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GUIDE TO CISG ARTICLE 77

Secretariat Commentary (closest counterpart to an Official Commentary)


Guide to the use of this commentary

The Secretariat Commentary is on the 1978 Draft of the CISG, not the Official Text, which re-numbered most of the articles of the 1978 Draft. The Secretariat Commentary on article 73 of the 1978 Draft is quoted below with the article references contained in this commentary conformed to the numerical sequence of the Official Text, e.g., article 73 [draft counterpart of CISG article 77].

To the extent it is relevant to the Official Text, the Secretariat Commentary on the 1978 Draft is perhaps the most authoritative source one can cite. It is the closest counterpart to an Official Commentary on the CISG. A match-up of this article of the 1978 Draft with the version adopted for the Official Text is necessary to document the relevancy of the Secretariat Commentary on this article. See the match-up for this article for a validation of citations to this Secretariat Commentary. This match-up indicates that article 73 of the 1978 Draft and CISG article 77 are substantively identical.


Text of Secretariat Commentary on article 73 of the 1978 Draft
[draft counterpart of CISG article 77]   [Mitigation of damages]

PRIOR UNIFORM LAW

ULIS, article 88.

COMMENTARY

1. Article 73 [draft counterpart of CISG article 77] requires a party who relies on a breach of contract to adopt such measures as may be reasonable in the circumstances to mitigate the loss, including the loss of profit, resulting from the breach.

2. Article 73 [draft counterpart of CISG article 77] is one of several articles which states a duty owed by the injured party to the party in breach [see footnote 1]. In this case the duty owed is the obligation of the injured party to take actions to mitigate the harm he will suffer from the breach so as to mitigate the damages he will claim under article 41(1)(b) or 57(1)(b) [draft counterpart of CISG article 45(1)(b) or 61(1)(b)]. "If he fails to take such measures, the party in breach may claim a reduction in the damages in the amount which [by which the loss] should have been mitigated."

3. The sanction provided by article 73 [draft counterpart of CISG article 77] against a party who fails to mitigate his loss only enables the other party to claim a reduction in the damages. It does not affect a claim for the price by the seller pursuant to article 58 [draft counterpart of CISG article 62] or a reduction in the price by the buyer pursuant to article 46 [draft counterpart of CISG article 50] [see footnote 2].

[Nor are principles of mitigation said to apply to an action by the buyer for specific performance under article 46. The Secretariat Commentary on article 42 [draft counterpart of CISG Article 46(1) and (2)] states: "[This article does not allow the seller to refuse to perform on the grounds that the non-conformity was not substantial or that performance of the contract would cost the seller more than it would benefit the buyer. The choice is that of the buyer." OFFICIAL RECORDS, p. 39, para. 11. Also, mitigation principles do not appear to require the injured party to choose the remedy which would be least expensive to the party in breach. A qualification to this conclusion could, however, apply to choice of damages remedies, i.e., as between article 75 and article 76. Language contained in the 1976 Draft of these articles that permitted the injured party to choose the damages remedy most beneficial to himself was changed. UNCITRAL Yearbook VIII, A/CN.9/SER.A/1977, pp. 161 and 59-60, paras. 472 and 489. Prior to that change, there was a Secretariat Commentary which stated that this was permissible. UNCITRAL Yearbook VII, A/CN.9/SER.A/1976, p. 137. However, with that change, this portion of that Secretariat Commentary was deleted.]

4. The duty to mitigate applies to an anticipatory breach of contract underarticle 63 [draft counterpart of CISG article 72] as well as to a breach in respect of an obligation the performance of which is currently due. If it is clear that one party will commit a fundamental breach of the contract, the other party cannot await the contract date of performance before he declares the contract avoided and takes measures to reduce the loss arising out of the breach by making a cover purchase, reselling the goods or otherwise. The use of the procedure set forth in article 62 [draft counterpart of CISG article 71], if applicable, would be a reasonable measure even though it may delay the avoidance of the contract and the cover purchase, resale of the goods or otherwise, beyond the date on which such action would otherwise have been required.

Example 73A: The contract provided that Seller was to deliver 100 machine tools by 1 December at a total price of $50,000. On 1 July he wrote Buyer and said that because of the rise in prices which would certainly continue for the rest of the year, he would not deliver the tools unless Buyer agreed to pay $60,000. Buyer replied that he would insist that Seller deliver the tools at the contract price of $50,000. On 1 July and for a reasonable time thereafter, the price at which Buyer could have contracted with a different seller for delivery on 1 December was $56,000. On 1 December Buyer made a cover purchase for $61,000 for delivery on 1 March. Because of the delay in receiving the tools, Buyer suffered additional losses of $3,000.

In this example Buyer is limited to recovering $6,000 in damages, the extent of the losses he would have suffered if he had made the cover purchase on 1 July or a reasonable time thereafter, rather than $14,000, the total amount of losses which he suffered by awaiting 1 December to make the cover purchase.

Example 73B: Promptly after receiving Seller's letter of 1 July, in Example 73A, pursuant to article 62 [draft counterpart of CISG article 71] Buyer made demand on Seller for adequate assurances that he would perform the contract as specified on 1 December. Seller failed to furnish the assurance within the reasonable period of time specified by Buyer. Buyer promptly made a cover purchase at the currently prevailing price of $57,000. In this case Buyer can recover $7,000 in damages rather than $6,000 as in Example 73A (OFFICIAL RECORDS, p. 61).

[Honnold provides further examples:

-  "Goods purchased for resale. Example 77A. On June 1 A and X made a contract for A to sell and deliver to X on the first of August 1,000 bales of cotton at $50 per bale. Both A and X were merchants engaged in the purchase and resale of cotton. Shortly after June 1 cotton prices fell and on July 1, when the market price was $40 per bale, buyer X repudiated the contract and requested A to resell the cotton before the market could decline further. A replied that A expected X to receive and pay for the cotton in accordance with the contract; X thereupon repeated its repudiation. By August 1, the agreed delivery date, the price had fallen to $30; X again refused to receive and pay for the goods. A thereupon declared the contract avoided, resold the goods for $30 per bale ($30,000) and claimed damages from X of $20,000 ($50,000 - $30,000). X contended that on July 1 when X repudiated A should have mitigated loss by selling the cotton at $40, a step that would have reduced damages from $20,000 to $10,000. The argument for mitigation should be rejected. Under article 72(1) ... on repudiation by one party (X) 'the other party may declare the contract avoided'; see also CISG 49(2) and 64(2) (provisions protecting the options of the aggrieved party). Does the mitigation principle of article 77 create an exception to the option as to avoidance expressed in article 72(1)? There is nothing unfair or wasteful in A's refusing to accept X's repudiation. No one knows when a 'falling' market has reached bottom [Cf. Example 73A of the Secretariat Commentary as to which an analogous comment could perhaps be made.]; if X was confident that the market would continue to fall X could have made a 'forward' sale at $40 for delivery on August 1. (The same analysis applies when a seller repudiates prior to the date for delivery followed by a rise in the market price). ... In short, the aggrieved party has no general obligation under article 77 to attempt to mitigate damages by 'accepting repudiation' by the other party.

-  "Materials needed for current production. Example 77B. On June 1 A and X made a contract for X to produce and deliver to A 10,000 sheets of steel on August 1 at $50 per sheet. Buyer A needed the steel for use in manufacturing. On July 1 Seller X notified A that production difficulties in X's steel mill would prevent delivery on the steel by August 1; X also stated that the production difficulties might persist for an unknown period after August 1 and urged A to obtain the steel elsewhere. Comparable steel was available in A's area; the price at all times remained at $50. For unexplained reasons A did not seek or obtain the steel elsewhere; as a consequence A's production facilities were shut down for the month of August. Buyer A sued X for damages based on shutdown losses (art. 74, 'loss of profit') of $10,000 per day or $30,000. Seller X argued that under article 77 A failed to 'take such measures as are reasonable in the circumstances to mitigate the loss' so that there should be a corresponding reduction in the damages. Seller X's claim for damage-reduction based on article 77 should prevail. Unlike Example 77A, in this case obtaining available alternative supplies was needed and reasonable to avoid certain loss. In this setting Buyer A's option to avoid or not to avoid is irrelevant. The notice by Seller X would relieve A of concern that Seller X might change its mind and deliver the goods; moreover, A could choose to avoid under article 72 or, if A wished to press for later delivery by X, A could send X a notice of suspension under article 71(3). (The effect of a right to require ('specific') performance (arts. 28, 46) ... is not relevant here since a court order could not overcome X's production difficulties. In any event, delays intrinsic to legal proceedings could not assure delivery in time to keep A in production)." John O. Honnold, "Uniform Law for International Sales under the 1980 United Nations Convention", 2d ed., Kluwer Law International (1991), pp. 516-518.]

[Lookofsky states: "Sometimes, a given buyer's loss may seem (at least partly) caused by her own pre-breach negligent act. ... And although CISG article [77] seems designed mainly to pos-tbreach mitigation, the Convention does not bar recognition of the pre-breach (prevention) aspect of avoidability. ... For example, where the harm caused by seller's delayed delivery of a simple standard part is aggravated by the fact that buyer keeps no such spares on hand, such a failure to take precautionary measures, if judged unreasonable, will prevent the recovery of compensation for avoidable loss." Joseph Lookofsky, "The 1980 United Nations Convention on Contracts for the International Sale of Goods", International Encyclopaedia of Laws, Blanpain, gen. ed., Kluwer (1993), pp. 127-128].


FOOTNOTES

1. Under articles 74 to 77 [draft counterpart of CISG articles 85 to 88] the party in possession of goods has a duty under certain circumstances to preserve these goods and to sell them for the benefit of the party who has breached the contract, even though the risk of loss is on the party in breach.

2. Article 46 [draft counterpart of CISG article 50] contains a principle of mitigation in that the buyer is not permitted to reduce the price if he does not permit the seller to remedy any failure on his part in respect of any of his obligations under the contract.


Pace Law School Institute of International Commercial Law - Last updated August 30, 2006
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