Reproduced with permission from 8 Journal of Law and Commerce (1988) 53-108
Harry M. Flechtner [*]
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Damages Upon Avoidance
A lawyer conversant with Article 2 of the U.C.C. who successfully travels the unfamiliar pathways of avoidance of contract under the Convention, including the sometimes unexpected turnings of its rules on restitution, will discover recognizable landscape at the end of the journey. Article 75, for instance, permits an avoiding party to recover damages measured by the difference between the contract price and the price in a reasonable substitute transaction. The aggrieved party can claim further damages as measured by Article 74. This provision, which will be discussed in more detail in connection with nonavoidance remedies  permits an avoiding party to recover consequential and incidental damages.
Provisions comparable to Article 75 are found in U.C.C. section 2-706 (sellers' resale damages) and U.C.C. section 2-712 (buyers' cover damages), both of which also permit recovery of consequential and/or incidental damages. For sellers, the major difference between U.C.C. section 2-706 and Article 75 of the Convention is that the latter neither requires notice of the substitute sale  nor regulates the details of resale beyond requiring that it be made "in a reasonable manner and within a reasonable time after avoidance."  For buyers, Article 75 appears almost indistinguishable from U.C.C. section 2-712. Article 75, however, does not specify the adjustment mentioned in both U.C.C. section 2-706(1) and U.C.C. section 2-712(2) for expenses saved by the party claiming damages as a result of the breach. Under the U.C.C. language, items such as transportation expenses saved by the aggrieved party in a substitute transaction are deducted from cover or resale damages. A similar result can be reached under Article 75 of the Convention by construing the phrase "price in the substitute transaction" to permit such adjustment. Equitable considerations demand this construction, given that increased transportation costs and similar items of extra expense associated with a substitute transaction would constitute losses suffered "as a consequence of breach" and thus would be recoverable under CISG Article 74.
Article 76(1) of the Convention permits a party that has not entered into a substitute transaction to claim damages measured by "the difference between the price fixed by the contract and the current [i.e., market] price."  The comparable provisions in U.C.C. Article 2 are section 2-708(1) (seller's market-price damages) and section 2-713 (buyer's market-price damages). The manner of measuring market-price damages under the Convention, however, differs in several significant respects from the method in the U.C.C.
CISG Article 76 damages are generally measured by the market price "at the time of avoidance";  if the aggrieved party avoids the contract after "taking over the goods," however, the reference point is "the time of such taking over." The latter alternative prevents an avoiding buyer who has received delivery from manipulating the time of avoidance in order to increase the seller's liability. Under U.C.C. Article 2, the seller's market-price damages are normally measured at the time for tender  and the buyer's damages are usually measured as of the time the buyer "learned of the breach."  If the breach was an anticipatory repudiation and the action comes to trial before the repudiator's performance is due, however, U.C.C. market-price damages are measured at the time the aggrieved party learned of the repudiation. Thus suppose the seller contracted to deliver goods at a price of $10,000 on June 1, at which time the market price was $8,000. If the buyer wrongfully rejected the goods, the seller's market-price damages under U.C.C. section 2-718(1) would be $2,000 (assuming no "expenses saved" because of the buyer's breach). The damages under Article 76 of the Convention, however, would depend on when the seller declared the contract avoided. If avoidance occurred on June 15, when the market price had risen to $9,000, the seller's market-price damages would be $1,000.
Under Article 76(2) of the Convention, market price is measured "at the place where delivery of the goods should have been made."  This language refers to the place of tender, at which the U.C.C. also measures market-price damages for sellers and, in many circumstances, buyers. The Convention and the U.C.C., therefore, often point to the same place for measuring market-price damages. Where an aggrieved buyer has rejected or revoked acceptance after the goods arrived, however, U.C.C. section 2-713(2) measures the market price at the place of arrival. Suppose goods that were sold and delivered under a shipment contract (i.e., a contract in which the seller tenders by placing the goods with the first carrier ) turn out to be seriously defective. Under the Convention, if the buyer rejects the goods by avoiding the contract, its market-price damages would be measured by reference to the price prevailing at the place of tender -- where the seller delivered the goods to the carrier for shipment. Under the U.C.C., the rejecting buyer's market-price damages would be measured by the price at the place where the goods arrived.
Most commentators on Article 2 of the U.C.C. agree that an aggrieved buyer or seller who has in fact entered into a substitute transaction should not be permitted to claim market-price damages more generous than those produced by the resale or cover damages formula. There is, however, contrary opinion  and the text of Article 2 does not provide clear guidance. Article 76(1) of the Convention resolves this issue in part by providing that an avoiding party can claim market-price damages only if it "has not made a purchase or resale under article 75." A party that has entered into a substitute transaction within the meaning of Article 75, therefore, must proceed under that provision and cannot claim damages under Article 76. An attempt at resale or cover that does not meet the requirements of Article 75 (e.g., because the substitute transaction did not occur within a reasonable time after avoidance), however, does not prevent the aggrieved party from claiming market price damages under Article 76. To avoid over-compensating the aggrieved party, nevertheless, such substitute transactions should be deemed to establish an upper limit on the amount of damages recoverable under Article 76, although the text of the Convention does not mandate this result.
A seller who is deprived of sales volume by the buyer's breach will be fully compensated only if it can recover the profit on the lost sale to the buyer. The U.C.C. deals with this situation in section 2-708(2), which permits an aggrieved seller to recover lost profits where the market-price damage formula "is inadequate to put the seller in as good a position as performance would have done."  Although the Convention contains no specific provision comparable to U.C.C. section 2-708(2), both Articles 75 and 76 permit an avoiding party to claim further damages recoverable under Article 74. Article 74, in turn, permits an aggrieved party to recover "the loss, including loss of profits," caused by a breach. This provision will permit a volume seller to recover damages to compensate for the lost sale.
Where a lost profits recovery would yield lower damages than other formulas, however, results under the Convention and the U.C.C. may differ. One court has restricted an Article 2 seller's damages to lost profits under U.C.C. section 2-708(2) where market-price damages measured by section 2-708(1) would have been more generous. The holding is consistent with the expectation-based principles behind U.C.C. remedies and is supported by at least one commentary. This result, however, may be difficult to reach under the Convention. Unlike U.C.C. section 2-708(2), which is cast as an alternative to market-price damages under U.C.C. section 2-708(1), the CISG provision that permits recovery of lost profits (Article 74) is structured as a supplement to the resale/cover or market-price damage provisions available to avoiding parties. The text of Articles 74-76, therefore, argues against limiting damages to lost profits where the contract has been avoided. Furthermore, the result under Article 2 of the U.C.C. is supported by the general statement of expectation principles in U.C.C. section 1-106(1). Although the Convention's remedial provisions reflect a policy of protecting an aggrieved party's expectation interest, there is no overt statement of this policy and at least one remedy -- the buyer's right to reduce the price under Article 50 -- will in some circumstances violate expectation principles.
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Remedies other than damages which are available to a party that has not avoided the contract -- i.e., the seller's price remedy and the buyer's right to specific performance, substitute goods, repair, or reduction in price -- have previously been described. To the extent these remedies do not fully protect the aggrieved party's expectations under the contract, Article 74 of the Convention authorizes recovery of damages measured by "the loss, including loss of profit, suffered . . . as a consequence of the breach."  Damages under this provision, which are also available where the aggrieved party has avoided the contract, are subject to familiar limitations involving foreseeability  and mitigation of damages.
Thus if the seller fails to deliver, a buyer who elects not to avoid the contract and who seeks specific performance under Article 46(1) can also claim damages under Article 74 for losses caused by the delay in receiving the goods, provided the losses were foreseeable when the contract was formed and could not have been avoided by reasonable attempts to mitigate. A buyer can also recover Article 74 damages if it reduces the price under Article 50, seeks substitute goods under Article 46(2), or demands repair of defective goods under Article 46(3). In these circumstances, Article 74 performs the function of the U.C.C. Article 2 provisions that permit an aggrieved buyer to recover consequential damages, which (under U.C.C. section 2-715(2)(a)) must be foreseeable at the time of contracting and not reasonably avoidable "by cover or otherwise."
Suppose, however, that a seller delivers non-conforming goods and the buyer can neither avoid the contract nor demand substitute goods because the defects do not satisfy the fundamental breach standard. Suppose further that the buyer cannot require the seller to repair because that would be "unreasonable having regard to all the circumstances."  Under Article 74 of the Convention, the buyer can claim damages measured by its losses from the defects. In these circumstances, Article 74 performs the function of U.C.C. section 2-714(2), which authorizes a buyer who has accepted the goods to recover damages for breach of warranty. Damages under the U.C.C. provision are measured by the difference between the value of the goods delivered and "the value they would have had if they had been as warranted."  The same measure is available under Article 74 of the Convention.
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* Assistant Professor, University of Pittsburgh School of Law. . . .
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204. See infra notes 252-62 and accompanying text.
205. See Honnold, supra note 25, at 409, 416. Under the Convention, all damage claims are subject to a mitigation limitation. Sales Convention, supra note 1, art. 77.
206. Honnold, supra note 25, at 413.
207. Contrast U.C.C. § 2-706(3) (notice of private resale) and § 2-706(4)(b) (notice of public resale except where the goods "are perishable or threaten to decline in value speedily"). Under the Convention, of course, a seller wishing to recover resale damages must give notice in order to avoid the contract. Sales Convention, supra note 1, art. 26.
208. Contrast U.C.C. § 2-706(2) (general rules on conducting the resale) and § 2-706(4) (rules on resale by public sale).
Article 75 of the Convention contains nothing comparable to U.C.C. § 2-706(5), specifying the rights of the original buyer vis-à-vis purchasers at a resale that fails to meet the requirements of § 2-706. Such issues, however, are beyond the scope of the Convention. See Sales Convention, supra note 1, art. 4. Article 75 also does not include a statement equivalent to the first sentence of U.C.C. § 2-706 (6) ("The seller is not accountable to the buyer for any profit made on any resale"). That principle, however, is implied by the Convention’s rules on the effect of avoidance of the contract. See Sales Convention, supra note 1, art. 81(1).
209. One difference between the two provisions is that Article 75 speaks of "the difference between the contract price and the price in the substitute transaction" whereas the comparable phrase in U.C.C. § 2-712(2) is "the difference between the cost of cover and the contract price" (emphasis added). The phrase "cost of cover," however, has generally been interpreted to mean the price in the substitute purchase. See White & Summers, supra note 9, § 6-3 at 216-18.
Article 75 does not specifically require that the substitute purchase or sale be made in good faith. Contrast U.C.C. § 2-706(1) and § 2-712(1). This difference is probably not significant, given the general mandate in Article 7(1) requiring the Convention to be interpreted in a manner that promotes "the observance of good faith in international trade."
210. White & Summers, supra note 9, § 6-3 at 217-18, § 7-6 at 265-66.
211. Article 76(1) also authorizes recovery of incidental and consequential damages under Article 74.
212. The market-price damage provision in the draft Convention submitted to the Vienna diplomatic conference measured damages at the time the aggrieved party "first had the right to declare the contract avoided." Text of Draft Convention on Contracts for the International Sale of Goods Approved by the United Nations Commission on International Law, art. 72(1), U.N. Doc. A/CONF.97/5 (1979), reprinted in Official Records, supra note 71, at 5, 13. During deliberations by the First Committee at the Vienna conference, this standard was criticized as too uncertain; various amendments, each of which specified the time of avoidance as a measuring point, were proposed and rejected. Summary Records of the Thirtieth Meeting of the First Committee, U.N. Doc. A/CONF.97/C.1/SR.30 (1980), reprinted in Official Records, supra note 71, at 393, 394-96. During a plenary session of the conference, an amendment containing the current language of the Article 76(1) was adopted. Summary Records of the Tenth Plenary Meeting, U.N. Doc. A/CONF.97/SR.10 (1980), reprinted in Official Records, supra note 71, at 219, 222-23.
The "time of avoidance" for purposes of Article 76(1) will presumably be determined by reference to the notice of avoidance required by Article 26. Indeed, the representative to the Vienna conference who introduced the amendment containing the current text of Article 76(1) spoke of measuring damages "at the time of the actual declaration of avoidance." Id. at 222 (statement of Mr. Bennet (Australia)). It is not clear, however, whether market price should be determined as of the time the aggrieved party dispatched notice of avoidance or as of the time the breaching party received (or should have received) the notice. Under Article 27, notice of avoidance "by means appropriate in the circumstances" is effective even if the notice is delayed or fails to arrive. Whether the dispatch principle of Article 27 will determine the time at which a contract is deemed avoided for purposes of Article 76(1), however, is not clear.
213. Honnold, supra note 25, at 414. Despite this apparent purpose, Article 76(1) does not limit the application of the alternative measuring point to buyers. It might therefore apply, e.g., to an avoiding seller who delivered and then "took over" the goods after they were wrongfully rejected by the buyer. As applied to buyers, the phrase "taking over the goods" implies something akin to "acceptance" under U.C.C. § 2-606. Thus the alternative should not apply when an aggrieved buyer rejects the goods immediately after the inspection permitted by CISG Article 38. See Honnold, supra note 25, at 414.
214. U.C.C. § 2-708(1) (1978).
215.Id. § 2-713(1).
216. Id. § 2-723(1).
217. Alternatively, suppose the buyer repudiated the contract on February 1, when the market price stood at $7,000. The seller’s market-price damages under the U.C.C. would still be $2,000 unless the seller’s suit went to trial before June 1. In the latter case, the seller’s damages would be measured at the time it learned of the repudiation, id., § 2-723(1), and the seller’s could recover $3,000. Under Article 76(1) of the Convention, however, the seller's damages would be determined at the time of avoidance. Thus is avoidance occurred on February 15, when the market price was $7,500, the seller’s damages would be $2,500.
Where the seller has repudiated, the Convention’s approach avoids difficult issues that have arisen under U.C.C. Article 2. The U.C.C. measures the buyer’s market-price damages as of the time the buyer learned of the repudiation, provided the breach of contract action goes to trial before the date for the seller’s performance. U.C.C. § 2-723(1) (1978). Where trial does not begin until after the seller’s performance was due, however, damages are measured under U.C.C. § 2-713(1) as of the time the buyer "learned of the breach." When does the buyer "learn of the breach" in an anticipatory repudiation situation? At least three answers have been proposed: 1) the date the buyer learns of the repudiation, e.g., Oloffson v. Coomer, 11 Ill. App. 3d 918, 296 N.E.2d 871 (1973); 2) the date the repudiated performance is due, White & Summers, supra note 9, § 6-7 at 242-47; 3) the date within a commercially reasonable time after repudiation on which the buyer treats the repudiation as a breach or, failing such treatment, the last day of a commercially reasonable period following the repudiation, J. Murray, Murray on Contracts § 246 at 498-99 (1974); see First Nat. Bank v. Jefferson Mortgage Co., 576 F.2d 479 (3d Cir. 1978). Professor Nordstrom argued that resolution of this issue required amending the U.C.C. R. Nordstrom, Handbook of the Law of Sales § 149 at 456 (1970). Article 76 of the Convention avoids this issue by specifying that the buyer’s market-price damages are measured as of the time the contract is avoided in all anticipatory repudiation situations.
218. Where "there is no current price at that place," however, market price is measured at a reasonable substitute location, "making due allowance for differences in the cost of transporting the goods." Sales Convention, supra note 1, art. 76(2). U.C.C. § 2-723(2) contains an equivalent rule.
219. See Honnold, supra note 25, at 415-16.
220. U.C.C. §§ 2-708(1), 2-713(2) (1978).
221. See Sales Convention, supra note 1, art. 31(a); e.g., U.C.C. § 2-319(1) (1978).
222. White & Summers, supra note 9, § 6-4 at 233-34; Murray, supra note 217, § 240 at 486-87.
223. See Peters, Remedies for Breach of Contract Relating to the Sale of Goods Under the Uniform Commercial Code: A Roadmap for Article Two, 73 Yale L.J. 199, 260 (1973).
224. Draft Commentary, supra note 86, art. 71, ¶ 6, reprinted in Official Records, supra note 71, at 60; Honnold, supra note 25, at 416.
225. White & Summers, supra note 9, § 7-9; Murray, supra note 217, § 243 at 489.
226. For discussion of the application of U.C.C. § 2-708, see White & Summers, supra note, 9 §§ 7-8 to 7-13; Murray, supra note 217, § 243.
227. Honnold, supra note 25, at 416; Ziegel, supra note 80, § 9.05 at 9-40 to 9-41. But see Hellner, The U.N. Convention on International Sales of Goods – An Outsider’s View in Ius Inter Nationes: Festschrift Fur Stefan Riesenfeld 71, 99-100 (1983).
228. Nobs Chemical, U.S.A., Inc. v. Koppers Co., Inc., 616 F.2d 212 (5th Cir. 1980).
229. White & Summers, supra note 9, § 7-12.
230. Nobs Chemical, U.S.A., Inc. v. Koppers Co., 616 F.2d 212, 215 (5th Cir., 1980); White & Summers, supra note 9, § 7-12 at 282.
231. See Draft Commentary, supra note 86, art. 70, ¶ 3, reprinted in Official Records, supra note 71, at 59 ("the basic philosophy of the action for damages is to place the injured party in the same economic position he would have been in if the contract had been performed"); Honnold, supra note 25, at 408 (Article 74 operates to place the aggrieved party "in as good a position as if the other party had properly performed the contract," a standard that "drives home the Convention’s unified approach to the parties’ obligation and to remedies for breach").
232. See supra note 28 and accompanying text.
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251. See supra notes 23-25 and accompanying notes.
252. Professor Honnold notes that the Article 74 damage measure is "designed to place the aggrieved party in as good a position as if the other party had properly performed the contract." Honnold, supra note 25, at 408.
253. For discussion of Article 74 damages where the contract has been avoided, see supra notes 204-05 and accompanying text.
254. Damages recoverable under Article 74 "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 matter of which he then knew or ought to have known, as a possible consequence of the breach of contract." Sales Convention, supra note 1, art. 74.
255. Id. art 77. For a discussion of the extent to which the mitigation of damages principle in Article 77 may restrict the seller’s price remedy, see Honnold, supra note 25, at 420-21.
256. "The buyer is not deprived of any right he may have to claim damages by exercising his right to other remedies." Sales Convention, supra note 1, art. 45(2). An aggrieved seller is protected by an equivalent provision in Article 61(2). Damages under Article 74, however, are less important for a seller exercising its price remedy than for a buyer seeking specific performance because Article 78 authorizes an aggrieved party to recover interest on "the price or any other sum that is in arrears." Thus unless an unpaid seller suffers consequential damages beyond loss of the time-value of the price, the combination of the price remedy in Article 62 and interest under Article 78 will eliminate the need to claim damages under Article 74. See Honnold, supra note 25, at 409. For discussion of the history and scope of Article 78, as well as the rate of interest to be paid thereunder, see id. at 422-25.
257. E.g., U.C.C. § 2-714(2) (1978).
258. See Sales Convention, supra note 1, art. 46(2), 49(1).
259. See id. art. 46(3).
260. The buyer could also use the reduction in price remedy in this setting, although resort to this remedy is optional. See id. art. 50.
261. U.C.C. § 2-714(2) (1978).
262. See Draft Commentary, supra note 86, art. 70, ¶ 7, reprinted in Official Records, supra note 71, at 59 ("If the goods delivered had a recognized value which fluctuated, the loss to the buyer would be equal to the difference between the value of the goods as they exist and the value the goods would have had if they had been as stipulated in the contract"). Compare Draft Commentary, supra note 86, art. 70, ¶ 7 n.2, reprinted in Official Records, supra note 71, at 59 (The difference in value should "[p]resumably" be measured "at the place the seller delivered the goods and at an appropriate point of time, such as the moment the goods were delivered, the moment the buyer learned of the non-conformity of the goods or the moment that it became clear that the non-conformity would not be remedied by the seller") with U.C.C. § 2-714(2) (1978) (Difference in value between the goods actually delivered and the goods as warranted to be measured "at the time and place of acceptance").
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