY, appealed to US Ct. of App., 2d Cir., decided 6 December 1995. Rotorex v. Delchi Carrier. [Case also reported at §415 on loss of profit.] B, on discovering that S’s air compressors were defective, expedited the shipment of compressors from another source. Held: B could recover from S the costs of this prompt substitute purchase, since this was consistent with B’s duty under Art. 77 to mitigate damages. CLOUT 85, 138, UNILEX D. & E. 1944–22, 1995–31. [Further references at §415, supra.]

§419 C. Mitigation prior to Date for Performance

In Part B we examined the relatively simple mitigation problems that faced Party A following seriously defective performance by Party X. We now turn to the more complex problems that arise when difficulty, such as repudiation by X, occurs prior to the time for performance. These problems will be introduced in two commercial settings: (1) Goods purchased for resale and (2) Materials needed for production. Perhaps this discussion will help to distinguish these questions:

I. Must an aggrieved party (A) "accept repudiation" by X? In other words does X’s repudiation require A to declare the contract avoided and thereupon take action to establish damages? See Example 77A, §419.1, infra.

II. Are there situations in which Article 77 requires A to take steps to mitigate loss prior to the date for performance? See Example 77B, §419.2, infra.

§419.1 (1) Goods Purchased for Resale

Example 77A. On June 1 A and X made a contract for A to sell and deliver to X on August 1 1,000 bales of cotton at $50 per bale. Both A and X were merchants engaged in the purchase and resale of cotton. Shortly after June 1 cotton prices fell and on July 1, when the market price was $40 per bale, buyer X repudiated the contract and requested A to resell the cotton before the market could decline further. A replied that A expected X to receive and pay for the cotton in accordance with the contract; X thereupon repeated its repudiation. By August 1, the agreed delivery date, the price had fallen to $30; X again refused to receive and pay for the goods. A thereupon declared the contract avoided, resold the goods for $30 per bale ($30,000) and claimed damages from X of $20,000 ($50,000–$30,000). X contended that on July 1, when X repudiated, A should have mitigated loss by selling the cotton at $40, a step that would have reduced damages from $20,000 to $10,000.[page 458]

The argument for mitigation should be rejected. Under Article 72(1) (§§395-397, supra), on repudiation by one party (X) "the other party may declare the contract avoided"; see also CISG 49(2) and 64(2) (provisions protecting the options of the aggrieved party).

Does the mitigation principle of Article 77 create an exception to the option as to avoidance expressed in Article 72(1)? There is nothing unfair or wasteful in A’s refusing to accept X’s repudiation. No one knows when a "falling" market has reached bottom; if X was confident that the market would continue to fall X could have made a "forward" sale at $40 for delivery on August 1. (The same analysis applies when a seller repudiates prior to the date for delivery followed by a rise in the market price.)[4]

In short, the aggrieved party has no general obligation under Article 77 to attempt to mitigate damages by "accepting repudiation" by the other party.

§ 419.2 (2) Materials Needed for Current Production

Example 77B. On June 1 A and X made a contract for X to produce and deliver to A 10,000 sheets of steel on August 1 at $50 per sheet. Buyer A needed the steel for use in manufacturing. On July 1 Seller X notified A that production difficulties in X’s steel mill would prevent delivery of the steel by August 1; X also stated that the production difficulties might persist for an unknown period after August 1 and urged A to obtain the steel elsewhere. Comparable steel was available in A’s area; the price at all times remained at $50. For unexplained reasons A did not seek or obtain the steel elsewhere; as a consequence A’s production facilities were shut down for the month of August. Buyer A sued X for damages based on shut-down losses (Art. 74, "loss of profit") of $10,000 per day, or $300,000. Seller X argued that, under Article 77, A failed to "take [page 459] such measures as are reasonable in the circumstances to mitigate the loss" so that there should be a corresponding reduction in the damages.

Seller X’s claim for damage-reduction based on Article 77 should prevail. Unlike Example 77A, in this case obtaining available alternative supplies was needed and reasonable to avoid certain loss. In this setting Buyer A’s option to avoid or not to avoid is irrelevant. The notice by Seller X would relieve A of concern that Seller X might change its mind and deliver the goods; moreover, A could choose to avoid under Article 72 or, if A wished to press for later delivery by X, A could send X a notice of suspension under Article 71(3). (The effect of a right to require ("specific") performance (Arts. 28, 46), to be considered in the following section, is not relevant here since a court order could not overcome X’s production difficulties. In any event, delays intrinsic to legal proceedings could not assure delivery in time to keep A in production.)

Decision:  GER. OLG München, 7 U 1720/94, 8 February 1995. In a contract calling for S’s delivery of 11 cars to B, B wrongfully refused to accept delivery. B was entitled to a refund of B’s advance payment; S was denied damages for B’s breach since S had failed to take reasonable measures, under Art. 77, to mitigate loss. [The court also referred to Arts. 80 & 84.] UNILEX D.1995-3. See: Schlechtriem, Com. (1998) 586–590 (Stoll).

§419.3 (3) Mitigation and the Right to Require Performance

We now meet cases that expose a conflict between two principles: (1) The obligation of an aggrieved party (Party A) to mitigate the loss resulting from breach by the other party (Article 77) and (2) The right of the aggrieved party to "require performance" (Arts. 46(1) and 62, §§280, 349, supra, as restricted by Article 28, §§191199, supra).

Example 77C. A sales contract made on June 1 called for A, a producer of steel, to produce and deliver steel girders to X, a building contractor. The contract called for A to cut the girders to special dimensions provided by X for X’s use in erecting a building for Owner. The contract price for the girders was $50,000. On July 1, before A had started work on the contract, Owner repudiated its contract with X; X immediately informed A of this and requested A not to cut the girders. Nevertheless, A cut the girders to the specifications stated in the contract. X refused to accept the girders. A sued X in a court in X’s State to require X to accept the goods and pay the agreed price. X’s State is one of the many common-law jurisdictions that, in cases like the present, does not "require performance" [page 460] by compelling acceptance and payment of the price, as contrasted with damages. See Art. 28, §§191-199, supra. The court dismissed A’s action for the price and permitted A to prove damages. A thereupon resold the girders but they brought only $10,000 because they had been cut in unusual lengths. A claimed damages of $40,000 (the contract price of $50,000 less $10,000). In response, X requested that damages be reduced by the amount that the value of the girders had been impaired by cutting them to unusual lengths.

In applying Article 77 we must ask this question: Would it have been "reasonable in the circumstances" for A "to mitigate the loss" by honoring X’s request of July 1 not to cut the girders? To determine what is "reasonable in the circumstances" one must consider: What would most sellers have done when it is evident that cutting the girders would seriously impair their value? The answer is clear. A’s conduct was inconsistent with normal business conduct and the explicit requirement of Article 77. Indeed, A’s conduct was foolhardy even by standards of short-term selfishness in view of litigation delays and risks, which were enhanced by increasing the amount at stake by wasteful conduct.

In the above case Seller A’s attempt to force X to receive and pay for the girders was doomed to failure by the fact that the legal rules in X’s State (the jurisdiction where A would normally need to sue for effective enforcement of a decree requiring performance) rejected this type of action even apart from the mitigation requirement of Article 77. Should the result be different in other jurisdictions? This question is posed by the following case.

Example 77D. The facts are the same as in Example 77C except that the law of X’s State generally grants requests to require ("specific") performance of contracts. However, A did not wish to lay out costs for storage of the girders pending litigation; consequently; A resold the girders and requested damages of $40,000 ($50,000–$10,000). Should the court grant X’s request to reduce damages, under Article 77, "in the amount by which the loss should have been mitigated"?

The answer, as in Example 77C, turns on whether A failed to take (Art. 77) "such measures as are reasonable in the circumstances to mitigate the loss". The only difference here is that the rules of X’s jurisdiction are more favorable to an action to require ("specific") performance. When a seller sues for damages Article 77 explicitly requires a "reduction of damages." See Knapp, B-B Commentary 564, §§3.13.3.

Example 77E. The facts are the same as Example 77D except that Seller A placed the girders in storage and under Article 62 requested the court to "require X" to pay the price [and] take delivery". Buyer X did [page 461] not object to paying damages but noted that the remedy sought by A would transfer to X the consequences of A’s failure to obey the mandate of Article 77 to "take such measures as are reasonable in the circumstances to mitigate the loss...". In the alternative, X claimed that if the court should require X to accept and pay for the girders the court should also award damages to X for the loss ($40,000) that A caused X by A’s conduct that violated the mandate of Article 77.

The above case presents a common problem of statutory construction: Two general rules that in most circumstances are compatible in unusual circumstances come into conflict. The appropriate response is to adopt the solution that does the least violence to either principle. Giving effect to the mitigation principle in unusual situations like Example 77E does not make a serious inroad in the general rule requiring performance of contracts; on the other hand, failing to give effect to Article 77 in such cases nullifies the mitigation rule when it is specially appropriate. In short, the mitigation rule is lex specialis in relation to the general rule requiring ("specific") performance.

In some cases a party’s need for requiring ("specific") performance may be so strong as to outweigh the mitigation principle of Article 77. Such a case is most likely to result when a buyer C needs materials that are not available elsewhere. It is difficult to imagine a comparable need when the seller (as in example 77E) sues to force a buyer to accept goods; in these cases the seller usually can be fully compensated by damages.

(a) A Failed Proposal and the Vienna Conference

The question that remains is whether the above approach to mitigation is foreclosed by the consideration of this provision at the 1980 Conference. The First Committee did not reach this provision (then draft article 73) until the last week of its deliberations. At that stage the Committee took up a suggestion by the present writer prompted by the fact that the first sentence of the article laid down a general rule requiring reasonable steps to mitigate loss while the second sentence mentioned only one sanction—reduction of damages. Out of concern that the article might be construed to exclude application of the mitigation principle to other alternative remedies an amendment was proposed to add at the end of the second sentence "or a corresponding modification or adjustment of any other remedy".[5]

Thirteen delegates addressed the question: Five supported the measure [6],[page 462] three were opposed;[7] five were concerned with the drafting—primarily because of concern that the reference to "any other remedy" was too vague or broad.[8] At the conclusion of this discussion a proposal to set up a drafting party to refine the proposal was defeated (24–8).

The above facts present an interesting question concerning the circumstances in which legislative history creates a binding interpretation of the Convention. Some may conclude that the discussion and vote means that in cases like Example 77E a seller’s failure to mitigate loss is irrelevant when the seller sues to recover the price in a jurisdiction where domestic law authorizes this broad approach to "requiring performance" (Art. 62). Schlechtriem, 1986 Commentary 99 Cf. Knapp, B-B Commentary 565–567, but see §§3.9(b)–3.13. (nuanced adjustment to carry out the Convention’s aim "to encourage mitigation of the loss").

The discussion of Article 7 at §91, supra, supports the use of legislative history when it reveals the prevailing understanding of the delegates. Did the legislative body face and decide the issue posed by Example 77E? The opinions expressed in the discussion dealt with diverse reasons for not adopting the proposed amendment. This writer (although possibly blinded by interest in the issue) does not see adequate grounds for concluding that a substantial number of delegates would have rejected the mitigation principle in cases like Example 77E.

Emerging from this experience is a lesson: Interpretation based on discussions by a large legislative body is more meaningful for decisions of broad issues of policy than for detailed applications. The present writer surely overlooked this principle in inviting consideration (particularly in the closing days of a large diplomatic conference) of complex questions concerning the interplay of competing principles of the Convention—questions that are better left to tribunals for consideration in the light of the precise facts of the case.[9] Ars longa vita brevis.[page 463]

If the verdict of history should be that the mitigation principle is inapplicable to cases like Example 77E one may seek comfort in the hope that few will act like the seller in that case and that, if this should occur, the buyer will be able to show that this conduct is inconsistent with applicable trade usage. See Art. 9(2), §§112-122, supra.[page 464]

FOOTNOTES: Chapter on Article 77

1. This article is the same as Art. 73 of the 1978 Draft and is substantially the same as ULIS 88. References to the legislative history appear in notes 7-9, infra.

2. See Treitel, Remedies (1988) 179 and references cited n.3, infra.

3. Treitel, Remedies (Int. Enc.) §§102–106 and Treitel, Remedies (1988) 179–192 give an illuminating comparison of the approaches of different legal systems. For discussion of English law see Schmitthoff, The Duty to Mitigate, 1961; J. Bus. L. 361; Benjamin §§1283–1286; Treitel, Contract 754–758. For U.S.A. rules see UCC 2–704(2), 2–715(2)(a); White & Summers §6-7, p. 285, §7–15, §10–4, pp. 451–453; Farnsworth, Contracts 858–873.

4. In the United States there is conflict in the case-law and academic writing over whether the aggrieved party has a duty to accept repudiation and to resell (or repurchase) in cases like Example 77A. Favoring this duty: Jackson, 31 Stanford L. Rev. 69, 75 et. seq. (1978); Farnworth, Contracts 862. Contra: White & Summers §6-7 at pp. 278–283. English case-law seems to reject such a duty. Treitel, Contract 655 at n. 75; Benjamin §§1341–1344, 1755, 1894. This latter position is often put in terms of the aggrieved party’s right to press for performance—an approach that is more consistent with a party’s right to "require performance" under CISG 46 and 62; cf. CISG 28. An aggrieved party who does not respond to repudiation by avoidance places itself in an uncertain position since the repudiating party may still perform. This possibility, inter alia, discourages temptation by the aggrieved party to delay a decision as to avoidance in order to speculate, at the other party’s expense, on possible changes in the market price.

5. Text of the proposal, O.R. 133, Docy. Hist. 705; discussion in the First Committee, O.R. 396–398, Docy. Hist. 617–619.

6. O.R. 396, Docy. Hist. 617; paras. 55 (U.S.A.), 56 (U.K.), 61 (Ireland: but the principle of the first sentence was sufficiently broad to permit other remedies), O.R. 397, Docy. Hist. 618: paras. 69 (Australia), 71 (Netherlands: "something must be done" but more detail needed).

7. O.R. 397, Docy. Hist. 618: paras. 64–65 (Canada), 66 (Sweden); 67 (Mexico).

8. O.R. 396, Docy. Hist. 617: paras. 57 (amendment in wrong section, should not be in section on "Damages"), 60 (useful in theory but reference to "any other remedy" was vague); O.R. 397, Docy. Hist. 618, paras. 68 (vague), 69 (same), 73 (too broad).

9. The three concrete cases used as a vehicle for the above discussion were not adequate to expose the factual variations that can be relevant. As was noted above, a party’s need for compelling ("specific") performance may be so strong as to override the competing principle calling for mitigation of loss.

Practical problems faced by delegates in obtaining authorization to support changes in a draft in the closing days of a diplomatic conference were discussed under Article 7, §91, supra.

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