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GUIDE TO ARTICLES 78 & 84(1)

Comparison with Principles of European Contract Law (PECL)


Match-up of CISG Articles 78 & 84(1) with PECL Article 9:508
CISG Article 78


If a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it, without prejudice to any claim for damages recoverable under article 74.

PECL Article 9:508 [Interest: Delay in Payment of Money]
(complete and revised version 1998)

(1) If payment of a sum of money is delayed, the aggrieved party is entitled to interest on that sum from the time when payment is due to the time of payment at the average commercial bank short-term lending rate to prime borrowers prevailing for the contractual currency of payment at the place where payment is due.

CISG Article 84(1)

(1) If the seller is bound to refund the price, he must also pay interest on it, from the date on which the price was paid.


Editorial remarks

CISG Articles 78 and 84(1) and their PECL counterparts

Francesco G. Mazzotta [1]
October 2004

  1. CISG Article 78
       a) Background
       b) Operation of Article 78
       c) Nature of interest under Article 78
  2. Whether PECL Article 9:508(1) may be of assistance in the interpretation of CISG Article 78
       a) PECL Article 9:508(1)
       b) PECL Article 9:508 and its relevance in determining the operation of CISG Article 78
  3. CISG Article 84
  4. Conclusions

The main goal of this commentary is to establish whether the Principles of European Contract Law (hereinafter "PECL" or "Principles") may be of assistance in construing the meaning of Article 78 of the United Convention on Contracts for the International Sale of Goods (hereinafter "Convention" or "CISG"). This author believes that the method for calculating interest rate as determined by the PECL may not be used under the CISG.

1. CISG Article 78

a) Background

It is well known that Article 78 is "more conspicuous for the questions it fails to answer than the questions it answers."[2] Due to the impossibility to reach an agreement among the delegations at the Vienna Convention,[3] the present version of Article 78 does not fix any rate of interest. It should be noted, however, that although considered as a "headless corpse", Article 78 introduces a far-reaching principle of a general entitlement to interest,[4] which is still rather important because it makes clear that a fixed interest (however not set by the Convention) must be applied to sums paid with delay (normativity feature),[5] and that the entitlement to interest is not limited by grounds for release as provided for by CISG Article 79 (absoluteness feature).[6]

b) Operation of CISG Article 78

Failure to pay the price or any other sum that is in arrears is the condition to be satisfied under Article 78.[7] Failure refers to a failure to comply with the obligation to pay the price by a specific time, whether the time is set by contract or set by the CISG (Article 58).[8] Interest is due regardless of proof of any losses[9] and it is independent of any claim for damages.[10] While there should not be too many problems in determining the time when the buyer is bound to pay the price (as explained, it will be either governed by the agreement between the parties or, as a default rule, by the CISG, Article 58),[11] there are no default rules with respect to the time of performance with respect to "other sums". In the latter case, in the absence of any other indication, it must be assumed that it is to be paid immediately when the claim for other sums arises.[12] No other additional requirements must be satisfied under domestic law (e.g., the issue of a formal prior warning).[13] As mentioned, Article 78 does not fix any specific interest rate. As suggested by many authors and courts, the issue is not within the CISG and, therefore, interest should be determined by the domestic law of the forum state or, more frequently, by the law that would otherwise govern the contract, absent the CISG, which usually is the law of the country resulting from the application of the rules of private international law of the forum state.[14] If the contract is between European Community nationals, absent a choice of law, the law of the country in which the seller has his principal place of business will be applied, according to Article 4(2) of the EEC Convention on the Law Applicable to Contractual Obligations.[15] There are many cases where the law of the country of the creditor was applied without making any reference to rules of private international law.[16] The law of the country of the debtor has also been applied by the courts [17] or suggested by commentators.[18] There are also cases in which the law of the country of the legal tender to be used was applied [19] as well as cases in which the law of the country where the price must be paid was applied.[20] Finally, some courts have also applied the rate of interest as determined by the UNIDROIT Principles of International Commercial Contracts (art. 7.4.9).[21] In cases where the applicable law prohibits the payment of interest, domestic public policy (very likely) makes CISG Article 78 unenforceable notwithstanding the language of CISG Article 4.[22] I believe, however, that interest should be awarded also in those countries where domestic applicable law forbids payment of it.[23] Indeed, the express language of the Convention provides for a general entitlement to interest and not enforcing it would be against the express text and purpose of Article 78.[24]

Other relevant topics to be considered include: compound interest and the meaning of "sums" under Article 78. As to the compound interest issue, CISG Article 78 does not expressly deal with it. There is a controversy also on this issue; it seems, however, that compound interest cannot be claimed.[25] As to the meaning of the word 'sums' under Article 78, it seems that the applicable law should define the term "sums".[26]

c) Nature of interest under CISG Article 78

Some authors argue that interest under CISG Article 78 is aimed at fully compensating the aggrieved party for the benefit of the bargain. Accordingly, this view applies Article 74 of the Convention to determine the interest rate. This view, however, results from a misunderstanding of the nature of the interest as defined by Article 78, the express wording of Article 78 and its legislative history. Article 78 draws a clear, distinct line between damages as defined under Article 74 and interest as defined under Article 78.[27] Under Article 78, interest is not meant to fully compensate the creditor for the benefit of the bargain.[28] Therefore, provisions that normally are to be used to calculate damages (full compensation) cannot be used to calculate the interest rate under Article 78.[29] Article 78 expressly excludes that interest is at any rate linked to damages since interest is due even when damages are excluded (a party is entitled to interest "without prejudice to any claim for damages recoverable under article 74").[30] It should also be considered that the interest rate provision belongs to Section III (Interest) as completely separated from the section dealing with damages (Section II. Damages).[31] Finally, the legislative history of Article 78 tells us that the choice of keeping the two concepts (interest as opposed to damages) distinct and separate was an informed decision.

Failure to consider the difference between the two concepts stems from a failure to understand the core function of interest as defined by Article 78. The interest under Article 78 is based on the general principle that the party who benefited from property belonging to another must remunerate the latter. This remuneration is based on the assumption that money naturally produces interest. It should also be noted that interest as described under Article 78 is different from interest under Article 84(1). Interest under Article 84(1) is to compensate the creditor for the fruits (interest) of not having benefited from money owed by the debtor due to the avoidance of the contract. In other words, interest under Article 78 is due because money naturally produces interest, and therefore is owed automatically. Interest under Article 84(1) is based on the same principle (money produces fruits), but is owed only when, as a result of the avoidance of the contract, the price must be refunded.

Moreover, it must be underlined that, although the scope and requirements of Articles 78 and 74 are different, as expressly stated by the courts,[32] a party may be able to recover under both provisions. Pursuant to Article 78, entitlement to interest is without prejudice to any claim for damages recoverable under Article 74. Entitlement to interest is an automatic consequence of a failure to pay a sum at the due date. Entitlement to damages under Article 74, on the other hand, requires a party to meet and prove all of the requirements set forth by Article 74.[33]

2. Whether PECL Article 9:508(1) may be of assistance in the interpretation of CISG Article 78

a) PECL Article 9:508(1)

PECL Article 9:508(1) simply states that "[i]f a payment of a sum is delayed, the aggrieved party is entitled to interest on that sum."[34] Interest is owed from the date payment is due. [35] Moreover, interest is owed regardless of whether or not payment may be excused under Article 8:108.[36] The aggrieved party is entitled to it regardless of whether it has taken reasonable steps to mitigate its loss. The rate of interest is fixed by making reference to the average commercial bank short-term lending rate applicable to prime borrowers prevailing for the contractual currency of payment[37] at the place of payment.[38] It should be noted that a right to interest arises only on primary contractual obligations to pay; the provision does not cover interest on secondary monetary obligations, such as damages or interest. Finally, interest is not a species of ordinary damages. Thus, the general rules on damages do not apply.

b) PECL Article 9:508 and its relevance in determining the operation of CISG Article 78

PECL Article 9:508 has limited relevance as a tool for construing the meaning of CISG Article 78, at least with regard to the method of calculating the interest rate. However, PECL 9:508 is very useful to understand the nature of the interest and its relationship to damage provisions.

The main difference between the two articles relates to the method of computing interest. While CISG Article 78 expressly does not deal with this issue, PECL Article 9:508, on the other hand, sets forth a precise method for computing interest. While a method like the one set by PECL may be useful and may encourage uniformity, it still cannot be used under the CISG. The CISG does not establish a method because state delegations could not reach any agreement on the issue. This means that there was not a uniform and commonly accepted rate of interest, even in terms of general principles, that could be applied in all transactions falling within the scope of the Convention. This is still true today as there is no agreement among commentators either, even though the majority of the courts clearly prefer the private international law solution. Allowing courts to use the PECL method, as well as any other method,[39] will be against the spirit of the Convention and the will of the majority of the member States.[40] It must be acknowledged that proposals to include express reference to the domestic rules of private international law (within Article 78) and to delete any provision making reference to interest were both rejected by the CISG drafters.[41] Some commentators have drawn the conclusion that the "drafters saw the question at issue not outside the scope of the Convention but rather wanted it to be governed by Article 7(2)."[42] This author believes that, had the drafters wanted to have the issue (the actual rate, not the entitlement to interest) dealt with in the Convention, there was no better place to do it (Ubi lex voluit. Dixit. Ubi noluit. Tacuit.). Thus, lacking any CISG general principle as well as any indication by the very same CISG, one can only conclude that the matter must be deferred to the domestic rule of private international law. Actually, resorting to private international law is not only admissible, but expressly required by Article 7(2).[43] Moreover, those courts and authors who believe that the matter is outside the CISG also prefer the private international law solution. In fact, as worldwide case law indicates, courts do not apply outright their own interest rates but, very likely, will rely on their own rules of private international law to determine the rate. Therefore, whether the matter is within the CISG or not, once a court concludes that the general principles of the Convention do not give an answer on the interest issue (which is what normally happens),[44] the matter would be in any event governed by the domestic rule of private international law. Thus, rules of private international law, although not expressly indicated as the applicable method under Article 78, nonetheless will be applied ex Article 7(2), if a court concludes that the interest issue is within the scope of the CISG.[45] Moreover, courts have shown that they would very likely reach the very same conclusion (i.e., private international law solution) even when they believe that the interest issue is not within the CISG.[46]

In the light of the relevant case law, it seems correct to conclude that the interest rate is not determined by the Convention and that courts normally determine it according to their own rules of private international law.[47] Given that (i) the drafters deliberately omitted any indication on how the interest rate should be determined, (ii) there are not general principles that can be of guidance in determining the applicable rate, and (iii) whether the matter is governed or not by the CISG, courts have applied Article 78 almost uniformly as though it requires reliance on the domestic rules of private international law,[48] it is clear that any other method is not appropriate.

Allowing courts to apply any ad hoc and ex post method is a clear violation of the Convention. Thus, the PECL formula as well as any other formula, although they state clear methods for calculating the interest rate in a way that may be acceptable in many countries, is not of any support in the construction of the current text of Article 78 of the CISG. The PECL formula may, however, be a very good starting point in a de jure condendum analysis when a new Article 78 will be drafted, if an interest rate method will ever be embodied in the text of an international convention. On the other hand, PECL Article 9:509, as construed, gives a definition of the nature of interest similar to the definition herein contended. The commentary to PECL Article 9:509 clearly states that interest is not a type of damages and that it cannot be determined by resorting to the rules for calculating damages.[49] Therefore, under both CISG and PECL, interest is meant to remunerate one party for having conferred a benefit to another; it does not have a compensative goal (in other words, it is not a species of ordinary damages), and general rules on damages do not apply. In fact, the aggrieved party is entitled to it regardless of whether it has taken reasonable steps to mitigate its loss.

Similar to CISG Article 78, PECL Article 9:508 (2), provides that "[t]he aggrieved party may in addition recover damages for any further loss so far as these are recoverable under this Section." Therefore, both CISG Article 78 and PECL Article 9:508 allow the damaged party to recover additional damages as long as the requirements for the recovery of damages (CISG Article 74) are met.

3. CISG Article 84[50]

The last provision of Section V (Effects of Avoidance) of Article 84 introduces complementary obligations with respect to the obligations of each party to return what they received under a contract once the contract has been avoided. Paragraph (1) of Article 84 introduces the principle that a party who is required to refund the price or the part received as a result of the avoidance of the contract must pay interest on the sum received from the date of its payment.[51] Article 84 applies independently of the applicable rules on damages.[52] However, recovery of interest can be barred if it is claimed cumulatively with damages.[53] It should be noted that Article 84(1) applies only to restitution and cannot be used in any other case.[54] The obligation to pay interest is automatic[55] because it is assumed that the seller has benefited from being in possession of the price during this period. Which party gave rise to the avoidance of the contract is irrelevant.[56] Interest is due from the date the seller received payment[57] and runs until the request for restitution for the price lapses.[58] No mention is made as to how to calculate interest. The Secretariat Commentary states that "[s]ince the obligation to pay interest partakes of the seller's obligation to make restitution and not of the buyer's right to claim damages, the right of interest payable would be based on that current at the seller's place of business."[59] However, similarly to what happens with regard to CISG Article 78, there are different views on the issue. Although several methods have been applied,[60] courts and arbitral tribunals clearly agree that "[t]he rate of the interest is not governed by the Convention, and must therefore be determined by internal law resulting from the application of the pertinent rules of conflict of laws."[61] The same comments made under Article 78 may be repeated herein,[62] which means that interest is due as of the date of payment of the sum and must be determined by the domestic law applicable pursuant to the rules of private international law. Any other method, including the PECL method, may not be used as the drafters expressly excluded the embodiment of any method in the Convention except for the one determined in "conformity with the law applicable by virtue of the rules of private international law" (CISG Art. 7(2)).[63]

4. Conclusions

The PECL cannot be used in construing CISG Article 78 to determine the proper rate of interest. The PECL counterpart provisions, however, are quite useful in clarifying the nature of interest ant its relationship to the damage provisions. Under both CISG and PECL, interest cannot be calculated based on damage provisions. Pursuant to both PECL Article 9:508(2) and CISG Article 78, the recovery of interest does not preclude a recovery for damages. The recovery of damages is subject to the requirements set forth by the damage provisions, respectively, Section 5 of Chapter 9 of the PECL and Article 74 of the CISG.

[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) 490-499.]


FOOTNOTES

1. Dottore in Giurisprudenza, University of Naples Federico II" (Italy), 1993; LL.M. in International & Comparative Law, University of Pittsburgh School of Law (U.S.A.), 2000; Associate of the Institute of International Commercial Law of the Pace University School of Law.

2. See Jacob S. Ziegel, Report to the Uniform Law Conference of Canada on the Convention on Contracts for the International Sale of Goods 149 (1981).

3. For an historical account on the issue of the rate of interest raised during the drafting period of the Vienna Sales Convention, see Pace University School of Law, Institute of International Commercial Law, Guide to CISG Article 78, visit <http://cisgw3.law.pace.edu/cisg/text/e-text-78.html>. For literature specifically relevant to the provisions of CISG Article 78 visit <http://cisgw3.law.pace.edu/cisg/text/mono78.html>.

4. See Fritz Enderlein & Dietrich Maskow, INTERNATIONAL SALES LAW, UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS - CONVENTION ON THE LIMITATION PERIOD IN THE INTERNATIONAL SALE OF GOODS 310, 311 (1992). See, e.g., Italy 31 March 2004 District Court [Tribunale] Padova, available at <http://cisgw3.law.pace.edu/cases/040331i3.html>.

5. See Enderlein & Maskow, supra note 4.

6. Id.

7. See, e.g., Switzerland 12 December 2002 District Court [Kantonsgericht] Zug, available at <http://cisgw3.law.pace.edu/cases/021212s1.html>.

8. See Germany 18 January 1994 Provincial Court of Appeal [Oberlandesgericht] Frankfurt am Main, available at <http://cisgw3.law.pace.edu/cases/940118g1.html; Germany 13 June 1991 Provincial Court of Appeal [Oberlandesgericht] Frankfurt am Main, available at <http://cisgw3.law.pace.edu/cases/910613g1.html>.

9. See Germany 26 September 1990 District Court [Landgericht] Hamburg, available at <http://cisgw3.law.pace.edu/cases/900926g1.html>; Germany 24 April 1990 Petty District Court [Amtsgericht] Oldenburg in Holstein, available at <http://cisgw3.law.pace.edu/cases/900424g1.html>.

10. See, e.g., Germany 14 January 1994 Provincial Court of Appeal [Oberlandesgericht] Düsseldorf, available at <http://cisgw3.law.pace.edu/cases/940114g1.html>; Germany 17 September 1993 Provincial Court of Appeal [Oberlandesgericht] Koblenz, available at <http://cisgw3.law.pace.edu/cases/930917g1.html>; ICC International Court of Arbitration, 1992, award No. 7197, available at <http://cisgw3.law.pace.edu/cases/927197i1.html>. See also, e.g., Enderlein & Maskow, supra note 4, at 311; Rolf Herber and Beate Czerwenka, INTERNATIONALES KUAFRECHT 348 (1991); Hans Stoll, Internationalprivatrechtliche Fragen bei der landesrechtlichen Ergänzung des einheitlichen Kaufrechts, in Festschrift für Murad Ferid 495, 509-10 (Andreas Heldrich ed., 1988). But see F.J.A. van der Velden, Het Weense Koopverdrag 1980 en zijn Rechtsmiddelen 405 (1988) who argues that interest is part of damages. According to this view, payment of interest could be exempted on the grounds of impediments.

11. See, Hans H. Eberstein & Klaus Bacher, Annotations 1-36 on Article 78, in COMMENTARY ON THE UN CONVENTION ON THE INTERNATIONAL SALE OF GOODS 591 (Peter Schlechtriem, ed., 1998); Enderlein & Maskow, supra note 4, at 313. See, e.g., Germany 12 October 2000 District Court [Landgericht] Stendal, available at <http://cisgw3.law.pace.edu/cases/001012g1.html>.

12. See Eberstein & Bacher, supra note 11, at 593. See also Herber & Czerwenka, supra note 10.

13. See, e.g., Switzerland 12 December 2002 District Court [Kantonsgericht] Zug, available at <http://cisgw3.law.pace.edu/cases/021212s1.html>. But see Finland 12 April 2002 Court of Appeal [Hovioikeus] Turku, available at <http://cisgw3.law.pace.edu/cases/020412f5.html>; Germany 19 March 1999 District Court [Landgericht] Zwickau, available at <http://cisgw3.law.pace.edu/cases/990319g1.html>.

14. See, e.g., Barry Nicholas, COMMENTARY ON THE INTERNATIONAL SALES LAW 570 (Massimo C. Bianca & Michael Joachim Bonell eds., 1987); Peter Schlechtriem, UNIFORM SALES LAW - THE UN CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS [hereinafter Uniform Sales Law] 100 (1986); Leif Sevón, INTERNATIONAL SALES OF GOODS: DUBROVNIK LECTURES 230 (Petar Sarcevic & Paul Volken eds., 1986); Enderlein & Maskow, supra note 4, at 312; Herber & Czerwenka, supra note 10, at 349; Martin Karollus, Judicial Interpretation and Application of the CISG in Germany 1988-1994, Cornell Review of the Convention on Contracts for the International Sale of Goods 51-94, (1995); Leif Sevón, Obligations of the Buyer under the Vienna Convention on the International Sale of Goods, 106 Jurisdisk Tidskrift 341 (1990). As to case law, see, e.g., Germany 28 February 2000 Provincial Court of Appeal [Oberalandesgericht] Stuttgart, available at <http://cisgw3.law.pace.edu/cases/000228g1.html>.

15. 5 See EEC Convention on the Law Applicable to Contractual Obligations of June 19, 1980, 1980 O.J. (L 266). See Schlechtriem, Uniform Sales Law, supra note 14, at 99; Volker Behr, The Sales Convention in Europe: From Problems in Drafting to Problems in Practice, 17 Journal of Law and Commerce 296, 263-299 (1998). Note, however, that the Hague Convention of June 15, 1955, on the law applicable to the international sales of goods, may come into play when the forum is located within a contracting state of the Hague Convention. See Carolina Saf, A Study of the Interplay between the Conventions Governing International Contracts of Sale, available at <http://cisgw3.law.pace.edu/cisg/biblio/saf.html>; Franco Ferrari, Uniform Application and Interest Rates Under the 1980 Vienna Sales Convention, 24 Ga. J. Int'l & Comp. L. 467 (1995).

16. See, e.g., Germany 13 April 2000 Petty District Court [Amtsgericht] Duisburg, available at <http://cisgw3.law.pace.edu/cases/000413g1.html>; Switzerland 9 December 1994 District Court [Bezirksgericht] Arbon, available at <http://cisgw3.law.pace.edu/cases/941209s1.html>.

17. See Switzerland 11 March 1996 Canton Appellate Court [Tribunal Cantonal] Vaud, 163/96/BA and 164/96/BA, available at <http://cisgw3.law.pace.edu/cases/960311s1.html>.

18. See Stoll, supra note 10.

19. See, e.g., Switzerland 5 November 2002 Commercial Court [Handelsgericht] Aargau, available at <http://cisgw3.law.pace.edu/cases/021105s1.html>.

20. See, e.g., Switzerland 5 February 1997 Commercial Court [Handelsgericht] Zürich, available at <http://cisgw3.law.pace.edu/cases/970205s1.html>; Netherlands 9 August 1995 District Court [Arrondissementsrechtbank] Almelo, available at <http://cisgw3.law.pace.edu/cases/950809n1.html>.

21. See, e.g., ICC International Court of Arbitration, 1988, award No. 9333, available at <http://cisgw3.law.pace.edu/cases/989333i1.html>; France 6 April 1995 Appeal Court [Cour d'appel] Paris, available at <http://cisgw3.law.pace.edu/cases/950406f1.html>. See also Austria 15 June 1994 Arbitral Tribunal [Internationales Schiedsgericht der Bundeskammmer der gewerblichen Wirtschaft] Vienna, SCH-4366, available at <http://cisgw3.law.pace.edu/cases/940615a3.html>; Austria 15 June 1994 Arbitral Tribunal [Internationales Schiedsgericht der Bundeskammmer der gewerblichen Wirtschaft] Vienna, SCH-4318, available at <http://cisgw3.law.pace.edu/cases/940615a4.html>, which expressly mentions the UNIDROIT Principles.

22. See Schlechtriem, Uniform Sales Law, supra note 14 at 100. See also Joseph M. Lookofsky, The 1980 United Nations Convention on Contracts for the International Sale of Goods, in International Encyclopedia of Laws 1, 128 (Blanpain gen. ed., 1993). Contra, see e.g., Enderlein & Maskow, supra note 4, at 312.

23. Enderlein & Maskow, supra note 4, at 312; Franco Ferrari, Specific Topics of the CISG in the light of Judicial and Scholarly Writing, 15 J.L. & Com. 1, 125 (1995); Jelena Vilus, INTERNATIONAL SALES OF GOODS: DUBROVNIK LECTURES 252 (Petar Sarcevic & Paul Volken eds., 1986);. As to case law mentioning the issue see Austria 15 June 1994 Arbitral Tribunal [Internationales Schiedsgericht der Bundeskammmer der gewerblichen Wirtschaft] Vienna, SCH-4366, available at <http://cisgw3.law.pace.edu/cases/940615a3.html>; Austria 15 June 1994 Arbitral Tribunal [Internationales Schiedsgericht der Bundeskammmer der gewerblichen Wirtschaft] Vienna, SCH-4318, available at <http://cisgw3.law.pace.edu/cases/940615a4.html>.

24. For example, there is no language on the interest issue that recognizes and/or tries to compromise the differences among different legal systems similar to the provisions set forth by CISG Article 28, according to which, where under domestic law in a similar case specific performance would not be granted, a court is allowed not to grant specific performance.

25. See Eberstein & Bacher, supra note 11, at 599; Enderlein & Maskow, supra note 4, at 315. But see John O. Honnold, UNIFORM LAW FOR INTERNATIONAL SALES UNDER THE 1980 INTERNATIONAL SALE LAW 469 (1999). See also ICC International Court of Arbitration, 1997, award No. 8864, available at <http://cisgw3.law.pace.edu/cases/978644i1.html>: "Compound interest is not awarded. Art. 78 CISG does not provide a sufficient basis for such a claim, at least not under the circumstances of the present case. Compound interest is not customary in international trade and thus a claim for compound interest could only be derived from Art. 78 CISG if this Article clearly provided for it. This is not the case." Similarly, see ICC International Court of Arbitration 1988, award No. 8908, available at <http://cisgw3.law.pace.edu/cases/988908i1.html>. On the compound interest issue, see also John Yukio Gotanda, Compound Interest in International Disputes, Oxford University Comparative Law Forum 2 available at <http://ouclf.iuscomp.org/articles/gotanda.shtml>.

26. See Nicholas, supra note 14, at 571.

27. See ICC International Court of Arbitration, 1992, award No. 7585, available at <http://cisgw3.law.pace.edu/cases/927585i1.html> where the Court states: "Article 78 .. . provides that the creditor is entitled to interest 'without prejudice to any claim for damages.' The purpose of this provision is to make a distinction between interest and damages and to give compensation for the financial loss due to the mere fact that delay in payment has a financial cost"; see also Italy 29 December 1999 District Court [Tribunale] Pavia, available at <http://cisgw3.law.pace.edu/cases/991229i3.html>.

28. Id. But see ICC International Court of Arbitration, 1997, award No. 8864, available at <http://cisgw3.law.pace.edu/cases/978644i1.html>.

29. Behr, supra note 15, at 296.

30. Id.

31. See Nicholas, supra note 14 at 570; Schlechtriem, Uniform Sales Law, supra note 14, at 100.

32. See, e.g., Germany 14 January 1994 Provincial Court of Appeal [Oberlandesgericht] Düsseldorf, Germany, available at <http://cisgw3.law.pace.edu/cases/940114g1.html>; ICC International Court of Arbitration, 1997, award No. 8962, available at <http://cisgw3.law.pace.edu/cases/978962i1.html>; Belgium 17 June 1998 District Court [Rechtbank van Koophandel] Hasselt, available at <http://cisgw3.law.pace.edu/cases/980617b1.html>; Switzerland 28 October 1998 Supreme Court [Schweizerisches Bundesgericht], available at <http://cisgw3.law.pace.edu/cases/981028s1.html>.

33. See, e.g., Germany 9 May 2000 District Court [Landgericht] Darmstadt, available at <http://cisgw3.law.pace.edu/cases/000509g1.html>.

34. See PECL Article 9:508 available at <http://www.cisg.law.pace.edu/cisg/text/textef.html#a9508>.

35. 5 See PECL Article 7:102 available at <http://www.cisg.law.pace.edu/cisg/text/textef.html#a7102>.

36. See PECL Article 8:108 available at <http://www.cisg.law.pace.edu/cisg/text/textef.html#a8108>.

37. See PECL Article 7:108 available at <http://www.cisg.law.pace.edu/cisg/text/textef.html#a7108> for the definition of "Currency of Payment" under the PECL.

38. See PECL Article 7:101 available at <http://www.cisg.law.pace.edu/cisg/text/textef.html#a7101> for the definition of "Place of Performance" under the PECL.

39. See ICC International Court of Arbitration, 1993, award No. 6653, available at <http://cisgw3.law.pace.edu/cases/936653i1.html>.

40. See Official Records of the United Nations Conference on Contracts for the International Sale of Goods, Vienna, March 10 - April 11, 1980 (United Nations publications, Sales No. E.81.IV.3), pp. 137-138. See Eberstein & Bacher, supra note 11, at 596, stating "[i]f the Conference was unable to solve that task [determining an uniform interest rate], any solutions proposed by legal writers and courts will need to be treated with particular caution [emphasis added]." See Eberstein & Bacher, supra note 11 at 596; Behr, supra note 15, at 290.

41. The delegations rejected the proposal seeking to exclude any rule on interest because they believed that it would leave the question totally governed by the applicable domestic law, including the question whether damages include interest, which was one of the major differences among the delegations. The drafters, therefore, not being able to reach any agreement, were perfectly aware that the matter would be regulated under the applicable domestic law, with one limitation to its application: interest is not a type of damages and may be awarded in addition to any damages due under Article 78.

42. See Christian Thiele, Interest on Damages and Rate of Interest Under Article 78 of the U.N. Convention on Contracts for the International Sale of Goods, 2 Vindobona Journal of International Commercial Law and Arbitration 3-35 (1998). "The goal of the delegations that believed that a special interest provision was necessary was precisely to prevent interest from being considered as damages and thereby to maintain the obligation to pay interest in the case of exemptions under Article 79."Schlechtriem, Uniform Sales Law, supra note 14, at 99. By no means, therefore, one should draw the further conclusion that the drafters wanted to have the Convention also governing the matter of the method of calculating the interest rate. Again, through the limited wording of Article 78, the delegations, being aware that no agreement, even on the general principles, was reachable, merely wanted to make clear that the aggrieved party does have a right to interest, which is owed regardless of any damage claim. See Summary Records of the Plenary Meetings, 11th Plenary Meeting, April 10, 1980, available at <http://cisgw3.law.pace.edu/cisg/firstcommittee/Meeting37.html>.

43. Michael Joachim Bonell, COMMENTARY ON THE INTERNATIONAL SALES LAW 74 (Massimo C. Bianca & Michael Joachim Bonell eds., 1987).

44. See, e.g., Italy 31 March 2004 District Court [Tribunale] Padova, available at <http://cisgw3.law.pace.edu/cases/040331i3.html>.

45. 5 Franco Ferrari, Tasso degli interessi ed applicazione uniforme della Convenzione di Vienna sui contratti di vendita internazionale, Rivista di Diritto Civile II 277 (1995). See also Germany 12 May 1995 Petty District Court [Amtsgericht] Alsfeld, available at <http://cisgw3.law.pace.edu/cases/950512g1.html>.

46. See Italy 31 March 2004 District Court [Tribunale] Padova, available at <http://cisgw3.law.pace.edu/cases/040331i3.html> citing other several cases holding same.

47. Id.

48. Switzerland September 9 1993 Commercial Court [Handelsgericht] Zürich, HG 930138, available at <http://cisgw3.law.pace.edu/cases/930909s1.html>.

49. See Pace Law School Institute of International Commercial Law, Guide to CISG Article 78 & 84(1), Comment and Notes on PECL 9:508 available at <http://cisgw3.law.pace.edu/cisg/text/peclcomp78.html>

50. See Pace Law School Institute of International Commercial Law, Guide to CISG Article 84, for a record of the legislative history of CISG Article 84, available at <http://cisgw3.law.pace.edu/cisg/text/e-text-84.html#leg>.

51. See Hans G. Leser, Annotations 1-28 on Article 84, in COMMENTARY ON THE UN CONVENTION ON THE INTERNATIONAL SALE OF GOODS 654, 659 (Peter Schlechtriem ed., 1998); Enderlein & Maskow, supra note 4, at 314, according to whom "[t]he same rule should apply to the refunding of reduced price under Article 50." See ICC International Court of Arbitration, 1999, award No. 9978, available at <http://cisgw3.law.pace.edu/cases/999978i1.html>; Germany 29 December 1998 Arbitral Tribunal [Schiedsgericht Hamburger Freundschaftliche Arbitrage] Hamburg, December 29, 1998, available at <http://cisgw3.law.pace.edu/cases/981229g1.html>.

52. See Leser, supra note 51, at 657 stating "[t]he inclusion of interest within the scope of restitution ... emphasizes the independent nature of restitution when compared with damages [footnote omitted]. Interest due under Article 84(1) should not be regarded as damages but as equalization of benefits, as the legislative history makes clear. [footnote omitted]." Further Leser adds "[i]t follows from the independent nature of the right to interest under Article 84(1) that the seller cannot claim exemption under Article 79 in respect of that interest [footnote omitted] as may also be inferred from Article 79(5) and the fact that entitlement to interest under article 78 is stated to be without prejudice to claims for damages. [footnote omitted]." Id. at 658.

53. Id. at 655 - 656. See also Enderlein & Maskow, supra note 4, at 348, note1; Schlechtriem, Uniform Sales Law, supra note 14, at 100.

54. See Leser, supra note 51, at 656.

55. 5 ICC International Court of Arbitration, 1993, award No. 6653, available at <http://cisgw3.law.pace.edu/cases/936653i1.html>: Interest is due regardless of any formal request.

56. See Commentary on the Draft Convention on Contracts for the International Sale of Goods, prepared by the Secretariat, U.N. Document A/CONF.97/5, Article 69 (draft counterpart of CISG Article 84), available at Pace Law School Institute of International Commercial Law, Guide to CISG Article 84 <http://cisgw3.law.pace.edu/cisg/text/secomm/secomm-84.html> [hereinafter Secretariat Commentary]. See also Leser, supra note 51; Enderlein & Maskow, supra note 4 at 349.

57. See Enderlein & Maskow, supra note 4, at 349. See also ICC International Court of Arbitration, 1993, award No. 6653, available at <http://cisgw3.law.pace.edu/cases/936653i1.html> But see Italy 24 November 1989 Court of First Instance [Pretura] Parma, sez. di Fidenza, available at <http://cisgw3.law.pace.edu/cases/891124i3.html>. In this case the court, contrary to what is provided by article 84(1), held that interest was payable from the date of avoidance of the contract.

58. See Enderlein & Maskow, supra note 4, at 349.

59. See also Leser, supra note 51, at 659 note 45a; Enderlein & Maskow, supra note 4, at 349. See Switzerland 5 February 1997 Commercial Court [Handelsgericht des Kantons] Zürich, available at <http://cisgw3.law.pace.edu/cases/970205s1.html>. However, this approach is considered to be "debatable", see Denis Tallon, COMMENTARY ON THE INTERNATIONAL SALES LAW 612 (Massimo C. Bianca & Michael Joachim Bonell eds., 1987), stating "[t]he determination of the applicable rate is, in effect, much more complex"; Honnold, supra note 25.

60. Among them, see, e.g., ICC International Court of Arbitration, 1993, award No.  6653, available at <http://cisgw3.law.pace.edu/cases/936653i1.html>: "[I]t appears logical to retain a percentage currently applied between merchants and that conforms with the currency in which the settlement was made and in which the payment must be made. This solution, which is in the eyes of the Arbitral Tribunal the most logical one from the economic point of view, leads to retaining the percentage that operators of international commerce apply to settlements made in Eurodollar, i.e., the one-year percentage of LIBOR (London Inter-Bank Offered Rate), published every day in the Wall Street Journal". But see France 6 April 1995 Appeal Court [Cour d'appel] Paris, available at <http://cisgw3.law.pace.edu/cases/950406f1.html>: The French appellate court reversed that part of that arbitral award "requiring the seller to pay interest at the LIBOR rate, on the grounds that the Convention is silent on the way in which the rate of interest is be determined, and that the decision to apply the LIBOR rate had been taken by the arbitrators without the parties being given the possibility to make their defense on that point, whereas the international trade usage invoked by the buyer does not provide rules to determine the applicable rate"; Germany 22 August 2002 District Court [Landgericht] Freiburg, available at <http://cisgw3.law.pace.edu/cases/020822g1.html>: "The claim for interest on the purchase price is justified under Art. 84(1) CISG; the claim for interest on damages is justified under Art. 78 CISG. As the CISG does not provide for an interest rate, it is appropriate to rely on 288 I 2 BGB because this is the rule more favorable to the seller in comparison to corresponding regulations in Italian law, which grant higher interest rates"; ICC International Court of Arbitration, 1992, award No. 7585, available at <http://cisgw3.law.pace.edu/cases/927585i1.html>: Pursuant to the law of the currency to be used.

61. See Switzerland 15 January 1998 Appeal Court [Tribunale d'Appello] Lugano, available at <http://cisgw3.law.pace.edu/cases/980115s1.html>. See, e.g., Spain 12 February 2002 Appeal Court [Audiencia Provincial] Barcelona, available at <http://cisgw3.law.pace.edu/cases/020212s4.html>; ICC International Court of Arbitration, 1999, award No. 9978, available at <http://cisgw3.law.pace.edu/cases/999978i1.html>; Germany 24 May 1995 Provincial Court of Appeal [Oberlandesgericht] Celle, available at <http://cisgw3.law.pace.edu/cases/950524g1.html>. Germany 18 January 1994 Provincial Court of Appeal [Oberlandesgericht] Frankfurt am Main, available at <http://cisgw3.law.pace.edu/cases/940118g1.html>

62. See Germany 5 April 1995 District Court [Landgericht] Landshut, available at <http://cisgw3.law.pace.edu/cases/950405g1.html>: "The rate of interest is not regulated by Art. 84 CISG. Also, in Art. 78 CISG no mention is made of the rate of interest. According to the prevailing opinion, the rate of interest within the scope of Art. 78 CISG is governed by the applicable national law, which is determined by the rules of private international law. This notion is also applicable to Art. 84 CISG."

63. See Germany 18 January 1994 Provincial Court of Appeal [Oberlandesgericht] Frankfurt am Main, available at <http://cisgw3.law.pace.edu/cases/940118g1.html>: "In this case ... the court has to decide according to the prevailing legal opinion. Since the amount of interest intentionally is not prescribed in the Convention, the answer can only be taken from the rules of international private law. Absent any point of reference, no principle can be derived from the Convention such as saying that the domicile of the debtor would be decisive"; France 6 April 1995 Appeal Court [Cour d'appel] Paris, available at <http://cisgw3.law.pace.edu/cases/950406f1.html>; ICC International Court of Arbitration, 1994, award No. 7660, available at <http://cisgw3.law.pace.edu/cases/947660i1.html>.


Comment and notes on PECL 9:508

Like the commentary to the UNIDROIT Principles and the U.S. Restatements, the comments to the PECL help explain the text. The PECL notes identify civil law and common law antecedents and related domestic provisions. With the permission of the Commission on European Contract Law, these comments and notes are presented below. The source of this material is Ole Lando & Hugh Beale eds., Principles of European Contract Law: Parts I and II, Kluwer Law International (2000) 450-453.


COMMENT AND NOTES: PECL Article 9:508: Delay in Payment of Money

(1) If payment of a sum of money is delayed, the aggrieved party is entitled to interest on that sum from the time when payment is due to the time of payment at the average commercial bank short-term lending rate to prime borrowers prevailing for the contractual currency of payment at the place where payment is due.

(2) The aggrieved party may in addition recover damages for any further loss so far as these are recoverable under this Section. [page 450]

Comment

A. Purposes

This article provides for interest and damages on failure to pay money by the date at which payment is due, see Article 7:102.

B. Interest

Paragraph (1) confers a general right to interest on primary contractual obligations to pay; the provision does not cover interest on secondary monetary obligations, such as damages or interest.

Interest is not a species of ordinary damages. Therefore the general rules on damages do not apply. Interest is owed whether or not non-payment is excused under Article 8:108. Also, the aggrieved party is entitled to it without regard to any question whether it has taken reasonable steps to mitigate its loss.

The rate of interest is fixed by reference to the average commercial bank short-term lending rate. This rate applies also in the case of a long delay of payment since the creditor at the due date cannot know how long the debtor will delay payment. Since interest rates differ, the lending rate for the currency of payment (Article 7:108) at the due place of payment (Article 7:101) has been selected because this is the best yardstick for assessing the creditor's loss. Unless otherwise agreed, interest is to be paid in the same currency (cf. Article 9:510 Comment D) and at the same place as the principal sum. The parties are free to exclude or modify paragraph (1) e.g. by fixing the rate of default interest and/or its currency in their contract.

C. Additional damages

Paragraph (2) makes it clear that the aggrieved party's remedy for non-payment or delay in payment is not limited to interest. It extends to additional and other loss recoverable within the limits laid down by the general provisions on damages, in particular Article 9:503 and Article 9:505. This might include, for example, loss of profit on a transaction which the aggrieved party would have concluded with a third party had the money been paid when due; a fall in the internal value of the money, through inflation, between the due date and the actual date of payment, so far as this fall is not compensated by interest under paragraph (1); and, where the money of payment is not the money of account, loss on exchange. However, in this last case the aggrieved party has the option of proceeding instead under Article 7:108(3).

Illustration 1: A agrees to pay B 50,000 if B will vacate A's property and find alternative accommodation. B moves out of the property but A fails to pay the agreed sum. In consequence B, who as A knew intended to use the payment to buy a house from C, has to negotiate with C to leave part of the purchase price outstanding on mortgage at interest. B is entitled to sue A for the interest and legal costs reasonably incurred.

Illustration 2: C agrees to lend 200,000 to D to enable D to purchase a business at a price equal to that sum from E. Under the contract of sale, the terms of [page 451] which are known to C, time of payment is of the essence. At the last moment C refuses to advance the money and D is unable to obtain alternative funds in time. E terminates the contract and sells his business to F for 300,000, its true value. D is entitled to damages from C for the loss of the contract.

Illustration 3: S in London agrees to sell goods to B in Hamburg at a price of US$ 100,000 payable in London 28 days after shipment. The goods are duly shipped to B, who is three months late in paying the price. During this period the value of the US dollar in relation to the pound sterling (the currency in which S normally conducts his business) depreciates by 20 per cent. Assuming that these consequences of delay in payment could reasonably have been foreseen by B at the time of the contract, S is entitled to recover US$ 20,000 damages from B, in addition to interest, for the loss on exchange.

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

1. Duty to pay interest

A statutory duty to pay interest exists under several international conventions and in all continental European countries; for references see note 2 below. CISG also recognizes this obligation (arts. 78, 84(1)). Contrary to all other conventions and statutes, CISG does not, however, fix a rate of interest because it proved impossible to agree upon a standard: the discount rate was thought to be inappropriate for measuring credit costs; nor could agreement be reached on whether the credit costs in the seller's or the buyer's country were to be selected. See however Unidroit art. 7.4.9.

ENGLISH law did not impose, in general, a statutory or common law obligation to pay interest upon default (President of India v. La Pintada Cia. Navegacion SA [1985] A.C. 104 (H.L.)). This rule was, however, much criticised; before the President of India case the English Law Commission had proposed the introduction of statutory interest on contractual obligations to pay money (Report on Interest, No. 88, Cmnd 7229, 1978). The rule has recently been changed for commercial debts by Late Payment of Commercial Debts (Interest) Act 1998. In any case, if proceedings have been commenced the court has discretion to award interest: Administration of Justice Act 1982, amending the Supreme Court Act 1981, s. 35A. SCOTTISH law is the same.

In IRELAND, although a court can order a contractual debtor to pay interest from the date of judgment, and a creditor who has served notice claiming interest on a defaulting debtor can have interest from the date of demand (Debtors (Ireland) Act 1840, s. 53), there is equally no general duty on a defaulting debtor to pay interest on the unpaid sum for the period of delay: see Clark 467.

2. Normal rates

The rates of statutory interest and the methods of computing them vary considerably.

(a) Fixed rate

The traditional method is to fix a statutory rate; it varies between 10 and 4 percent. 4%: GERMAN BGB 288 (1), 5%: GERMAN HGB 352 (1); 5%: ITALIAN CC art. 1224 (1), 1284 (as amended in 1996); 6%: the Geneva Conventions on Bills of Exchange of 1930, art. 48(2) and on Cheques of 1931, art. 45(1);

(a) Flexible rates

In recent years many countries have introduced flexible interest rates. The methods of determining the rate vary considerably.

DENMARK adds a percentage, to be fixed biannually by the Minister of Justice, to the respective official discount rate (Law on Interests of 1 September 1986, 5); interest is due from the time a payment which is fixed in advance becomes due ( 3). In FINLAND the Act on interest, as amended 3 March 1995, prescribes different rates: if there is an agreed rate of interest on the debit, the interest for delay is 4% above the agreed interest rate, in other cases the interest for delay is 7% (in certain cases 4%) above an official reference rate determined by the Bank of Finland. SWEDEN adds 8% to the official discount rate and, when time for [page 452] payment has not been fixed in advance, allows a grace period of 30 days after notice that interest will be charged. In FRANCE the rate is the arithmetic average of the last twelve monthly figures of the official discount rate (Law of 11 July 1975, art. 1, as am. by Law of 23 June 1989); two months after a judicial condemnation to pay, that rate is increased by 5% (Law of 11 July 1985 arts. 1-2). The GERMAN Consumer Credit Law of 17 December 1990 (BGBL I 2840) 11(1) fixes a rate of 5% above the respective official discount rate. GREECE adds 4% to the rate of interest charged by the central bank for financing of credit institutions against state funds given as a pledge (Act of the Council of Ministers 261/1996), which at the time of writing (July 1997) gives an interest rate for arrears of 23%. In BELGIUM an Act of 30 June 1970, as amended in 1986, now allows rate to be fixed by Royal Decree;

In other countries, the interest rate is fixed (and amended) annually by the government (GREEK CC art. 345; LUXEMBOURG: Law 22 Feb. 1984; the NETHERLANDS: BW art. 6:120; PORTUGAL: CC art. 559(1), Comm. C art. 102(2); SPAIN: CC art. 1108 and Law of 29 June 1984, arts. 1 and 2.)

3. Higher contractual rates

In some countries if there is a contractual interest rate that is higher than the statutory rate, the higher rate is applied to the time after default (DANISH law, see note 2(b) above, 6; ITALIAN CC art. 1224(1) sent. 2; the NETHERLANDS: BW art. 6:119(3); PORTUGUESE CC art. 806(2)); GREEK Introductory law to the Civil Code art. 109(1) 3. SPANISH CC art. 1108; also see Civil Procedure Code art. 921 establishing higher, punitive rate; SWEDISH Interest Act, 1. In GERMANY, in contrast, the Federal Supreme Court has expressly refused to apply such a rule because it might give a windfall profit to the creditor if the market rate is much lower at the time of default. A bank is merely entitled to the average market rate for its various types of credits and, if the bank cannot establish this, to the market rate for its cheapest type of credit (BGH 8 Oct. 1991, BGHZ 115, 268, 269 f., 271 f.).

4. Loss in addition to interest

Loss in addition to interest may be claimed in most countries by virtue of the general rules on damages but lost profits and loss through inflation cannot always be recovered. See DENMARK (Gomard , Obligationsret II 197); FINLAND (Wilhelmsson & Sevón 156); FRENCH CC art. 1153(4); GERMAN BGB 88(2); GREEK CC art. 345 sent. 2; ITALIAN CC art. 1224 (2), except if the parties had fixed the rate of interest for default in the contract SWEDEN (Ramberg, Köplagen 568; SPANISH law, TS 28 November 1983, 6 May 1988, (Albaladejo II, 1, 33.3). The possibility is not recognised in BELGIUM, see CC art. 1153, except for losses caused by devaluation of foreign currency.

Further loss may be recovered in ENGLAND (Wadsworth v. Lydall [1981] 1 W.L.R. 598, C.A., confirmed by the President of India case, supra note 1) and in FRANCE (Civ. 1, 21 June 1989, Bull, I. No. 251); and the position is thought to be the same in IRELAND.

In contrast, additional damages may not be claimed in the NETHERLANDS (except in the special case mentioned in note 4 on Article 7:108, above); in PORTUGAL; and in SCOTLAND, McBryde ch. 20-78.

See generally Treitel, Remedies 159-162. [page 453]

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