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Published in J. Herbots editor / R. Blanpain general editor, International Encyclopaedia of Laws - Contracts, Suppl. 29 (December 2000) 1-192. Reproduced with permission of the publisher Kluwer Law International, The Hague.

[For more current case annotated texts by this author, see Bernstein & Lookofsky, Understanding the CISG in Europe, 2d ed. (2003) and Lookofsky, Understanding the CISG in the USA, 2d ed. (2004).]

excerpt from

The 1980 United Nations Convention on Contracts
for the International Sale of Goods

Joseph Lookofsky

Article 74
Damages for Breach

A.  Introduction
B.  CISG Liability: Basis, Extent and Exemptions
C.  Expectation Protection: the General Rule
D.  Foreseeability as a Limitation

A. Introduction

287. Section II of Chapter V supplements the remedial rules in Chapters II and III. Those chapters deal primarily with the remedies of specific performance and avoidance. Chapter V deals with provisions common to buyers and sellers alike, in particular with the important topic of damages for breach. [page 151]

B. CISG Liability: Basis, Extent and Exemptions

288. Before proceeding with an examination of the damages rules in Chapter V, it should be remembered that Chapters II and III of CISG Part III also contain significant provisions as regards damages for breach. In particular, Articles 45(1) and 61(1) do more than merely catalogue the various CISG provisions regarding buyer's and seller's breach. These rules provide the basis of Convention liability; they are the very source of the buyer's and seller's respective rights to claim damages for breach.[1]

According to Articles 45(1) and 61(1), if the seller or buyer fails to perform any of its obligations under the contract or this Convention, the other party may...'claim damages as provided in articles 74 to 77.' As indicated below, these articles concern only the extent or the measurement of damages, the question being 'how much' compensation the injured party should receive; in other words Articles 74 to 77 operate on the assumption that the breaching party is liable on the basis of either Article 45(1) or 61(1). And since Articles 45(1) and 61(1) allow the injured party to claim damages for any breach, these provisions represent no-fault liability rules: assuming that the injured party has suffered some loss, the basis of Convention liability in damages is the breach itself; there is no requirement that the party claiming damages must establish a 'culpable' breach.

The Convention thus operates on the basis of an essentially no-fault liability scheme, but this does not mean that CISG liability is absolutely 'strict.' In certain exceptional circumstances, a promisor may be held not liable in damages for his failure to perform, particularly to the extent such non-performance is attributable to unforeseeable and unavoidable circumstances, i.e. the kind of 'impediments' often associated with a force majeure event.[2] For the present, however, it is sufficient to note that the possibility of such an 'exemption' does not water down Convention liability to a regime based culpable breach.[3]

1. Regarding these rules, see supra Nos. 210 and 252.
2. Regarding Article 79, see infra No. 298 et seq.
3. Accord: Huber in Schlechtriem, Commentary (1998) at 368.

C. Expectation Protection: the General Rule

289. Article 74 sets forth the general principle by which the CISG measures liability for breach:

'Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract.'

The basic CISG formula is quite simple: damages for breach of contract are designed to compensate (and are thus measured by) the loss suffered by the other [page 152] party as a consequence of breach. Assuming a causal connection between the breach and the loss,[1] the Convention scheme seeks to place the injured party in the position he would have enjoyed 'but for' the breach. Like the remedy of specific performance,[2] substitutionary relief serves to protect the promisee's expectation of full performance, i.e., his or her 'expectation interest.'[3] And because the promisor's breach, without more, entitles the injured party to compensation to this extent, it may be said that the CISG provides a no-fault basis of liability for expectation interest protection. Depending on the circumstances, a lesser/alternative measure of 'reliance interest' protection might also be awarded with reference to the Article 74 rule.[4]

Damages measured by the promisee's expectation are often described in terms of 'direct' and 'indirect' loss. Direct loss refers to loss of bargain: the contract/cover or contract/market differential. For example, a buyer who retains goods which are defective in some (less than 'fundamental') respect may recover damages calculated, inter alia, to compensate the difference between the value of the goods delivered and the value conforming goods would have had.[5] And although all kinds of loss are, in principle, recoverable under the general Article 74 rule, Articles 75 and 76 provide more detailed, lex specialis, rules for measurement of direct loss when the contract is avoided.[6] On the other hand, as discussed below, the contract/cover price differential (and the corresponding lex specialis rule) may not always be adequate to compensate the seller's expectation in the case of the buyer's failure to perform; in such cases, the general Article 74 rule will provide the seller the supplementary expectation protection deserved.[7]

Article 74 is particularly significant as regards the 'indirect' consequences of breach. Such claims for 'consequential damages' can include, e.g. compensation for a buyer, lost profits (pure economic loss) as well as physical damage to buyer's property, just as a seller will also sometimes be entitled to compensation for consequential loss.[8] Also damages sometimes characterized as 'incidental' are easily subsumed under the general Article 74 rule.[9] On the other hand, damages for lost profits may sometimes be limited or denied, inter alia by the Convention's foreseeability and/or mitigation rules.[10]

1. I.e., that the loss is a 'consequence' of the breach.
2. Supra No. 44.
3. See, e.g. Treitel, Remedies for Breach of Contract, pp. 43 and 82.
4. Although the CISG contains no express provision with respect to the Common Law concept of the 'reliance interest' (a concept derived from the German 'negative interest'), the broadly formulated rule in Article 74 may be read as comprising, inter alia, damages based on this form of protection: see Ziegel, J., 'The Remedial Provisions in the Vienna Sales Convention: Some Common Law Perspectives', in International Sales (N. Galston, H. Smit ed.) (New York, 1984). at pp. 9-37 [available at <http://www.cisg.law.pace.edu/cisg/biblio/ziegel6.html>].
5. Another, alternative measurement might be cost to cure the defect: See A/CONF./97/5, paras. 6-7 of Secretariat's Commentary to Article 70 of the 1978 Draft Convention.
6. Regarding Article 75, see infra No. 291; regarding Article 76, see infra No. 293. Avoidance usually requires a 'fundamental' breach: see supra Nos. 225 and 259.
7. See infra No. 292.
8. As regards consequential loss which takes the form of damage to buyer's property (other than the goods themselves), the Convention may not supply the only relevant rule, in that some domestic systems see liability for such product damage as grounded both in contract and in tort. Regarding Article 5, see supra No. 66 et seq. Regarding consequential damages suffered by the seller, see, e.g., the decision of LG Krefeld (Germany), 28 April 1993,[page 153] No. 11 O 210/92, NJW 1994, 1101, also reported [at <http://cisgw3.law.pace.edu/cases/930428g1.html> and] in UNILEX (German seller's damages included interest paid on loans and legal fees as well as losses suffered due to devaluation of Italian currency).
9. Regarding additional costs incurred after the breach in a reasonable attempt to avoid loss, see (re. American domestic law) Farnsworth, E.A., Contracts (1999) 12.9.
10. See infra Nos. 290 and 294.

D. Foreseeability as a Limitation

290. A major component of Article 74 is the 'foreseeability' limitation familiar to many students of domestic law: damages may not exceed the loss which the breaching party foresaw or ought to have foreseen as a consequence of the breach of contract.[1] Foreseeability under the Convention is measured at the time of the conclusion of the contract in the light of the facts and matters of which the breaching party then knew or ought to have known, the underlying idea being that the 'parties, at that point in time, should be able to calculate the risks and potential liability they assume by agreement.[2]

Although the Convention test seems quite liberal, requiring only that the loss be foreseeable [3] by the defendant [4] at the time of contracting as a 'possible consequence' of breach,[5] full compensation for profits lost will sometimes be precluded either by the mitigation requirement [6] or by domestic standards of proof (and' certainty') applicable with respect to such loss.[7] A more controversial question is whether the foreseeability limitation in Article 74 will function as a sufficient surrogate for other domestic law standards designed, inter alia, to prevent compensation for 'disproportionate' loss.[8] Here as elsewhere, Courts must coordinate the limited catalogue of CISG conceptions with those of domestic law.[9]

1. The CISG 'foreseeability' rule can be traced back to the classic English case of Hadley v. Baxendale: 9 Ex. 341, 156 Eng. Rep. 145 (1854); compare American Restatement Second of Contracts 351; accord Stoll in Schlechtriem, Commentary (1998) at p. 554.
As regards the developing CISG case law see, e.g., Delchi Carrier S.p.A. v. Rotorex Corp., 1994 WESTLAW 495787 (N.D.N.Y.), CLOUT Case 85, aff'd. in part and rev'd in part, and remanded, 71 F.3d 1024 (2d Cir. 1995), CLOUT Case 138 [reported at <
http://www.cisg.law.pace.edu/cisg/text/casecit.html>], where Italian buyer recovered foreseeable consequential and incidental damages deriving from: shipping, customs and incidentals relating to compressors rejected and returned to American seller; obsolete insulation materials and tooling purchased for use with seller's compressors; and labour expenses incurred as result of production line shutdown due to non-conforming delivery, but only to extent such expenses were included in variable costs.
2. Accord Stoll in Schlechtriem, Commentary (1998) at pp. 554-555.
3. As opposed to actually foreseen.
4. As opposed to the classical formulation in Hadley (supra note 1): in the 'contemplation' of both parties. See, e.g., OLG Köln (Germany), 21 May 1996 [reported at <http://www.cisg.law.pace.edu/cisg/text/casecit.html>] (seller was aware buyer was car dealer at time of conclusion of contract; damages paid by buyer to its customer was therefore foreseeable loss under Art. 74).
5. See, e.g., the decision of the Swiss Supreme Court (Schweizerisches Bundesgericht), 28 October 1998, reported in CLOUT as Case 248 [reported at <http://www.cisg.law.pace.edu/cisg/text/casecit.html>] (German sellers delivered frozen meat containing excessive fat to Swiss buyer; buyer's loss of clientele was foreseeable consequence of breach, particularly since buyer was wholesale dealer in sensitive market and had no alternative by which it could meet obligations to its buyers). See also, e.g., the decision of Handelsgericht Zürich (Switzerland), 5 February 1997, No. HG 95 0347, reported [at <http://cisgw3.law.pace.edu/cases/970205s1.html> and] in UNILEX (buyer awarded damages for loss of profit and other consequential damages for losses suffered due to exchange rate fluctuation between US dollars (currency of payment) and German marks). Compare (re. American law) Farnsworth, E.A., Contracts (1999) 12.14 with note 21 (foreseeable as probable). [Page 154]
6. See infra No. 294.
7. In American law, only 'reasonable certainty' is now required. See, e.g. Farnsworth, E.A., Contracts (1999) 12.15. In other legal systems, lost profits may be more difficult to prove: see, e.g., Hellner, J., 'Consequential loss and Exemption Clauses', Oxford Journal of Legal Studies 13, 24 (1981). Compare, e.g., the decision of LG Düsseldorf (Germany), 5 March 1996, No. 36 O 178/95, reported [at <http://cisgw3.law.pace.edu/cases/960305g1.html> and] in UNILEX (German buyer denied damages for lost profit caused by Italian seller's non-delivery; buyer failed to provide sufficient evidence that customers were not interested in any other type of shoes). For an example of a compromise verdict, see the decision of Rechtbank van Koophandel, Hasselt (Belgium), 2 May 1995, No. AR 1849/94, also reported [at <http://cisgw3.law.pace.edu/cases/950502b1.html> and] in UNILEX (court determined Chilean seller's lost profits ex aequo et bono, taking into account probability of cover sale at price significantly lower than price agreed in contract with Belgian buyer).
8. For a comparison of 351(3) of the American Restatement 2d of Contracts and the corresponding limitation in the Scandinavian Liability Act, see Lookofsky, J., Consequential Damages in Comparative Context (1989), Pt.
9. Regarding Article 7, see supra No. 75 et seq. Although the Hadley-like rule in CISG Article 74 clearly displaces such domestic sales analogues as UCC 2-715(2)(a), it could still be argued that the general contract law rule in the American Restatement 2d 351(3) (preceding note) applies, inter alia, to international sales. A similar position could be taken with respect to the 'safety-valve' provisions in the Danish and Swedish Liability Acts which operate to deny 'unreasonably burdensome' awards (etc.) in actions grounded in contract or tort, especially since these provisions are rightly regarded as validity-related rules: see Lookofsky, Understanding the CISG in Scandinavia (1996) p. 97, note 129.

Pace Law School Institute of International Commercial Law - Last updated April 5, 2005
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