|Where the aggrieved party has terminated the contract and has made a replacement transaction within a reasonable time and in a reasonable manner it may recover the difference between the contract price and the price of the replacement transaction as well as damages for any further harm.||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.|
[The UNIDROIT article displayed above is to be read in conjunction with the Official Comments on them it "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
Bojidara Borisova [*]
CISG art. 75 and its counterpart UNIDROIT Principles art. 7.4.5. regulate the institute of substitute transaction in a similar manner. Both articles correspond to each other in substance; hence the Official Comments on this article of the UNIDROIT Principles can arguably be used for the interpretation and gap filling of the CISG.
The basic premises that must be taken into consideration when interpreting the text of CISG art. 75 are the characteristics of the substitute transaction, the time and manner in which the substitute transaction should be made, the nature of recoverable damages, any further damages recoverable for additional harm.
Starting with the prerequisite included in both articles - i.e., avoidance of the contract (termination of the contract in the terminology of the Principles) by the injured party - it must be noted that this particular element in CISG art. 75 and UNIDROIT Principles art. 7.4.5 provides for a special application of the general rule applicable to the proof of the existence and of the amount of the harm caused to one of the contracting parties by the other.
The new element that both counterpart articles introduce is the facilitated mechanism for measuring damages that does not require proof of market price, but instead it provides for the comparison between the contractual price and the price of the substitute transaction and the difference defines the amount of the damages.
II. Substitute transaction
The Official Comments to the UNIDROIT Principles contain several instructions on the particularity of the substitute transaction. The replacement transaction must be performed with the intention to substitute the original transaction, which means that its purpose, basic terms and characteristics must be identical with the original transaction to the extent of reasonableness. Consequently both transactions need not be absolutely identical.
According to the Principles, no substitute transaction is performed if the aggrieved party has itself fulfilled the obligation that lay upon the non-performing party. The substitute transaction must be concluded with a different contracting party, because the comparison between the price of the two contracts yields the amount of the remedy. In cases of self-performance, the objective method for measuring damages pursuant to CISG art. 75 cannot be applied; therefore, the other CISG provisions regulating the law for damages will be applicable.
The Principles stipulate that there is no replacement if an aggrieved party, after the termination of the initial contract, uses its equipment for the performance of another contract, which it could have performed at the same time as the first. Hence the substitute transaction rule does not regulate the so-called "lost volume" sales, where the seller has a sufficient supply and insufficient demand.
In the classic lost volume situation, the remedy is provided only to the seller, whereas CISG art. 75 and its counterpart UNIDROIT Principles art 7.4.5. provide a remedy to both contracting parties. CISG art. 75 explicitly states that the damages recovable under this article are provided to the buyer who has bought goods in replacement or to the seller who has resold the goods.
The remedy that both articles regulate is given for the performance of the substitute transaction and not for any other action undertaken by the injured party. That is why the definition of the "substitute transaction" is essential for the application of the specific method for measuring damages that CISG art. 75 provides.
The UNIDROIT Principles Comments, together with CISG art. 75 descriptive methods for defining the replacement transaction, provide a comprehensive description of this term, which facilitates the complete interpretation of CISG art. 75 and its proper application.
The UNIDROIT Principles, similar to the Convention, do not contain a specific definition of the term "reasonableness".
But bearing in mind the fact that "reasonableness" is a general principle of the CISG and as such is mentioned in many of the Convention's provisions, including art. 75, a careful consideration of that term is warranted.
The Official Comments to the UNIDROIT Principles do not contain a thorough examination of the term "reasonableness". The Principles only provide brief and general guidelines of the basic idea that this term carries. According to the Principles, the expression "reasonable time" and "reasonable manner" is meant to avoid the prejudice of the non-performing party by "hasty or malicious conduct".
Consequently, the Principles do not directly indicate the meaning of the term "reasonableness" and the measures that should be applied for its definition, and only point out the results that must be accomplished following the fulfillment of this condition. Each case will require separate consideration and interpretation of the term "reasonableness". The aggrieved party in each case may calculate which is the most appropriate moment for the conclusion of and what are the most appropriate conditions of the substitute transaction; and, thus, act within the boundaries of "reasonableness".
No particular criterion exists for the determination of "reasonableness". The aggrieved party must take into consideration and act as the reasonable person will; i.e., follow the behavior of a hypothetic person acting in a similar situation, having the same quality, engaged in the same branch of business or in the same trade.
The Official Comments to the UNIDROIT Principles prescribe that the aggrieved party should not react "hasty", i.e., must consider thoroughly the situation, the characteristics of the original contract that was breached and the terms and conditions of the substitute transaction. The aggrieved party must also judge the consequences of its behavior (the replacement transaction).
If it is not to the detriment of the non-performing party and it only restores the situation the way it should be if the original contract was diligently performed, than it can be concluded that the "reasonableness" criterion is fulfilled. The requirement to act in a "reasonable manner" will not be fulfilled and art. 75 will not be applicable, if the injured party by concluding the substitute transaction maliciously harms the non-performing party.
From the Official Comments to the UNIDROIT Principles still another peculiarity can be drawn. CISG art. 75 and its counterpart Principles art. 7.4.5 are designed to provide a remedy for the injured contracting party and must restore it into the position that it would have been if the initial contract had been properly performed, but this does not mean that the non-performing party should be excessively damaged. As it is already mentioned, the performance of the substitute transaction must not prejudice the non-performing party. The purpose of the remedy provided in CISG art. 75 and its UNIDROIT Principles counterpart is to mitigate the damages, not to punish the non-performing party.
Both counterpart provisions use one and the same method for measuring damages in case of a replacement transaction. The rule is that the aggrieved party may recover the difference between the two contract prices. According to the UNIDROIT Principles Official Comments, art. 7.4.5. only established a minimum right of recovery. This conclusion is based on the fact that the aggrieved party may recover further damages under the other provisions in the Principles that regulate the law on damages. Bearing in mind that CISG art. 75 and UNIDROIT Principles art. 7.4.5. correspond in substance, the same inference is also true for CISG art. 75.
Concerning the method for measuring damages there is little room for interpretation, because both articles use very clear wording. The amount of the remedy required under CISG art. 75 and its counterpart UNIDROIT Principles art. 7.4.5. is the difference between the prices of the original transaction and the substitute transaction concluded by the aggrieved party.
Both articles apply the so-called "concrete" method, which uses objective and rather practical criteria for measuring damages caused by a party’s breach of contract.
In conclusion, it must be underlined that both counterpart articles represent a specific hypothesis of the general rule regulating the corresponding remedy in case of breach of contract. The remedy provided in CISG art. 75 – and its counterpart UNIDROIT Principles art. 7.4.5 – applies to both contracting parties and consequently gives a general guarantee of the proper performance of the contractual obligations of both the buyer and the seller under an international contract for the sale of goods.
More importantly, both articles, along with the possibility for the innocent party to declare the contract avoided, stipulate an additional method of protection for the injured party by providing the possibility to claim damages.
Therefore, this right might be executed only after the moment of avoidance of the contract is finally defined and the strict requirements outlined in CISG art. 75 and its counterpart UNIDROIT Principles art. 7.4.5. are fulfilled.
[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) 219-222.]
* Bojidara Borisova received her law degree from Sofia University "St.Kl.Ohridsky", Bulgaria, in 2001. Currently, she is a Ph.D. candidate at the same university, working on her research project on international investment law. Since July 2003 she is working as a part time legal advisor at the Bulgarian Investment Agency.
1. See Kritzer, General Observations on Use of the UNIDROIT Principles to Help Interpret the CISG, available online <http://cisgw3.law.pace.edu/cisg/text/matchup/general-observations.html> and Liu, Remedies for Non-performance: Perspectives from CISG, UNIDROIT Principles and PECL, available online <http://cisg3.law.pace.edu/cisg/biblio/chengwei-75.html>.
2. See Sutton, Measuring Damages Under the United Nations Convention on the International Sale of Goods, 50 Ohio State Law Journal (1989), 737-752, also available online at <http://cisgw3.law.pace.edu/cisg/biblio/sutton.html>.
3. See Text of Secretariat Commentary on article 71 of the 1978 Draft Convention, available online at <http://cisgw3.law.pace.edu/cisg/text/secomm/secomm-75.html>.
4. See Flechtner, Remedies Under the New International Sales Convention: The Perspective from Article 2 of the U.C.C., 8 Journal of Law and Commerce (1988) 53-108, also available online at <http://cisgw3.law.pace.edu/cisg/biblio/flecht.html>.
5. See Sutton, op. cit; see also Text of Secretariat Commentary on article 71 of the 1978 Draft Convention, op. cit.
6. See Official Comments on Articles of the UNIDROIT Principles.
7. See Official Comments on Articles of the UNIDROIT Principles, op. cit., Sutton, op. cit. and Saidov, Methods of Limiting Damages under the Vienna Convention on Contract for the International Sale of Goods, 2001, available online at <http://cisgw3.law.pace.edu/cisg/biblio/saidov.html>.
8. See Sutton, op. cit.
9. For the characteristics of the "substitute transaction", see the following case decisions:
Italy 11 December 1998 Appellate Court Milan, <http://cisgw3.law.pace.edu/cases/981211i3.html>;
ICC Arbitration Case No. 8786 of January 1997, <http://cisgw3.law.pace.edu/cases/978786i1.html>;
Switzerland 20 February 1997 District Court Saane, <http://cisgw3.law.pace.edu/cases/970220sl.html>;
China 30 October 1991 CIETAC Arbitration Proceeding, <http://cisgw3.law.pace.edu/cases/911030c1.html>.
10. See Liu, op. cit. and the following case decisions for the determination of the term
Germany 14 January 1994 Appellate Court Düsseldorf , <http://cisgw3.law.pace.edu/cases/940114gl.html>;
Switzerland 15 September 2000 Supreme Court, <http://cisgw3.law.pace.edu/cases/000915s1.html>;
Netherlands 15 October 2002 Netherlands Arbitration Institute, Case No.2319, <http://cisgw3.law.pace.edu/cases/021015nl.html>.
11. See Comments on the concept of "Reasonableness" in the CISG: A.H.Kritzer, <http://cisgw3.law.pace.edu/cisg/text/reason.html#over
12. Official Comments on Articles of the UNIDROIT Principles, op.cit.
13. See Honnold, Uniform Law for International Sales Under the 1980 United Nations Convention, 3d ed. Kluwer Law International (1999).
14. See Vilus, Commentary on Common Law Institutions in the United Nations Sales Convention, Estudios en Homenaje a Jorge Barrera Graf, Bd. 2, Mexico: Universidad Nacional Autónoma de Mexico (1989) 1431-1457.
15. See Tunc, Commentary of the Hague Convention on International Sale of Goods, Records and Documents of Conference, Vo. 1 - Records, The Hague (1966) 355-391.
16. See Farnsworth, Damages and Specific Relief, 27 Am.J.Comp.L. 247 (1979), also available at <http://cisgw3.law.pace.edu/cisg/biblio/farns.html>. See also Art. 77 CISG, providing for mitigation of damages under the Convention.
17. See the following case decisions, which confirm the statement that as far as it concerns the method for measuring
damages the text of art. 75 of the CISG does not provide any difficulty for the national courts or the arbitral tribunals:
ICC Arbitration Case No. 8740 of October 1996, <http://cisgw3.law.pace.edu/cases/968740i1.html>;
ICC Arbitration Case No. 8574 of September 1996, <http://cisgw3.law.pace.edu/cases/968574.html>;
Spain 28 January 2000 Supreme Court, <http://cisgw3.law.pace.edu/cases/000128s4.html>;
Germany 30 July 2001 District Court Braunschweig, <http://cisgw3.law.pace.edu/cases/01730g1.html>.
18. See Text of Secretariat Commentary on article 71 of the 1978 Draft Convention, op. cit. and Flechtner, op. cit.
19. See Saidov, op. cit.
20. See Schlechtriem, Extent and Measure of Damages (CISG Arts. 74-76), in Uniform Sales Law - The UN-Convention for the International Sale of Goods, Vienna: Manz (1986), also available online at <http://cisgw3.law.pace.edu/cisg/biblio/schlechtriem.html>, and Liu, op. cit.
21. See Sutton, op. cit., Saidov, op. cit. and case decision Russia 22 October 1998 Arbitration Proceeding 196/1997, <http://cisgw3.law.pace.edu/cases/981022r1.html>.
22. See Vilus, Provisions Common to the Seller and the Buyer, Petar Sarcevic & Paul Volken eds., International Sale of Goods: Dubrovnik Lectures, Oceana (1986), also available online at <http://cisgw3.law.pace.edu/cisg/biblio/vilus.html>; and Schlechtriem, op. cit.
23. See for this inference the following case decisions:
Austria 6 February 1996 Supreme Court, <http://cisgw3.law.pace.edu/cases/960206a3.html>;
Russia 24 January 2000 Arbitration Proceeding 54/1999, <http://cisgw3.law.pace.edu/cases/000124r1.html>;
Austria 9 March 2000 Supreme Court, <http://cisgw3.law.pace.edu/cases/000309a3.html>;
Germany 6 April 2000 District Court München, <http://cisgw3.law.pace.edu/cases/000406g1.html>;
Germany 13 January 1999 Appellate Court Bamberg, <http://cisgw3.law.pace.edu/cases/990113g1.html>.
Comments reprinted with permission from UNIDROIT
(Proof of harm in case of replacement transaction)
Where the aggrieved party has terminated the contract and has made a replacement transaction within a reasonable time and in a reasonable manner it may recover the difference between the contract price and the price of the replacement transaction as well as damages for any further harm.
1. Amount of harm presumed in case of replacement transaction
It seems advisable to establish, alongside the general rules applicable to the proof of the existence and of the amount of the harm, presumptions which may facilitate the task of the aggrieved party.
The first of these presumptions is provided by this article which corresponds in substance to Art. 75 CISG. It concerns the situation where the aggrieved party has made a replacement transaction, for instance because so required by the duty to mitigate harm or in conformity with usages. In such cases, the harm is considered to be the difference between the contract price and the price of the replacement transaction.
The presumption comes into play only if there is a replacement transaction and not where the aggrieved party has itself performed the obligation which lay upon the non-performing party (for example when a shipowner itself carries out the repairs to its vessel following the failure to do so of the shipyard which had been entrusted with the work).
Nor is there replacement, and the general rules will apply, when a company, after the termination of a contract, uses its equipment for the performance of another contract which it could have performed at the same time as the first ("lost volume").
The replacement transaction must be performed within a reasonable time and in a reasonable manner so as to avoid the non-performing party being prejudiced by hasty or malicious conduct.
2. Further damages recoverable for additional harm
The rule that the aggrieved party may recover the difference between the two contract prices establishes a minimum right of recovery. The aggrieved party may also obtain damages for additional harm which it may have sustained.
A, a shipyard, undertakes to accommodate a ship belonging to B, a shipowner, in dry dock for repairs costing US $500,000 as from 1 July. B learns on 1 June that the dry dock will only be available as from 1 August. B terminates the contract and after lengthy and costly negotiations concludes with C, another shipyard, an identical contract at a price of US $700,000. B is entitled to recover from A not only the difference in the price of US $200,000 but also the expenses it has incurred and compensation for the longer period of unavailability of the ship.