Cite as Knapp, in Bianca-Bonell Commentary on the International Sales Law, Giuffrè: Milan (1987) 559-567. Reproduced with permission of Dott. A Giuffrè Editore, S.p.A.
1. History of the provision
2. Meaning and purpose of the provision
3. Problems concerning the provision
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.
1. History of the provision
1.1. - The provision of Article 77 is analogous to that of Article 88 of ULIS, which read:
The party who relies on a breach of a contract shall adopt all reasonable measures to mitigate the loss resulting from the breach. If he fails to adopt such measures, the party in breach may claim a reduction in the damages.
The two articles are very similar. Article 77 of the Convention added to the wording of Article 88 of ULIS, in order to clarify, that the loss to be mitigated includes the loss of profit, and that the reduction in damages which the party in breach may claim is equal to the amount by which the loss should have been mitigated.
1.2. - Although Article 77 followed the main idea and even the general wording of Article 85 of ULIS, some aspects of it were the subject of great discussion at the Vienna Conference. We shall deal with these in more detail at §§ 3.1. et seq., infra.
2. Meaning and purpose of the provision
2.1. - Article 77 sets forth the principle of prevention applied in several legal systems. Under this principle the party threatened [page 559] by loss as a consequence of a breach (fundamental or not) of contract by the other party is not permitted to await passively incurrence of the loss and then sue for damages. He is obliged to take adequate preventive measures to mitigate his loss.
2.2. - Appropriate measures are those aimed at lessing the loss as far as reasonably possible. Such measures will typically be a resale of the goods by the seller or a cover purchase by the buyer. Of course, other measures may be appropriate to mitigate the threatened loss from a breach of contract. For example, measures taken to mitigate potential loss would be for the buyer himself to remedy hidden defects of the goods delivered to him by the seller, or, in a contract involving carriage of the goods in which the seller is unable to hand them over in due time to the carrier, for the buyer to take them over at the seller's place of business.
2.3. - The measures the injured party is expected to take in order to mitigate the loss must be reasonable in the circumstances. He is not obliged to take measures which, although they may mitigate the loss, would be excessive. If the injured party abstains from taking such excessive measures he will not be considered to have failed to mitigate the loss under Article 77.
2.4. - Suppose, on the other hand, that the non-breaching party, though not remaining inactive, takes measures to mitigate the loss which prove to be insufficient to avert or to lessen it. If the injured party was in a position to take more effective measures and could be reasonably expected to do so in the circumstances, he will be subject to the sanction of the second sentence of Article 77.
2.5. - In the foregoing case, the injured party might act so as to mitigate the loss only in part, that is, to a lesser degree than he was able and reasonably expected to do. Article 77 will then be applied to the difference between the amount by which the loss should have been mitigated under Article 77 and the amount by which it in fact was mitigated as a result of the preventive measures taken by the party in question. [page 560]
2.6. - The party taking reasonable measures under Article 77 to mitigate the threatened loss will likely expend money to this aim. The expended sum of money is considered as a loss suffered as a consequence of the breach of contract (see commentary on Article 74, supra, § 3.12.). Therefore, the party expending the money has the right to claim compensation for it even if the actions to mitigate the loss were in vain, provided that they were reasonable under the circumstances.
2.7. - As an illustration, suppose Buyer ordered goods for 20,000 to be delivered on July 1. On February 1 he informed Seller that he would be unable to use the goods ordered and that therefore he will not take delivery. Seller avoided the contract for anticipatory breach under Article 72 and then succeeded in reselling the goods for a reasonable price of 18,000. In this substitute sale Seller paid 1,000 in brokerage costs. The calculation of damages he may claim is as follows:
2.8. - The sanction provided in Article 77 against a party who fails to mitigate his loss only enables the other party to claim reduction in the damages. It does not affect a claim for the price by the seller pursuant to Article 62 (see § 3.9., infra) or a reduction of the price by the buyer pursuant to Article 50.
2.9. - A prerequisite of the sanction under the second sentence of Article 77 is the failure by the party relying on the breach to take such measures as it is reasonable to expect him to take in the circumstances in order to avert or to lessen the threatened loss (see §§ 2.2. et seq., supra). Thus, he is not liable to the party in breach for failing to take such measures which, although able to mitigate the loss, exceeded reasonable expectations in the circumstances. [page 561]
2.10. - A reduction of damages is the only remedy available to the party in breach in cases covered by Article 77. That means that the obligation to mitigate the loss under Article 77 differs substantially from other obligations of the seller and of the buyer under this Convention (see Articles 30 et seq. and Articles 53 et seq.). For instance, the obligation under Article 77 cannot be directly enforced, and failure to comply with it is no ground for avoidance of the contract.
2.11. - The reduction in damages under Article 77 is equal to the amount by which the loss should have been mitigated if the injured party had taken reasonable measures to avert or to lessen it. Thus, the amount the party in breach owes to the injured party when the latter failed to mitigate the loss under Article 77 is calculated as follows: (a) first, full damages are calculated according to the rules given in Article 74, or as the case may be, in Articles 75 or 76; (b) then, the amount by which the loss should have been mitigated is established, and (c) the latter is deducted from the former.
2.12. - The following examples illustrate the calculation of damages in some typical Article 77 cases. The first two examples are from the Secretariat's Commentary (Official Records, I, 61).
Example A: The contract provided the Seller was to deliver one hundred machine tools by December 1 at a total price of 50,000. On July 1 he wrote to Buyer saying that, due to a rise in prices which would certainly continue throughout the rest of the year, he would not deliver the tools unless Buyer agreed to pay 60,000. Buyer replied that he would insist that Seller deliver the tools at the contract price of 50,000. On July 1 and for a reasonable time thereafter the price at which Buyer could have contracted with a different seller for delivery on December 1 was 56,000. On December 15 Buyer, after avoiding the contract, made a cover purchase for 61,000, delivery on March 1. Because of the delay in receiving the tools, Buyer suffered additional losses of 3,000. [page 562]
|In this example the damages suffered by the buyer amounted to a price difference of:||11,000|
|and the additional loss of:||3,000|
|reduced by: the difference between the price on July 1 or a certain time thereafter and the price on December 15:||5,000|
|and the amount of additional losses which would not have been incurred if Buyer had purchased replacement goods on July 1 or a certain time thereafter:||3,000|
|hence, the total reduction is:||8,000|
|Buyer will be limited to recovering in damages the sum of:|| 6,000
Example B: Promptly after receiving Seller's letter of July 1, the same as in example A, Buyer made demand on Seller pursuant to Article 72 for adequate assurances that he would perform the contract on December 1 as specified. Seller failed to furnish the assurances within the reasonable period of time specified by Buyer. Buyer promptly avoided the contract and made a cover purchase at the currently prevailing price of 57,000. In this case Buyer can recover 7,000 in damages rather than 6,000 as in example A. This is so because in this case Buyer has taken reasonable and effective measures under Article 77 to mitigate his loss, so he is entitled to recover the total amount of losses he suffered as a consequence of Seller's breach of contract. At length, Buyer recovers the difference between
|the price paid for replacement goods:||57,000|
|and the contract price:||50,000|
|amount of damages:|| 7,000
Example C: Seller delivered goods for 30,000. Because of a hidden defect not remedied subsequently by Seller the price was reduced to 25,000, pursuant to Article 50. In addition, Buyer suffered a loss of profit of 6,000 as a result of the defective quality of the goods delivered by Seller. However, he was in a position to repair the goods himself for a cost of 1,500 and so to lessen his loss of profit to 3,000, but he failed to do so. Buyer's damages will be calculated as follows: [page 563]
|Loss of profit suffered in fact:||6,000|
|Cost of repairs, if made:||1,500|
|Total (presumed) out-of-pocket to Buyer:||7,500|
|Difference between the loss suffered in fact and the loss mitigated as a result of measures the injured party failed to take:||3,000|
|Amount of damages recoverable:|| 4,500
3. Problems concerning the provision
3.1. - The sanction under the second sentence of Article 77 applies to the party «who relies on a breach of contract». This party, be it the seller or the buyer, has at his disposal several remedies under the Convention (see Articles 45 et seq. and Articles 61 et seq.) for breach of contract by the other party. The sanction imposed by Article 77 applies only to the extent that the party who relies on the breach of contract so relies in order to claim damages arising out of the breach. Article 77 does not apply to other instances of reliance on the breach.
3.2. - Thus, for example, if the seller requires that the buyer in breach pay the price under Article 62, the buyer may not object that the seller did not take measures to mitigate the loss. Nor will the buyer be entitled to demand, on this same ground, a reduction of price.
3.3. - Imagine that in this example it becomes clear that the buyer will not comply with his obligations under the contract and the Convention. Assume that the seller, instead of declaring the contract avoided and resorting to a resale of the goods in question, insists on specific performance of the contract (here, on the taking over of the goods and the payment of the price). If, in such a case, the buyer in fact does not comply with his obligations and the seller subsequently claims for damages, Article 77 will apply. The buyer is entitled to claim a reduction in damages based on the seller's failure to take reasonable measures to mitigate the loss (see § 3.9., infra). [page 564]
3.4. - This question was discussed at length at the Vienna Conference, where some delegations criticized the proposed wording of Article 77 (Official Records, II, 396-398; 429-430). The proposed provision was objected to as being too narrow and especially, that it would not apply if, in the case of an anticipatory breach, the injured party does not rely on the breach but instead requires specific performance. The reasoning advanced was that an anticipatory breach authorizes the injured party to resort to remedies provided in Articles 71 and 72 but does not oblige him to do so. It follows that the injured party may, even in the case of an anticipatory breach, insist on specific performance of the contract.
3.5. - For example, a buyer might realize, shortly after placing an order, that he would be unable to use the goods ordered. He might therefore propose to the seller that he, the buyer, pay damages in exchange for the seller's forebearance in filling the order. The buyer has no right to avoid unilaterally the contract in question nor to release himself from his obligations thereunder. His request to the seller is nothing more than a proposal to avoid the contract by mutual consent. The seller is free to accept or reject the proposal.
3.6. - Thus, in such a case, if the seller avoids the contract, either by agreement or unilaterally under Article 72, resells the goods and subsequently claims damages from the buyer, the principle of mitigation under Article 77 would apply. On the other hand, the seller might ignore the buyer's request or reject it expressly and not declare the contract avoided unilaterally under Article 72 but insist on specific performance (i.e., await the contract date and then insist on the taking over of the goods and the payment of the price by the buyer). The principle of mitigation provided in Article 77 should not operate and the seller would have the right to claim the full price without any reduction.
3.7. - For this reason an amendment to Article 73 of the UNCITRAL Draft Convention (now Article 77) was put forward to enlarge the ambit of the provision by stating that, in such a case, the party in breach may claim not only a reduction in [page 565] damages but also «a corresponding modification or adjustment of any other remedy» (see Official Records, II, 396-398).
3.8. - This proposal met with several objections. It was objected that such an amendment would enable an unscrupulous party to escape his obligations, and also that it was not necessary because the proposed wording already provided a satisfactory solution to the above-described situation. The proposal to amend the then Article 73 was rejected, and Article 77 was adopted as it now stands.
3.9. - It was the intention of the Vienna Conference (the ratio legis) that Article 77 be broadly interpreted, but not so broadly as to enable or encourage a party to the contract to abrogate his obligations thereunder. The intended interpretation of the Vienna Conference was generally that:
(a) avoidance of the contract, if applicable, is not obligatory for the injured party who may, even in case of a breach of contract by the other party, require specific performance; and
(b) avoidance of the contract and a subsequent resale of the goods or a subsequent cover purchase are, however, considered reasonable measures to mitigate the loss under Article 77 in cases in which the party claiming specific performance was in a position to foresee that the other party would not comply with his obligations under the contract and that a loss would be caused to the injured party as a result of non-performance by the other party.
3.10. - In cases mentioned under § 3.9. (b), supra, non-avoidance of the contract by the injured party and failure to resell the goods or to purchase replacement goods will be considered as failure to take preventive measures to mitigate the loss as provided in Article 77.
3.11. - Are the measures called for in Article 77 to be taken only after the breach of contract or, when appropriate, may they be resorted to before it? The answer to this question has already been anticipated in part in the foregoing discussions. The aim of Article 77 is to encourage mitigation of the loss. To this end, measures directed at mitigating the loss are to be taken as soon [page 566] as the party to the contract could foresee the danger of breach of the contract by the other party and of his consequent potential loss. Of course, some measures aimed at mitigating the loss are not feasible before avoidance of the contract, such as resale of the goods or the cover purchase.
3.12. - The duty to mitigate the loss applies not only to a breach of contract in respect of an obligation whose performance is currently due, but also to an anticipatory breach of contract under Article 71. If it becomes clear that one party will commit a fundamental breach of contract, the other party is entitled to suspend his performance under Article 71(3) and to declare the contract avoided under Article 72.
3.13. - If the injured party does not suspend his performance or avoid the contract but insists on specific performance of the contract, he risks, on claiming damages, being found to have failed to take appropriate measures to mitigate the threatened loss. In such a case the injured party, if he wishes to comply with Article 77, cannot await the contract date of performance before declaring the contract avoided and taking measures to reduce the loss arising out of the breach by making a cover purchase, reselling the goods or otherwise. The use of the procedure set forth in Article 71, if applicable, would be a reasonable measure even though it may delay the avoidance of the contract and the cover purchase, resale of the goods, or other actions, beyond the date on which such actions would otherwise have been required (see § 3.9., supra). [page 567]