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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 75

E.  The Contract/Cover Differential
F.  No Cover if Seller's Supply Exceeds Demand

E. The Contract/Cover Differential

291. The Convention contains two specific rules which measure damages for direct loss in situations where an injured buyer or seller exercises the right to avoid the sales contract (for fundamental breach, etc.).[1] The first of these practical provisions, Article 75, provides:

'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.'

Both buyers and sellers can elect to measure damages by the contract/cover differential. Where the seller's delayed or defective delivery constitutes a 'fundamental breach', the buyer may avoid the contract and arrange for a (reasonable) substitute transaction and measure his damages by the difference in price, as well as any further (e.g. incidental) damages recoverable under Article 74.[2] Technically speaking, there is no 'duty' to cover, but a buyer who, after avoiding a sale, makes no reasonable effort to procure substitute goods by reasonable means may later be barred from compensation for loss which he, by inaction, failed to mitigate.[3] Thus, the buyer's recovery even for direct loss is limited by the general principle of substitution [4] and (more specifically) by the obligation to cover.[5]

Similar principles apply in the wake of the buyer's fundamental breach. If the seller elects to avoid, e.g. because of the buyer's failure to pay, and if, within a reasonable time thereafter, the seller resells the goods concerned, she may recover the [page 155] contract-cover price differential, as well as any further damages recoverable under Article 74.[6] Assuming the second transaction is a substitute for the first, there will be little or no loss if the cover price obtained equals or exceeds the price which the first buyer fails to pay.

1. See supra Nos. 225 and 259.
2. See supra No. 289 et seq. See, e.g., the award of the ICC Court of Arbitration (Paris), No. 8128/1995, reported [at <http://cisgw3.law.pace.edu/cases/958128i1.html> and] in UNILEX (transaction reasonable if buyer acted as prudent and careful businessman; goods bought in replacement should be of same kind and quality, but small differences allowed; short period in which buyer had to cover so as to make timely delivery to third party justified cover price higher than market price).
3. See infra No. 294.
4. See (re. this principle under American domestic law) Farnsworth, E.A, 'Legal Remedies for Breach of Contract', 70 Columbia Law Review 1145, 1188 (1970).
5. To minimize his 'loss on this bargain' and maximize his 'cost avoided,' the buyer must cover his loss by securing a substitute. See generally Farnsworth, E.A, Contracts (1999) 12.9.
6. See, e.g., the decision by LG Berlin (Germany), No. 99 O 123/92, reported [at <http://cisgw3.law.pace.edu/cases/920930g1.html> and] in UNILEX. Also 'incidental' damages, such as the administrative costs of cover, are recoverable under the Article 74 rule: see supra No. 289 et seq.

F. No Cover if Seller's Supply Exceeds Demand

292. A party cannot demand compensation for any loss which could have been prevented by cover.[l] On the other hand, not all loss is preventable by cover.

In particular, a seller's own supply may exceed her own demand. In such market conditions,[2] the seller cannot 'cover' buyer's breach, simply because a subsequent sale of the same goods to another buyer is no substitute for the first transaction: in this situation, there is no causal relationship between buyer's breach and seller's subsequent sale.[3] The loss suffered in such a situation is unavoidable, and the Article 75 contract/cover differential is 'inadequate to put the seller in as good a position as performance would have done.'[4] The profit lost by reason of buyer's breach, best described as a 'direct' loss;[5] can only be recovered by damages under Article 74 which protect the lost-volume seller's justifiable expectation.[6] Domestic sales law recognizes this kind of expectation protection,[7] and the CISG seller's case for recovery appears equally strong.[8]

1. Neither party can recover for avoidable loss: regarding Article 77, see infra No. 294.
2. 'You have always to ask yourself, "what market",' See Farnsworth, Contracts 12.12 with note 28, quoting Lord Dunedin in Charrington & Co. v. Wooder, [1914] AC. 71, 74.
3. See Farnsworth at id.
4. Cf. the American sales act: UCC 2-708(2).
5. Although the CISG does not distinguish between various forms of loss as such, it may be noted that the loss suffered relates not to 'collateral transactions' but rather to the value of the breached transaction itself; accord: Farnsworth op. cit., 12.0
6. See supra No. 289.
7. Regarding American sales law and UCC 2-708(2), see White and Summers, Uniform Commercial Code 7-8.
8. Article 75 authorizes the recovery of additional damages pursuant to Article 74 which, in turn, authorizes damages for foreseeable 'lost profits'. Both rules apply, inter alia, to buyer's breach. Accord: Ziegel, 'The Remedial Provisions in the Vienna Sales Convention: Some Common Law Perspectives' in International Sales (Galston and Smit ed, New York 1984) at pp. 9-41 [available at <http://www.cisg.law.pace.edu/cisg/biblio/ziegel6.html>] and Flechtner, H., 'Remedies Under the New International Sales Convention: The [page 156] Perspective from Article 2 of the UCC' Vol. 8 Journal of Law and Commerce 53 (1998), 101-102 [available at <http://www.cisg.law.pace.edu/cisg/biblio/flecht.html>] (both opposing the contrary position taken by Professor Hellner).

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