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GUIDE TO ARTICLE 74

Use of UNIDROIT Principles to help interpret CISG Article 74


Match-up of CISG Article 74 with counterpart provisions of UNIDROIT Principles

UNIDROIT Principles
Chapter 7 - Non-Performance
Section 4 - Damages

Article 7.4.1 - Right to Damages

CISG
Article 74

Any non-performance gives the aggrieved party a right to damages either exclusively or in conjunction with any other remedies except where the non-performance is excused under these Principles.

Article 7.4.2 - Full Compensation

(1) The aggrieved party is entitled to full compensation for harm sustained as a result of the non-performance. Such harm includes both any loss which it suffered and any gain of which it was deprived, taking into account any gain to the aggrieved party resulting from its avoidance of cost or harm.

(2) Such harm may be non-pecuniary and includes, for instance, physical suffering or emotional distress.

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.

Article 7.4.3 - Certainty of harm

(1) Compensation is due only for harm, including future harm, that is established with a reasonable degree of certainty.

(2) Compensation may be due for the loss of a chance in proportion to the probability of its occurrence.

(3) Where the amount of damages cannot be established with a sufficient degree of certainty, the assessment is at the discretion of the court.

Article 7.4.4 - Foreseeability of harm

The non-performing party is liable only for harm which it foresaw or could reasonably have foreseen at the time of the conclusion of the contract as being likely to result from its non-performance.

Article 7.4.5 - Proof of Harm in Case of Replacement Transaction

[see presentation with CISG Article 75]

Article 7.4.6 - Proof of Harm by Current Price

[see presentation with CISG Article 76]

Article 7.4.7 - Harm Due in Part to Aggrieved Party

Where the harm is due in part to an act or omission of the aggrieved party or to another event as to which that party bears the risk, the amount of damages shall be reduced to the extent that these factors have contributed to the harm, having regard to the conduct of each of the parties.

Article 7.4.8 - Mitigation of Harm

[see presentation with CISG Article 77]

Article 7.4.9 - Interest for Failure to Pay Money

[see presentation with CISG Article 78]

Article 7.4.10 - Interest on Damages

Unless otherwise agreed, interest on damages for non-performance of non-monetary obligations accrues as from the time of non-performance.

Article 7.4.11 - Manner of Monetary Redress

(1) Damages are to be paid in a lump sum. However, they may be payable in instalments where the nature of the harm makes this appropriate.

(2) Damages to be paid in installments may be indexed.

Article 7.4.12 - Currency in which to Access Damages

Damages are to be assessed either in the currency in which the monetary obligation was expressed or in the currency in which the harm was suffered, whichever is more appropriate.

Article 7.4.13 - Agreed Payment for Non-Performance

(1) Where the contract provides that a party who does not perform is to pay a specified sum to the aggrieved party for such non-performance, the aggrieved party is entitled to that sum irrespective of its actual harm.

(2) However, notwithstanding any agreement to the contrary the specified sum may be reduced to a reasonable amount where it is grossly excessive in relation to the harm resulting from the non-performance and to the other circumstances.

[The UNIDROIT articles displayed above are to be read in conjunction with the Official Comments on them as "the comments on the articles are to be seen as an integral part of the Principles" (UNIDROIT).]


To examine CISG provisions displayed above in their context, go to the full text of the CISG || To examine UNIDROIT Principles displayed above in their context, go to the full text of the UNIDROIT Principles


Remarks on the Manner in which the UNIDROIT Principles of International Commercial Contracts May Be Used to Interpret or Supplement Article 74 of the CISG

Sieg Eiselen [*]
October 2004

a. The right to claim damages as a result of a breach of contract is probably the single most important remedy available to the aggrieved party.[1] The law of damages is a complex set of rules and principles hiding behind the fairly simple-looking formulae such as those found in CISG articles 74 to 76. The interpretation of article 74 CISG is therefore fraught with all kinds of difficulties of which the interpreter should be aware. Not least of these difficulties could be the different notions and understanding of damages in the particular legal system that the interpreter itself comes from.

b. Although the CISG deals with damages in some detail, a number of vexing practical issues, which are dealt with in most legal systems and also in the UNIDROIT Principles, have been left open or unresolved. These issues include the time at which damages are to be calculated, the liability and calculation of future damages, contributory conduct of the claimant increasing the amount of damages, saved expenses, loss of an opportunity or chance, penalty clauses and proof of damages. The provisions of articles 7.4.1 and 7.4.2 of the UNIDROIT Principles may be helpful in interpreting and applying article 74 CISG.

c. The basic premise underlying both the provisions of article 74 CISG and articles 7.4.1 and 7.4.2 of the UNIDROIT Principles are that the breaching party is liable to compensate the aggrieved party in full for all pecuniary damages suffered by the aggrieved party, including the loss of profit.[2] The second shared premise in the CISG and the UNIDROIT Principles is that the claim for damages is available over and above any other remedies that the aggrieved party may have or exercise.[3] The third shared premise is that the breaching party is only liable for damages that were either actually foreseen or foreseeable by the breaching party at the time of the conclusion of the contract -- that is, according to the so-called contemplation principle.[4] The UNIDROIT Principles, however, contain more detailed provisions than the CISG in respect of what is to be understood under full compensation. These provisions and their applicability in the interpretation of article 74 CISG will be discussed below.

d. There is one radical difference between the damages provisions in the CISG and those in the UNIDROIT Principles, namely in respect of non-pecuniary damages or damages resulting from personal injury or death. Article 5 CISG excludes the claim for such damages from the scope of the Convention.[5] Therefore, whether a party will be entitled to such damages will depend on the provisions of the applicable national legal system. However, article 7.4.2 of the UNIDROIT Principles specifically includes liability for such damages. This does not so much reflect a difference in the basic approach between the CISG and UNIDROIT Principles as the fact that the drafters of the CISG wished to remove the complex area of products liability from the sphere of the CISG.[6] The fact that such a provision is included in the UNIDROIT Principles provides good grounds for arguing that the provisions of article 5 CISG should be restrictively interpreted and only the liability for personal injury or death should be excluded, but not other personal damages such as damage to reputation.[7]

e. The provisions of article 74 CISG are reflected in articles 7.4.1 and 7.4.2 of the UNIDROIT Principles. In article 7.4.2 of the UNIDROIT Principles the emphasis is on full compensation for harm sustained as a result of breach.[8] The wording "harm sustained" in the UNIDROIT Principles is probably wider than the words "a sum equal to the loss suffered" in the CISG reflecting the difference in approach to personal injuries discussed above. In case of doubt the interpretation of article 74 CISG should also lean toward full compensation for harm as far as harm has not been excluded from the scope of the CISG by article 5.

f. Article 7.4.2 of the UNIDROIT Principles further requires that any gain received by the aggrieved party should be taken into account when calculating the loss.[9] This issue is not pertinently dealt with in the CISG and therefore article 7.4.2 of the UNIDROIT Principles might be useful in interpreting article 74 of the CISG with reference to such gain. This interpretation is further strengthened when the principles underlying CISG articles 77 (duty to mitigate) and 80 (prevention or causation by the creditor) are also taken into account.[10]

g. The extent of the liability of a party for breach of contract is restricted in both instruments by the so-called contemplation principle.[11] The test of foreseeability is worded differently in the two instruments. In article 74 CISG, the emphasis is on loss which was actually foreseen or which the party ought to have foreseen in the light of circumstances known to him or of which he should have known as a possible consequence of the breach.[12] The test is therefore either subjective (where there is actual knowledge) or objective (where there is no subjective knowledge).[13] This accords with the provisions of article 7.4.4 of the UNIDROIT Principles.

h. In article 7.4.4 of the UNIDROIT Principles, however, emphasis is placed on the "foreseeability of harm being likely to result from its non-performance".[14] The CISG standard as formulated in Article 74 however is "foresaw or ought to have foreseen … as a possible consequence of the breach of contract." This standard seems to be much wider than the standard contained in the UNIDROIT Principles. Ziegel [15] explains the difference between "likely to result" and "a possible consequence" with reference to the following example: "if one takes a well-shuffled pack of cards it is quite possible, though not likely, that the top card will prove to be the nine of diamonds even though the odds are 51 to 1 against." Farnsworth,[16] however, in comparing Article 74 with the American Restatement provision, remarks quite correctly that the wide ambit of the word "possible" is cut back by the preceding requirement of "in the light of the facts". In the Official Comments [17] on article 7.4.4, the test of foreseeability is also linked to the requirement in article 7.4.3 of the UNIDROIT Principles that the harm must be certain. Therefore, it must have been foreseeable that harm will with certainty (is likely to) flow from such a breach. The Comment further makes it clear that the breaching party is not liable for harm that was not foreseeable even if the breach was willful, as is the case in some legal systems.[18] Foreseeability must therefore be narrowly interpreted. This is also important for the restrictive interpretation of article 74 CISG in the light of the wide phrasing of Article 74. The Comment to article 7.4.4 further makes it clear that the emphasis is on the conduct of a "normally diligent person" in foreseeing the consequences of non-performance. This should also be the approach in the interpretation and application of article 74 of the CISG.[19] Finally the Comment also makes it clear that the foreseeability relates to "the nature or type of harm but not to its extent". This should also be the approach under article 74 of the CISG.[20]

i. The liability for damages is further limited in both the CISG and the UNIDROIT Principles by the causality requirement. In the CISG, this requirement is found in the words "as a consequence of" and in the UNIDROIT Principles in the words "as a result of".[21] Stoll argues that there is only a need for factual causation (conditio sine qua non) inquiry as the foreseeability rule is employed in the place of the legal causation requirement.[22] The UNIDROIT Principles shed no further light on this issue as the Comments to Article 7.4.2 simply refer to causation without further elaboration.

j. Neither article 74 CISG nor the UNIDROIT Principles contain an express provision about the time at which damages are to be calculated.[23] However, the underlying principle is suggested by the provisions in article 76 CISG and article 7.4.6 of the UNIDROIT Principles dealing with the current price of goods as presumptive measure for the calculation of damages. This would suggest that damages are to be calculated at the time that the action is lodged and not at the time of the breach.

k. Article 74 CISG contains an apparent gap in that it does not deal with the issue of future damages.[24] The UNIDROIT Principles may be helpful in that this issue is fully dealt with in article 7.4.3 under the heading "Certainty of Harm". The principle that the party is not liable for harm which has not occurred and which also is not likely to occur can be assumed. Such interpretation of article 74 CISG is strengthened by the interpretation of article 7.4.3 of the UNIDROIT Principles. In calculating the harm, there are two approaches that a court may follow: Where the amount of harm, including future harm, can be established with certainty, the court will award that amount. However, where it is certain that harm has resulted or will result, but where the amount cannot be established with sufficient certainty, the court has a discretion in assessing the amount.

l. It is submitted that article 7.4.3 of the UNIDROIT Principles may be helpful in interpreting article 74 CISG and to fill the apparent gap which exists. The UNIDROIT Principles clearly accept the principle that the defaulting party is liable for future damages and provide a practical, reasonable and equitable approach for the determination of such damages.

m. A specific application of the liability for future damages is the liability for the loss of a chance or opportunity. Article 7.4.3 of the UNIDROIT Principles makes express provision for liability in such a case. It establishes two principles, namely, (a) the defaulting party is liable; and (b) the calculation of the loss is in proportion to the probability of the occurrence of the chance.

It is submitted that article 7.4.3 of the UNIDROIT Principles can be used to fill the gap in article 74 CISG establishing liability for a loss of a chance as well as the manner of calculating the amount of damages. Loss of profit which is included specifically in article 74 CISG may further indicate that liability for future damages and loss of a chance should be accounted for in terms of the CISG.

n. The CISG contains no indication of the currency in which the loss is to be calculated [25] or where it is to be paid.[26] Article 7.4.12 of the UNIDROIT Principles allow a discretion to the court by stipulating that loss can be calculated either in the currency in which the monetary obligation (price) was expressed in the contract or the currency in which the harm was suffered, whichever is more appropriate. For instance, where replacement goods were bought or where the current market price presumption is used to calculate damages, those currencies would prima facie seem most appropriate. It is suggested that this approach should be used in the interpretation and application of CISG articles 74 et. seq.[27] The CISG also does not deal with losses due to a devaluation of a currency or drop in the exchange rate in the cases of late payment. There are conflicting decisions in the case law on this issue.[28] In principle, such damages ought to be awarded.

o. The CISG consciously does not deal with so-called liquidated damages and penalty clauses. The framers of the Convention agreed that the validity and application of such clauses were to be dealt with in terms of the applicable legal system due to widely divergent approaches in the different legal systems.[29] Article 7.4.13 of the UNIDROIT Principles, however, is based on the validity of such clauses subject to a judicial discretion to reduce the amount where it is grossly excessive. The vagaries of private international law will therefore decide this issue and the UNIDROIT Principles cannot provide any interpretative assistance to the CISG.[30]

p. Except indirectly, the CISG does not deal with the issue of contributory conduct of the aggrieved party which adds to the loss of harm suffered.[31] Article 77 CISG deals with the duty of the aggrieved party to mitigate damages, which covers only one aspect of the issue at stake here. This is clear from the fact that the issue of contributory conduct is dealt with separately in the UNIDROIT Principles in article 7.4.7, whereas the mitigation duty is dealt with in article 7.4.8 of the UNIDROIT Principles. If it is a separate issue, there is a gap in the CISG that can be filled by interpretation of either article 74 or article 77. In a German case [32] it seems that the court simply assumed, without further reference to authority, that contributory conduct could play a role.[33]

q. The principle that damages are to be reduced to the extent that they were caused by the aggrieved party or by circumstances for which it bore the risk, is found in the general principle established in article 7.1.2 of the UNIDROIT Principles which restricts its remedies where non-performance is partly due to the conduct of the aggrieved party.

r. The principle contained in article 7.1.2 of the UNIDROIT Principles is reflected in the similar provisions found in CISG articles 77 and 80. Article 7.4.7 of the UNIDROIT Principles can therefore be helpful in the interpretation of article 74 of the CISG read together with articles 77 and 80 in establishing the extent to which the defaulting party is excused from liability for damages due to the conduct of the aggrieved party.[34] The formulation of article 7.4.7 of the UNIDROIT Principles and the Official Comments are helpful in this process. It is clear that in such a case the amount of damages ought to be reduced proportionally. Such apportionment of damages will often involve a judicial discretion in weighing the different facts contributing to the eventual damages suffered.

s. As far as the burden of proof is concerned, it is generally accepted that the burden of proving the extent of damages lies on the aggrieved party.[35] However, where parties have failed to prove the exact extent of their loss, there is a divergence in the case law about the consequences. Belgian and Swiss courts seem to award an estimated amount ex aequo et bono where it is clear that damages have been suffered, but not clear what the extent thereof was.[36] German and American courts seem to dismiss the claim for damages under similar circumstances.[37] On the available doctrine, Lookofsky is of the opinion that problems of proof and certainty of loss are procedural matters which remain within the province of national law.[38]

t. Neither the CISG nor the UNIDROIT Principles devote explicit attention to the issue of legal fees or litigation costs. It is therefore unlikely that the UNIDROIT Principles can come to the aid in the solution of this controversy which has erupted after the decision in the Zapata Hermanos case [39] where the court on appeal overturned an earlier decision.[40] The court held that attorneys' fees are not covered by Article 74 of the CISG, but that this is a procedural matter falling outside the scope of the CISG and that it must therefore be dealt with in terms of the domestic law of the forum.[41] This is in contrast to certain German decisions where legal fees have been awarded as part of the damages recoverable under Article 74.[42]

[See also commentary by the author on this subject in: John Felemegas ed., An International Approach to the Interpretation of the United Nations Convention on Contracts for the International Sale of Goods (1980) as Uniform Sales Law, Cambridge University Press (2006) 211-218.]


FOOTNOTES

* Professor in Private Law, University of South Africa; Advocate of the High Court of South Africa.

1. Honnold J.O., Uniform Law for International Sales Under the 1980 United Nations Convention 3rd ed. (1999 Deventer) para 403 - 404, at pp. 445-446; Enderlein F. & Maskow D., International Sales Law - United Nations Convention on Contracts for the International Sale of Goods (1992 New York) 297-302, also available online at <http://www.cisg.law.pace.edu/cisg/biblio/enderlein.html>; Magnus U., in Martinek M. (ed) J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetze: Wiener UN-Kaufrecht (1999 Berlin) Art 74, Rn 2 & 3; Bernstein H & Lookofsky J., Understanding the CISG in Europe (1997 The Hague) 96; Schönle in Honsell 1 & 10; Witz W., Salger H.C. & Lorenz M., Internationales Einheitliches Kaufrecht (2000 Heidelberg) Art 74, Rn 1 & 2; Kritzer A.H., Guide to the Practical Applications of the United Nations Convention on Contracts for the International Sale of Goods (1989 Deventer) 474-482; Stoll H in Schlechtriem P.H. & Bacher K. (eds) Kommentar zum einheitlichen UN Kaufrecht 3rd ed (2000 München) Art 74, Rn 1 & 2.

2. Honsell/Schönle Art 74 Rn 10; Honnold para 417 at 456; Enderlein/Maskow (1992) Notes 1 & 4, at pp 297-298; Witz/Salger/Lorenz Art 74, Rn 12 & 19; Staudinger/Magnus, Art 74, Rn 12, 16 & 19; Liu C., "Remedies for Non-performance: Perspectives from CISG, UNIDROIT Principles & PECL", September 2003 at 13.2 available at <http://www.cisg.law.pace.edu/cisg/biblio/chengwei-74.html>. For relevant case law, see ICC Arbitration Case No. 8574 of September 1996, available online at <http://cisgw3.law.pace.edu/cases/968574i1.html>; Germany 21 September 1995 Landgericht [District Court] Kassel, available online at <http://cisgw3.law.pace.edu/cases/950921g1.html>; Austria 9 March 2000 Oberster Gerichtshof [Supreme Court], available online at <http://cisgw3.law.pace.edu/cases/000309a3.html>; United States 9 September 1994 Federal District Court [New York] (Delchi Carrier v. Rotorex), available online at <http://cisgw3.law.pace.edu/cases/940909u1.html>; Austria 14 January 2002 Supreme Court, available online at <http://cisgw3.law.pace.edu/cases/020114a3.html>.

3. Staudinger/Magnus, Art 74, Rn 8.

4. See para g., infra.

5. Staudinger/Magnus, Art 5, Rn 1; Enderlein/Maskow (1992), Note 1 at p 46; Liu at 13.4. Cf. Germany 2 July 1993 Oberlandesgericht [Appellate Court] Düsseldorf, available online at <http://cisgw3.law.pace.edu/cases/930702g1.html>. This case involved a claim for indemnification for an obligation stemming from a personal injury related to defects in the goods. The court erroneously regarded indemnification of such an obligation as an allowable element of damages under the CISG. For criticism of the court for overlooking article 5 CISG in so ruling, see commentary by Schlechtriem, P. at the above URL.

6. See legislative history of article 5 CISG at the 1980 Vienna Diplomatic Conference, available online at <http://www.cisg.law.pace.edu/cisg/chronology/chrono05.html>; see also Staudinger/Magnus, Art 74, Rn Art 5 Rn 3; Bianca C.M. & Bonell J.M., Commentary on the International Sales Law - the 1980 Vienna Sales Convention (1987 Milan), Art. 5, Note 2.1.

7. Liability for a loss of reputation seem to be generally recognized as one such instance, see relevant case law: Russia 24 January 2000 Arbitration proceeding 54/1999, available online at <http://cisgw3.law.pace.edu/cases/000124r1.html>; Switzerland 28 October 1998 Bundesgericht [Supreme Court], available online at <http://cisgw3.law.pace.edu/cases/981028s1.html>; Germany 21 September 1995 Landgericht [District Court] Kassel, available online at <http://cisgw3.law.pace.edu/cases/950921g1.html>. See also Staudinger/Magnus, Art 74, Rn 27, 45 & 50; Witz/Salger/Lorenz, Art 74, Rn 14; Honsell/Schönle, Art 74, Rn 2 & 7.

However, for a contrary decision, see France 21 October 1999 Cour d'appel [Appellate Court] Grenoble (Calzados Magnanni v. Shoes General International), available online at <http://cisgw3.law.pace.edu/cases/991021f1.html>.

8. Honsell/Schönle, Art 74, Rn 9-17; Witz/Salger/Lorenz, Art 74, Rn 15-20; Austria 9 March 2000 Oberster Gerichtshof [Supreme Court], available online at <http://cisgw3.law.pace.edu/cases/000309a3.html>.

9. Schlechtriem/Stoll 32; Honsell/Schönle, Art 74, Rn 11.

10. Liu at 13.5.

11. Kritzer 479; Witz/Salger/Lorenz, Art 74, Rn 2 & 27; Honnold, para 406 at p. 447; Staudinger/Magnus, Art 74, Rn 5; Vékás L., "The Foreseeability Doctrine in Contractual Damage Cases, (2002) 43 Acta Juridica Hungarica 145-174, available at <http://www.cisg.law.pace.edu/cisg/biblio/vekas.html>; Saidov D., 2001, "Methods of Limiting Damages under the Vienna Convention on Contracts for the International Sale of Goods" <http://www.cisg.law.pace.edu/cisg/biblio/saidov.html>; Liu at 14.2.2; Austria 14 January 2002 Supreme Court, available online at <http://cisgw3.law.pace.edu/cases/020114a3.html>. In United States 6 December 1995 Federal Appellate Court [2d Circuit] (Delchi Carrier v. Rotorex), available online at <http://cisgw3.law.pace.edu/cases/951206u1.html>, the American court dealt with a number of issues reflecting on damages and foreseeability. Unfortunately, the court relied on domestic interpretations of foreseeability rather than an approach free of domestic legal influence; see the editorial discussion of Kritzer A.H. on the case at <http://www.cisg.law.pace.edu/cisg/wais/db/editorial/951206u1editorial.html>. Cook S.V., "The UN Convention on Contracts for the International Sale of Goods: A Mandate to Abandon Legal Ethnocentricity", (1997) 16 Journal of Law and Commerce 257-263, available online at <http://cisgw3.law.pace.edu/cisg/biblio/1cook.html>, correctly points out at 258-259 that the court made use of the Hadley v. Baxendale approach and jurisprudence which is not supported on the wording of the CISG. See also Schneider E.C., "Consequential Damages in the International Sale of Goods: Analysis of Two Decisions", (1995) 16 Journal of International Business Law 615-668, available online at <http://www.cisg.law.pace.edu/cisg/wais/db/articles/schnedr2.html>.

See also relevant case law, Germany 21 September 1995 Landgericht [District Court] Kassel, available online at <http://cisgw3.law.pace.edu/cases/950921g1.html> where it was held that it was foreseeable that a failure to perform to a wholesaler would negatively influence its trade relationships with retailers; Switzerland 28 October 1998 Bundesgericht [Supreme Court], available online at <http://cisgw3.law.pace.edu/cases/981028s1.html>.

12. Germany 24 October 1979 Bundesgerichshof [Federal Supreme Court] [ULIS precedent], available online at <http://cisgw3.law.pace.edu/cases/791024g1.html>; United States 6 December 1995 Federal Appellate Court [2d Circuit] (Delchi Carrier v. Rotorex), available online at <http://cisgw3.law.pace.edu/cases/951206u1.html>; Stockholm Chamber of Commerce Arbitration Award of 1998, available online at <http://cisgw3.law.pace.edu/cases/980107s5.html>; Finland 5 November 1996 District Court of Kuopio, available online at <http://cisgw3.law.pace.edu/cases/961105f5.html; ICC Arbitration Case No. 8769 of December 1996, available online at <http://cisgw3.law.pace.edu/cases/968769i1.html>; Germany 2 October 1996 Landgericht [District Court] Heidelberg, available online at <http://cisgw3.law.pace.edu/cases/961002g1.html>.

13. Enderlein/Maskow, Note 7-10 at pp. 300-301; Honsell/Schönle, Art 74, Rn 23-27; Witz/Salger/Lorenz, Art 74, Rn 2; Bernstein & Lookofsky 100-101.

14. Germany 23 March 1978 Oberlandesgericht [Appellate Court] Hamm [ULIS precedent], available online at <http://cisgw3.law.pace.edu/cases/780323g1.html>.

15. Ziegel J., Parker School Text as quoted in Kritzer H. Guide to Practical Applications of the United Nations Convention on Contracts for the International Sale of Goods (Kluwer 1994) 587-588.

16. "Damages and Specific Relief" 27 Am J of Comp L 253.

17. The Official Comments on the UNIDROIT Principles cited are available online at <http://www.cisg.law.pace.edu/cisg/principles/uni74.html#official>.

18. This is also the case with the CISG; see Enderlein/Maskow, Note 8 at p. 301.

19. See Staudinger/Magnus Art 74, Rn 35; Honsell/Schönle, Art 74, Rn 24.

20. See, however, Germany 15 September 1997 Landgericht [District Court] Heilbronn, available online at <http://cisgw3.law.pace.edu/cases/970915g1.html> where the court seems to have taken the opposite view. See also Staudinger/Magnus, Art 74, Rn 34; Witz/Salger/Lorenz, Art 74, Rn 31; Austria 14 January 2002 Supreme Court, available online at <http://cisgw3.law.pace.edu/cases/020114a3.html>.

21. Saidov D., "Causation in Damages: The Convention on Contracts for the International Sale of Goods, the UNIDROIT Principles of International Commercial Contracts, the Principles of European Contract Law" at fn 1-3; Schlechtriem/Stoll Art 74 Rn 12. See also Staudinger/Magnus, Art 74, Rn 28. Saidov, "Limiting Damages" at fn 22-25, however, expresses doubt whether the combination of factual causality and foreseeability is adequate to deal with complex situations of causality.

22. Schlechtriem/Stoll art 74 Rn 12.

23. Staudinger/Magnus, Art 74, Rn 55; Schlechtriem/Stoll 33.

24. Enderlein/Maskow, Note 5 at p. 299-300. Liu at 14.3. In Switzerland 5 February 1997 Handelsgericht [Commercial Court] Zürich, available online at <http://cisgw3.law.pace.edu/cases/970205s1.html>, the issue was raised but not pertinently decided. The court in its exposition apparently relied on the principles of Swiss law.

25. In Switzerland 3 December 2002 Commercial Court St. Gallen, available online at <http://cisgw3.law.pace.edu/cases/021203s1.html>, the court dealt with this matter according to Swiss law without any reference to the CISG and any possible gap. This recourse to domestic law should be rejected as the issue is clearly one that falls within the scope of the CISG. The gap needs to be filled in accordance with Article 7.

26. In Germany 2 July 1993 Oberlandesgericht [Appellate Court] Düsseldorf, available online at <http://cisgw3.law.pace.edu/cases/930702g1.html>, it was decided that damages had to be paid at the place of business of the creditor. In United States 6 December 1995 Federal Appellate Court [2d Circuit] (Delchi Carrier v. Rotorex), available online at <http://cisgw3.law.pace.edu/cases/951206u1.html>, the court employed the American "breach day rule" without proper justification or reference to any other possible approaches -- see Kritzer's editorial comment at <http://www.cisg.law.pace.edu/cisg/wais/db/editorial/951206u1editorial.html>. See also Darkey J.M., "A U.S. Court's Interpretation of Damage Provisions under the U.N. Convention on Contracts for the International Sale of Goods: A Preliminary Step towards an International Jurisprudence of CISG or a Missed Opportunity?", (1995) 15 Journal of Law and Commerce 139-152 at 138-139, also available online at <http://www.cisg.law.pace.edu/cisg/biblio/darkey2.html>; Murray J.E. Jr., "The Neglect of CISG: A Workable Solution", Journal of Law and Commerce (1998) 17 365-379, also available on line at <http://www.cisg.law.pace.edu/cisg/wais/db/articles/murray.html>.

27. In Germany 28 February 1997 Oberlandesgericht [Appellate Court] Hamburg, available online at <http://cisgw3.law.pace.edu/cases/970228g1.html>, it was decided that the damages had to be calculated in the currency in which they were suffered. See also Staudinger/Magnus, Art 74, Rn 56.

28. See Germany 27 January 1981 Landgericht [District Court] Heidelberg, available online at <http://cisgw3.law.pace.edu/cases/810127g1.html> [ULIS case]; Germany 14 January 1994 Oberlandesgericht [Appellate Court] Düsseldorf , available online at <http://cisgw3.law.pace.edu/cases/940114g1.html> where such claims were rejected. See also Enderlein Maskow 302.

Cf. the following case law: Netherlands 6 May 1993 Arrondissementsrechtbank [District Court] Roermond (Gruppo IMAR v. Protech Horst), available online at <http://cisgw3.law.pace.edu/cases/930506n1.html>; Germany 28 April 1993 Landgericht [District Court] Krefeld, available online at <http://cisgw3.law.pace.edu/cases/930428g1.html>; Netherlands 15 April 1997 Gerechtshof [Appellate Court] Arnhem (Celli v. Agrolang), available online at <http://cisgw3.law.pace.edu/cases/970415n1.html>; Switzerland 5 February 1997 Handelsgericht [Commercial Court] Zürich, available online at <http://cisgw3.law.pace.edu/cases/970205s1.html> where such a claim was recognized.

This is also the practical effect of the "day of breach rule" applied in United States 9 September 1994 Federal District Court [New York] (Delchi Carrier v. Rotorex), available online at <http://cisgw3.law.pace.edu/cases/940909u1.html>. See also Honnold 446 fn 4; Staudinger/Magnus, Art 74, Rn 48; Witz/Salger/Lorenz, Art 74, Rn 21.

29. Staudinger/Magnus, Art 74, Rn 59 & 60; Honsell/Schönle Art 74, Rn 32; Witz/Salger/Lorenz, Art 74, Rn 42.

30. Russia 23 November 1994 Arbitration proceeding 251/1993, available online at <http://cisgw3.law.pace.edu/cases/941123r1.html>, restricting the damages to the extent of the penalty clause.

31. Enderlein/Maskow, Note 1 at p. 308 & Note 5 at p. 309; Bernstein & Lookofsky 103-104; Honnold. para 417 at p. 456; Saidov at fn 77078, 84-86; Liu at 14.4. In respect of the issue of causality, see Austria 9 March 2000 Oberster Gerichtshof [Supreme Court], available online at <http://cisgw3.law.pace.edu/cases/000309a3.html> and the editorial comment by A.H. Kritzer.

32. Germany 23 March 1978 Oberlanesgericht [Appellate Court] Hamm [ULIS precedent], available online at <http://cisgw3.law.pace.edu/cases/780323g1.html>.

33. In the Israeli case of 22 August 1993 Supreme Court (Eximin v. Textile and Footwear), available online at <http://cisgw3.law.pace.edu/cases/930822i5.html>, the court relied on Israeli law to deal with apportionment without reference to CISG authority. See also the critical comments of Reich A. at the above reference. In Germany 25 June 1996 Landgericht [District Court] Paderborn, available online at <http://cisgw3.law.pace.edu/cases/960625g1.html> reliance on contributory causation was rejected.

34. See generally Enderlein/Maskow, Art 80, Note 1 at p. 335 and Note 6 at p. 339. Liu at 14.4.1.

35. Enderlein/Maskow, Art 74, Note 6 at p. 300; Witz/Salger/Lorenz, Art 74, Rn 40; Honsell/Schönle, Art 74, Rn 33; Staudinger/Magnus, Art 74, Rn 61; Australia 17 January 2003 Supreme Court of Western Australia (Ginza Pte Ltd v Vista Corporation Pty Ltd), available online at <http://cisgw3.law.pace.edu/cases/030117a2.html>; Switzerland 10 March 2003 District Court Appenzell Auserrhoden, available online at <http://cisgw3.law.pace.edu/cases/030310s1.html>; Germany 2 February 2004 Appellate Cout Zweibrücken, available online at <http://cisgw3.law.pace.edu/cases/040202g1.html>

For other relevant case law, see Switzerland 26 April 1995 Handelsgericht [Commercial Court] Zürich, available online at <http://cisgw3.law.pace.edu/cases/950426s1.html>; Spain 20 June 1997 Audiencia Provincial [Appellate Court] Barcelona, available online at <http://cisgw3.law.pace.edu/cases/970620s4.html>; Germany 15 February 1996 Landgericht [District Court] Kassel, available online at <http://cisgw3.law.pace.edu/cases/960215g1.html>; Italy 11 December 1998 Corte di Appello [Appellate Court] Milano (Bielloni Castello v. EGO), available online at <http://cisgw3.law.pace.edu/cases/981211i3.html>.

36. Belgium 18 May 1999 Hof van Beroep [Appellate Court] Antwerp (Vandermaesen Viswaren v. Euromar Seafood), available online at <http://cisgw3.law.pace.edu/cases/990518b1.html>; Belgium 8 October 1996 Rechtbank van Koophandel [District Court] Hasselt (Vandermaesen Viswaren v. Euromar Seafood), available online at <http://cisgw3.law.pace.edu/cases/961008b1.html>; Netherlands 15 April 1997 Gerechtshof [Appellate Court] Arnhem (Celli v. Agrolang), available online at <http://cisgw3.law.pace.edu/cases/970415n1.html>; Belgium 2 May 1995 Rechtbank van Koophandel [District Court] Hasselt (Vital Berry Marketing v. Dira-Frost), available online at <http://cisgw3.law.pace.edu/cases/950502b1.html>; Switzerland 26 September 1997 Handelsgericht [Commercial Court] Aargau, available online at <http://cisgw3.law.pace.edu/cases/970926s1.html>. Cf. Switzerland 10 March 2003 District Court Appenzell Auserrhoden, available online at <http://cisgw3.law.pace.edu/cases/030310s1.html>.

37. Germany 5 March 1996 Landgericht [District Court] Düsseldorf, available online at <http://cisgw3.law.pace.edu/cases/960305g1.html>; Germany 17 June 1996 Landgericht [District Court] Hamburg, available online at <http://cisgw3.law.pace.edu/cases/960617g1.html>. In Germany 2 February 2004 Appellate Court Zweibrücken, available online at <http://cisgw3.law.pace.edu/cases/040202g1.html>, the court held that it was entitled to decide damages cases in two stages in appropriate circumstances. In the first stage, it is established whether a breach has occurred entitling a party to damages. In the second stage, the quantum of the damages is established.

38. Bernstein & Lookofsky 101. See also Honsell/Schönle, Art 74, Rn 35; Staudinger/Magnus Art 74 Rn 61 ; Giovannucci Orlandi, C., "Procedural Law Issues and Uniform Law Conventions" 2000-2001 Uniform Law Review 23-41, available online at <http://cisgw3.law.pace.edu/cisg/biblio/orlandi.html>. In Germany 9 January 2002 Bundesgerichshof [Federal Supreme Court], available online at <http://cisgw3.law.pace.edu/cases/020109g1.html> the court held that "however, [] the burden of proof rules of the CISG cannot go farther than the scope of its substantive applicability" clearly and quite correctly indicating that the application of the CISG in respect of issues of burden of proof is limited to those instances where those issues are regulated by the CISG expressly or by necessary implication. For a discussion of this case see Perales Battle of the Forms and the Burden of Proof: An Analysis of BGH 9 January 2002, 2002 (6) Vindobona Journal of International Law and Arbitration 217, available online at <http://cisgw3.law.pace.edu/cisg/biblio/perales2.html>. A distinction must be drawn between general issues of proof and procedure which is governed by the lex fori unless the CISG contains a clear provision on that aspect and issues of burden of proof where the express or implied provisions of the CISG will take precedence over the lex fori. In the latter instance the lex fori will only be applied if the issue to be determined falls outside the general scope of the CISG.

39. United States, 19 November 2002 Federal Appellate Court [7th Circuit] (Zapata Hermanos v. Hearthside Baking), available online at <http://cisgw3.law.pace.edu/cases/021119a1.html>.

40. United States, 28 August 2001 Federal District Court [Illinois] (Zapata Hermanos v. Hearthside Baking), available online at <http://cisgw3.law.pace.edu/cases/010828u1.html>.

41. Schlechtriem P., "Attorneys' Fees as Part of Damages", (2002) 14 Pace International Law Review 205-209, available online at <http://cisgw3.law.pace.edu/cisg/biblio/schlechtriem4.html>; Felemegas J., "An Interpretation of Article 74 by the U.S. Circuit Court of Appeals" (2003) 15 Pace International Law Review 91-147, available online at <http://cisgw3.law.pace.biblio/felemegas4.html>; Vanto J., "Attorneys' fees as damages in international commercial litigation" (2003) 5 Turku Law Journal 89-83 and 15 Pace International Law Review (2003) 203-222, also available at <http://cisgw3.law.pace.biblio/vanto1.html>; Flechtner H. & Lookofsky J., "Viva Zapata! American Procedure and CISG Substance in a U.S. Circuit Court of Appeal", (2003) 7 Vindobona Journal of International Commercial Law and Arbitration 93-104, also available at <http://cisgw3.law.pace.biblio/flechtner5.html>; Keily T., "How Does the Cookie Crumble? Legal Costs under a Uniform Interpretation of the United Nations Convention on Contracts for the International Sale of Goods", (2003) Nordic Journal of Commercial Law, available online at <http://www.njcl.utu.fi> and at <http://cisgw3.law.pace.edu/biblio/keily2.html>; Zeller B., "Interpretation of Article 74 -- Zapata Hermanos v. Hearthside Baking -- Where Next?, (2004) Nordic Journal of Commercial Law, available online at <http://www.njclfi/1_2004/commentary1.pdf>.

42. Germany 11 April 2002 Lower Court Viechtach, available online at <http://cisgw3.law.pace.edu/cases/020411g1.html>; Germany 14 January 1994 Appellate Court Düsseldorf, available online at <http://cisgw3.law.pace.edu/cases/940114g1.html>; Vanto at II; Felemegas at 4(c).


Official Comments on Articles of the UNIDROIT Principles cited

Comments reprinted with permission from UNIDROIT

SECTION 4: DAMAGES

ARTICLE 7.4.1

(Right to damages)

Any non-performance gives the aggrieved party a right to damages either exclusively or in conjunction with any other remedies except where the non-performance is excused under these Principles.

COMMENT

1. Right to damages in general

This article establishes the principle of a general right to damages in the event of non-performance, except where the non-performance is excused under the Principles, as in the case of force majeure (Art.7.1.7) or of an exemption clause (Art. 7.1.6). Hardship (Art. 6.2.1 et seq.) does not in principle give rise to a right to damages.

The article recalls that the right to damages, like other remedies, arises from the sole fact of non-performance. It is enough for the aggrieved party simply to prove the non-performance, i.e. that it has not received what it was promised. It is in particular not necessary to prove in addition that the non-performance was due to the fault of the non-performing party. The degree of difficulty in proving the non-performance will depend upon the content of the obligation and in particular on whether the obligation is one of best efforts or one to achieve a specific result. See Art. 5.4.

The right to damages exists in the event of failure to perform any of the obligations which arise from the contract. Thus it is not necessary to draw a distinction between principal and accessory obligations.

2. Damages may be combined with other remedies

This article also states that the aggrieved party may request damages either as an exclusive remedy (for example damages for delay in the case of late performance or for defective performance accepted by the aggrieved party; damages in the event of impossibility of performance for which the non-performing party is liable), or in conjunction with other remedies. Thus, in the case of termination of the contract, damages may be requested to compensate the loss arising from such termination, or again, in the case of specific performance, to compensate for the delay with which the aggrieved party receives performance and for any expenses which might have been incurred. Damages may also be accompanied by other remedies (cure, publication in newspapers of, for example, an admission of error, etc.).

3. Damages and pre-contractual liability

The right to damages may arise not only in the context of non-performance of the contract, but also during the pre-contractual period. See, for instance, Art. 2.15 in case of negotiations in bad faith, Art. 2.16 in the event of breach of the duty of confidentiality, or Art. 3.18 in the case of mistake, fraud, threat or gross disparity. The rules governing damages for non-performance as laid down in this Section may be applied by analogy to those situations.

ARTICLE 7.4.2

(Full compensation)

(1) The aggrieved party is entitled to full compensation for harm sustained as a result of the non-performance. Such harm includes both any loss which it suffered and any gain of which it was deprived, taking into account any gain to the aggrieved party resulting from its avoidance of cost or harm.

(2) Such harm may be non-pecuniary and includes, for instance, physical suffering or emotional distress.

COMMENT

1. Aggrieved party entitled to full compensation

Para. (1) of this article establishes the principle of the aggrieved party's entitlement to full compensation for the harm it has sustained as a result of the non-performance of the contract. It further affirms the need for a causal link between the non-performance and the harm. See also comment 3 on Art. 7.4.3. Non-performance must be a source neither of gain nor of loss for the aggrieved party.

The solution to be found in some legal systems which allows the court to reduce the amount of damages having regard to the circumstances has not been followed, since in international situations it could risk creating a considerable degree of uncertainty and its application might moreover vary from one court to another.

2. Damages cover loss suffered, including loss of profit

In specifying the harm for which damages are recoverable, para.(1) of this article, following the rule laid down in Art. 74 CISG, states that the aggrieved party is entitled to compensation in respect not only of loss which it has suffered, but also of any gain of which it has been deprived as a consequence of the non-performance.

The notion of loss suffered must be understood in a wide sense. It may cover a reduction in the aggrieved party's assets or an increase in its liabilities which occurs when an obligee, not having been paid by its obligor, must borrow money to meet its commitments. The loss of profit or, as it is sometimes called, consequential loss, is the benefit which would normally have accrued to the aggrieved party if the contract had been properly performed. The benefit will often be uncertain so that it will frequently take the form of the loss of a chance. See Art. 7.4.3(2).

Illustrations

1. The Bibliothèque de France sends a rare manuscript by special courier to New York for an exhibition. The manuscript is irreparably damaged during transport. Its loss in value is estimated at 50,000 French francs and it is this sum which is due by the courier.

2. A, who has not been paid by B under the terms of their contract, must borrow money from its bank at a high rate of interest. B must compensate A for the interest due by the latter to its bank.

3. A, a construction company, hires a crane from company B. The boom of the crane, which has been poorly maintained, breaks and in falling crushes the architect's car and results in an interruption of work on the site for eight days, for which A must pay a penalty for delay of 70,000 French francs to the owner. B must reimburse A for the expenses incurred as a consequence of the interruption of the work, the amount of the penalty and the cost of repairing the architect's car which A has had to pay.

4. A, a singer, cancels an engagement with B, an impresario. A must pay damages to B in respect not only of the expenses incurred by B in preparing the concert, but also of the loss of profit resulting from the cancellation of the concert.

3. Damages must not enrich the aggrieved party

However, the aggrieved party must not be enriched by damages for non-performance. It is for this reason that para. (1) also provides that account must be taken of any gain resulting to the aggrieved party from the non-performance, whether that be in the form of expenses which it has not incurred (e.g. it does not have to pay the cost of a hotel room for an artist who fails to appear), or of a loss which it has avoided (e.g. in the event of non-performance of what would have been a losing bargain for it).

Illustration

5. A hires out excavating machinery to B for two years at a monthly rental of 50,000 French francs. The contract is terminated after six months for non-payment of the rentals. Six months later, A succeeds in renting out the same machinery at a monthly charge of 55,000 French francs. The gain of 60,000 French francs realised by A as a result of the reletting of the machinery for the remainder of the initial contract, that is to say one year, should be deducted from the damages due by B to A.

4. Damages in case of changes in the harm

In application of the principle of full compensation regard is to be had to any changes in the harm, including its expression in monetary terms, which may occur between the time of the non-performance and that of the judgment. The rule however is not without exceptions: for example, if the aggrieved party has itself already made good the harm at its own expense, the damages awarded will correspond to the amount of the sums disbursed.

5. Compensation of non-material harm

Para. (2) of this article expressly provides for compensation also of non-pecuniary harm. This may be pain and suffering, loss of certain amenities of life, aesthetic prejudice, etc. as well as harm resulting from attacks on honour or reputation.

The rule might find application, in international commerce, in regard to contracts concluded by artists, outstanding sportsmen or women and consultants engaged by a company or by an organisation.

In these cases also, the requirement of the certainty of harm must be satisfied (see Art. 7.4.3), together with the other conditions for entitlement to damages.

Illustration

6. A, a young architect who is beginning to build up a certain reputation, signs a contract for the modernization of a municipal fine arts museum. The appointment receives wide press coverage. The municipal authorities subsequently decide to engage the services of a more experienced architect and terminate the contract with A. A may obtain compensation not only for the material loss suffered but also for the harm to A's reputation and the loss of the chance of becoming better known which the commission would have provided.

The compensation of non-material harm may assume different forms and it is for the court to decide which of them, whether taken alone or together, best assures full compensation. The court may not only award damages but also order other forms of redress such as the publication of a notice in newspapers designated by it (e.g. in case of breach of a clause prohibiting competition or the reopening of a business, defamation etc.).

ARTICLE 7.4.3

(Certainty of harm)

(1) Compensation is due only for harm, including future harm, that is established with a reasonable degree of certainty.

(2) Compensation may be due for the loss of a chance in proportion to the probability of its occurrence.

(3) Where the amount of damages cannot be established with a sufficient degree of certainty, the assessment is at the discretion of the court.

COMMENT

1. Occurrence of harm must be reasonably certain

This article reaffirms the well-known requirement of certainty of harm, since it is not possible to require the non-performing party to compensate harm which may not have occurred or which may never occur.

Para. (1) permits the compensation also of future harm, i.e. harm which has not yet occurred, provided that it is sufficiently certain. Para. (2) in addition covers loss of a chance, obviously only in proportion to the probability of its occurrence: thus, the owner of a horse which arrives too late to run in a race as a result of delay in transport cannot recover the whole of the prize money, even though the horse was the favourite.

2. Determination of extent of harm

Certainty relates not only to the existence of the harm but also to its extent. There may be harm whose existence cannot be disputed but which it is difficult to quantify. This will often be the case in respect of loss of a chance (there are not always "odds" as there are for a horse, for example a student preparing for a public examination) or of compensation for non-material harm (detriment to someone's reputation, pain and suffering, etc.).

Illustration

A entrusts a file to B, an express delivery company, in response to an invitation to submit tenders for the construction of an airport. B undertakes to deliver the file before the closing date for tenders but delivers it after that date and A's application is refused. The amount of compensation will depend upon the degree of probability of A's tender having been accepted and calls for a comparison of it with the applications which were admitted for consideration. The compensation will therefore be calculated as a proportion of the profit which A might have made.

According to para. (3), where the amount of damages cannot be established with a sufficient degree of certainty then, rather than refuse any compensation or award nominal damages, the court is empowered to make an equitable quantification of the harm sustained.

3. Harm must be a direct consequence of non-performance as well as certain

There is a clear connection between the certainty and the direct nature of the harm. Although the latter requirement is not expressly dealt with by the Principles, it is implicit in Art. 7.4.2(1) which refers to the harm sustained "as a result of the non-performance" and which therefore presupposes a sufficient causal link between the non-performance and the harm. Harm which is too indirect will usually also be uncertain as well as unforeseeable.

ARTICLE 7.4.4

(Foreseeability of harm)

The non-performing party is liable only for harm which it foresaw or could reasonably have foreseen at the time of the conclusion of the contract as being likely to result from its non-performance.

COMMENT

The principle of limitation of recoverable harm to that which is foreseeable corresponds to the solution adopted in Art. 74 CISG. This limitation is related to the very nature of the contract: not all the benefits of which the aggrieved party is deprived fall within the scope of the contract and the non-performing party must not be saddled with compensation for harm which it could never have foreseen at the time of the conclusion of the contract and against the risk of which it could not have taken out insurance.

The requirement of foreseeability must be seen in conjunction with that of certainty of harm set out in Art. 7.4.3.

The concept of foreseeability must be clarified since the solution contained in the Principles does not correspond to certain national systems which allow compensation even for harm which is unforeseeable when the non-performance is due to wilful misconduct or gross negligence. Since the present rule does not provide for such an exception, a narrow interpretation of the concept of foreseeability is called for. Foreseeability relates to the nature or type of the harm but not to its extent unless the extent is such as to transform the harm into one of a different kind. In any event, foreseeability is a flexible concept which leaves a wide measure of discretion to the judge.

What was foreseeable is to be determined by reference to the time of the conclusion of the contract and to the non-performing party itself (including its servants or agents), and the test is what a normally diligent person could reasonably have foreseen as the consequences of non-performance in the ordinary course of things and the particular circumstances of the contract, such as the information supplied by the parties or their previous transactions.

Illustrations

1. A cleaning company orders a machine which is delivered five months late. The manufacturer is obliged to compensate the company for lost profit caused by the delay in delivery as it could have foreseen that the machine was intended for immediate use. On the other hand the harm does not include the loss of a valuable government contract that could have been concluded if the machine had been delivered on time since that kind of harm was not foreseeable.

2. A, a bank, usually employs the services of a security firm for the conveyance of bags containing coins to its branches. Without informing the security firm, A sends a consignment of bags containing new coins for collectors worth fifty times the value of previous consignments. The bags are stolen in a hold-up. A can only recover compensation corresponding to the value of the normal consignments as this was the only kind of harm that could have been foreseen and the value of the items lost was such as to transform the harm into one of another kind..

Unlike certain international conventions, particularly in the field of transport, the Principles follow CISG in not making provision for full compensation of harm, albeit unforeseeable, in the event of intentional non-performance.

 

ARTICLE 7.4.5

(Proof of harm in case of replacement transaction)

[The Commentary on Principles Article 7.4.5 is presented with comparative to CISG Article 75.]

 

ARTICLE 7.4.6

(Proof of harm by current price)

[The Commentary on Principles Article 7.4.6 is presented with the comparative to CISG Article 76.]

 

ARTICLE 7.4.7

(Harm due in part to aggrieved party)

Where the harm is due in part to an act or omission of the aggrieved party or to another event as to which that party bears the risk, the amount of damages shall be reduced to the extent that these factors have contributed to the harm, having regard to the conduct of each of the parties.

COMMENT

1. Contribution of the aggrieved party to the harm

In application of the general principle established by Art. 7.1.2 which restricts the exercise of remedies where non-performance is in part due to the conduct of the aggrieved party, the present article limits the right to damages to the extent that the aggrieved party has in part contributed to the harm. It would indeed be unjust for such a party to obtain full compensation for harm for which it has itself been partly responsible.

2. Ways of contributing to the harm

The contribution of the aggrieved party to the harm may consist either in its own conduct or in an event as to which it bears the risk. The conduct may take the form of an act (e.g. it gave a carrier a mistaken address) or an omission (e.g. it failed to give all the necessary instructions to the constructor of the defective machinery). Most frequently such acts or omissions will result in the aggrieved party failing to perform one or another of its own contractual obligations; they may however equally consist in tortious conduct or non-performance of another contract. The external events for which the aggrieved party bears the risk may, among others, be acts or omissions of persons for whom it is responsible such as its servants or agents.

Illustrations

1. A, a franchisee bound by an "exclusivity" clause contained in the contract with B, acquires stock from C because B has required immediate payment despite the fact that the franchise agreement provides for payment at 90 days. B claims payment of the penalty stipulated for breach of the exclusivity clause. B will obtain only part of the sum due thereunder as it was B who provoked A's non-performance.

2. A, a passenger on a liner effecting a luxury cruise, is injured when a lift fails to stop at the floor requested. B, the shipowner, is held liable for the consequences of A's injury and seeks recourse against C, the company which had checked the lifts before the liner's departure. It is proved that the accident would have been avoided if the floor had been better lit. Since this was B's responsibility, B will not obtain full recovery from C.

3. Apportionment of contribution to the harm

The conduct of the aggrieved party or the external events as to which it bears the risk may have made it absolutely impossible for the non-performing party to perform. If the requirements of Art. 7.1.7 (Force majeure) are satisfied, the non-performing party is totally exonerated from liability.

Otherwise, the exoneration will be partial, depending on the extent to which the aggrieved party contributed to the harm. The determination of each party's contribution to the harm may well prove to be difficult and will to a large degree depend upon the exercise of judicial discretion. In order to give some guidance to the court this article provides that the court shall have regard to the respective behaviour of the parties. The more serious a party's failing, the greater will be its contribution to the harm.

Illustrations

3. The facts are the same as in Illustration 1. Since it was B who was the first not to observe the terms of the contract, B is deemed to have caused A's failure to respect the exclusivity clause. B may only recover 25% of the amount stipulated in the penalty clause.

4. The facts are the same as in Illustration 2. Since the failings of B and C seem to be equivalent. B can only recover from C 50% of the compensation it had to pay A.

4. Contribution to harm and mitigation of harm

This article must be read in conjunction with the following article on mitigation of harm (Art. 7.4.8). While the present article is concerned with the conduct of the aggrieved party in regard to the cause of the initial harm, Art. 7.4.8 relates to that party's conduct subsequent thereto.

 

ARTICLE 7.4.8

(Mitigation of harm)

[The Commentary on Principles Article 7.4.8 is presented with the comparative to CISG Article 77.]

 

ARTICLE 7.4.9

(Interest for failure to pay money)

[The Commentary on Principles Article 7.4.9 is presented with the comparative to CISG Article 78.]

 

ARTICLE 7.4.10

(Interest on damages)

Unless otherwise agreed, interest on damages for non-performance of non-monetary obligations accrues as from the time of non-performance.

COMMENT

This article determines the time from which interest on damages accrues in cases of non-performance of obligations other than monetary obligations. In such cases, at the time of non-performance the amount of damages will usually not yet have been assessed in monetary terms. The assessment will only be made after the occurrence of the harm, either by agreement between the parties or by the court.

The present article fixes as the starting point for the accrual of interest the date of the occurrence of the harm. This solution is that best suited to international trade where it is not the practice for businesspersons to leave their money idle. In effect, the aggrieved party's assets are diminished as from the occurrence of the harm whereas the non-performing party, for as long as the damages are not paid, continues to enjoy the benefit of the interest on the sum which it will have to pay. It is only natural that this gain passes to the aggrieved party.

However, when making the final assessment of the harm, regard is to be had to the fact that damages are awarded as from the date of the harm, so as to avoid double compensation, for instance when a currency depreciates in value.

The present article takes no stand on the question of compound interest, which in some national laws is subject to rules of public policy limiting compound interest with a view to protecting the non-performing party.

ARTICLE 7.4.11

(Manner of monetary redress)

(1) Damages are to be paid in a lump sum. However, they may be payable in instalments where the nature of the harm makes this appropriate.

(2) Damages to be paid in instalments may be indexed.

COMMENT

1. Lump sum or instalments

Although this article does not impose a fixed rule as to the manner in which damages are to be paid, the payment of damages as a lump sum is in general considered to be the mode of payment best suited to international trade. There are however situations in which payment by instalments will be more appropriate, having regard to the nature of the harm, for instance when the harm is on-going.

Illustrations

A, a consultant, is retained by B for the purpose of checking the safety of its factories. A is killed when travelling by helicopter to one of B's factories, for which accident B is held responsible. A leaves two children aged twelve and eight. So as to compensate for the loss of the maintenance of the family, a monthly allowance will be payable to the children until they reach the age of majority.

2. A, a consultant in safety matters, is recruited by B for a three year period. The remuneration is fixed at 0.5% of the production. A is wrongfully dismissed after six months. It may be appropriate that B be ordered to pay A monthly a sum corresponding to the agreed salary until A has found new employment or, at the most, for thirty months.

2. Indexation

Para. (2) of this article contemplates the possibility of indexation of damages to be paid in instalments so as to avoid the complex mechanism of a review of the original judgment in order to take account of inflation. Indexation may however be prohibited by the law of the forum.

Illustration

3. The facts are the same as in Illustration 1. The monthly allowance may be adjusted In accordance with the cost of living index applicable where the children live.

ARTICLE 7.4.12

(Currency in which to assess damages)

Damages are to be assessed either in the currency in which the monetary obligation was expressed or in the currency in which the harm was suffered, whichever is more appropriate.

COMMENT

The harm resulting from the non-performance of an international contract may occur in different places and the question therefore arises of the currency in which it is to be assessed. This question is dealt with by the present article and should be kept distinct from that of the currency of payment of the damages addressed in Art. 6.1.9.

The article offers a choice between the currency in which the monetary obligation was expressed and that in which the harm was suffered, whichever is more appropriate in the circumstances.

While the first alternative calls for no particular comment, the second takes account of the fact that the aggrieved party may have incurred expenses in a particular currency to repair damage which it has sustained. In such a case it should be entitled to claim damages in that currency even if it is not the currency of the contract. Another currency which may be considered the most appropriate is that in which the profit would have been made.

The choice is left to the aggrieved party, provided that the principle of full compensation is respected.

Finally, it may be noted that in the absence of any indication to the contrary, a party is entitled to interest and to liquidated damages and penalties in the same currency as that in which the main obligation is expressed.

ARTICLE 7.4.13

(Agreed payment for non-performance)

(1) Where the contract provides that a party who does not perform is to pay a specified sum to the aggrieved party for such non-performance, the aggrieved party is entitled to that sum irrespective of its actual harm.

(2) However, notwithstanding any agreement to the contrary the specified sum may be reduced to a reasonable amount where it is grossly excessive in relation to the harm resulting from the non-performance and to the other circumstances.

COMMENT

1. Agreed payment for non-performance defined

This article gives an intentionally broad definition of agreements to pay a specified sum in case of non-performance, whether such agreements be intended to facilitate the recovery of damages (liquidated damages according to the common law) or to operate as a deterrent against non-performance (penalty clauses proper), or both.

2. Agreed payment for non-performance in principle valid

National laws vary considerably with respect to the validity of the type of clauses in question, ranging from their acceptance in the civil law countries, with or without the possibility of judicial review of particularly onerous clauses, to the outright rejection in common law systems of clauses intended specifically to operate as a deterrent against non-performance, i.e. penalty clauses.

In view of their frequency in international contract practice, para.(1) of this article in principle acknowledges the validity of any clauses providing that a party who does not perform is to pay a specified sum to the aggrieved party for such non-performance, with the consequence that the latter is entitled to the agreed sum irrespective of the harm actually suffered by it. The non-performing party may not allege that the aggrieved party sustained less harm or none at all.

Illustration

1. A, a former Brazilian international player, is recruited for three years to train the players of B, an Australian football team, at a monthly salary of 10,000 Australian dollars. Provision is made for a severance allowance of 200,000 Australian dollars in the event of unjustified dismissal. A is dismissed without any justification after six months. A is entitled to the agreed sum, even though A was immediately recruited by another team at double the salary received from B.

Normally, the non-performance must be one for which the non-performing party is liable, since it is difficult to conceive a clause providing for the payment of an agreed sum in case of non-performance operating in a force majeure situation. Exceptionally, however, such a clause may be intended by the parties also to cover non-performance for which the non-performing party is not liable.

In the case of partial non-performance, the amount may, unless otherwise agreed by the parties, be reduced in proportion.

3. Agreed sum may be reduced

In order to prevent the possibility of abuse to which such clauses may give rise, para. (2) of this article permits the reduction of the agreed sum if it is grossly excessive "in relation to the harm resulting from the non-performance and to the other circumstances". The same paragraph makes it clear that the parties may under no circumstances exclude such a possibility of reduction.

The agreed sum may only be reduced, but not entirely disregarded as would be the case were the judge, notwithstanding the agreement of the parties, to award damages corresponding to the exact amount of the harm. It may not be increased, at least under this article, where the agreed sum is lower than the harm actually sustained (see however comment 4 on Art. 7.1.6). It is moreover necessary that the amount agreed be "grossly excessive", i.e. that it would clearly appear to be so to any reasonable person. Regard should in particular be had to the relationship between the sum agreed and the harm actually sustained.

Illustration

2. A enters into a contract with B for the purchase of machinery which provides for 48 monthly payments of 30,000 French francs. The contract contains a clause allowing immediate termination in the event of non-payment by A of one instalment, and authorises B to keep the sums already paid and to recover future instalments as damages. A fails to pay the eleventh instalment. B keeps the 300,000 francs already paid and claims, in addition to the return of the machinery, the 1,140,000 francs representing the 38 outstanding instalments. The court will reduce the amount since A's non-performance would result in a grossly excessive benefit for B.

4. Agreed payment for non-performance to be distinguished from forfeiture and other similar clauses

The type of clauses dealt with in the present article must be distinguished from forfeiture and other similar clauses which permit a party to withdraw from a contract either by paying a certain sum or by losing a deposit already made. On the other hand a clause according to which the aggrieved party may retain sums already paid as part of the price falls within the scope of this article.

Illustrations

3. A undertakes to sell real estate to B for 900,000,000 Italian lire. B must exercise the option to purchase within three months and must pay a deposit of 50,000,000 lire, which A is entitled to retain if B does not exercise the option. Since this is not an agreed payment for non-performance it does not fall under the present article and the sum cannot be reduced thereunder even if grossly excessive in the circumstances.

4. A enters into a contract with B for the lease of a machine. The contract provides that in the event of A's failure to pay one single rental the contract will be terminated and that the sums already paid will be retained by B as damages. The clause falls under the present article and the agreed amount may be subject to reduction.


Pace Law School Institute of International Commercial Law - Last updated January 5, 2007
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