CISG Advisory Council: Opinion No. 8

Calculation of Damages under CISG Articles 75 and 76

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To be cited as: CISG-AC Opinion No. 8, Calculation of Damages under CISG Articles 75 and 76. Rapporteur: Professor John Y. Gotanda, Villanova University School of Law, Villanova, Pennsylvania, USA. Adopted by the CISG-AC following its 12th meeting in Tokyo, Japan, on 15 November 2008.

Reproduction of this opinion is authorized.

ERIC E. BERGSTEN, Chair

MICHAEL JOACHIM BONELL, MICHAEL G. BRIDGE, ALEJANDRO M. GARRO, ROY M. GOODE, JOHN Y. GOTANDA, SERGEI N. LEBEDEV, PILAR PERALES VISCASILLAS, INGEBORG SCHWENZER, HIROO SONO, CLAUDE WITZ, Members

SIEG EISELEN, Secretary 

Article 75 CISG

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. Article 76 CISG (1) If the contract is avoided and there is a current price for the goods, the party claiming damages may, if he has not made a purchase or resale under article 75, recover the difference between the price fixed by the contract and the current price at the time of avoidance as well as any further damages recoverable under article 74. If, however, the party claiming damages has avoided the contract after taking over the goods, the current price at the time of such taking over shall be applied instead of the current price at the time of avoidance. (2) For the purposes of the preceding paragraph, the current price is the price prevailing at the place where delivery of the goods should have been made or, if there is no current price at that place, the price at such other place as serves as a reasonable substitute, making due allowance for differences in the cost of transporting the goods. 

OPINION

1.1 Articles 75 and 76 set forth ways to calculate damages when a contract has been avoided.


1.2 Articles 75 and 76 do not replace Article 74. Rather, they provide aggrieved parties with alternative methods that may be used to measure damages when a contract has been avoided. 1.3 Damages recoverable under Articles 75 or 76 should not place the aggrieved party in a better position than it would have enjoyed if the contract had been performed properly.


2.1 Under Article 75, an aggrieved party is entitled to recover as damages the difference between the contract price and the price of the substitute transaction.


2.2 The contract price is the price fixed in the contract or the price as determined under Article 55.


2.3 The price in any substitute transaction may be used to calculate damages under the formula set forth in Article 75 only if the aggrieved party made a substitute transaction in a reasonable manner and in a reasonable time.


2.4 In the event that the aggrieved party’s substitute transaction was unreasonable, damages may be calculated according to Article 76 or Article 74.


  1. An aggrieved party entitled to damages under Article 75 may also recover any further damages under Article 74.


4.1 Under Article 76, an aggrieved party is entitled to recover as damages the difference between the price fixed by the contract and the current price.


4.2 In order for damages to be calculated pursuant to Article 76, the contract must fix, expressly or implicitly, a price for the goods.


4.3 The current price is the price generally charged for such goods sold under comparable circumstances in the trade concerned.


4.4 The time at which the current price is to be established is the time of avoidance, which is the moment when avoidance was declared; provided, however, that if the aggrieved party avoids the contract after taking over the goods, then the current price is to be determined at the time of such taking over.


4.5  (a) The location at which the current price is to be established is the place where the delivery of the goods should have been made.


        (b) If there exists no current price at the place of delivery, the current price is to be established at a reasonable substitute place.


  1. If the contract does not fix a price or there is no current price within the meaning of Article 76, damages may be calculated under Article 74.

  2. An aggrieved party entitled to damages under Article 76 may also recover any further damages under Article 74.

COMMENTS

 1.1 Articles 75 and 76 set forth ways to calculate damages when a contract has been avoided.

1.1.1 Under the Convention, if a party fails to perform its contractual obligations, the aggrieved party has various remedies, including the right to claim damages.[1] The principles concerning the calculation of damages are set forth in Articles 74 through 76.[2]

1.1.2 The purpose of these provisions is to place the aggrieved party in the position that it would have been in had the contract been performed.[3] To effectuate that purpose, Article 74 provides for the recovery of both actual loss suffered and net gains prevented.[4] Articles 75 and 76 set forth ways that an aggrieved party can measure damages when a contract has been avoided.[5] Article 75 provides a method for calculating damages if the aggrieved party avoided the contract and entered into a substitute transaction. If the aggrieved party has avoided the contract but has not entered into a substitute transaction, then Article 76 permits the abstract calculation of damages under certain conditions.

1.2 Articles 75 and 76 do not replace Article 74. Rather, they provide aggrieved parties with alternative methods that may be used to measure damages when a contract has been avoided.

1.2.1 In cases where a contract has been avoided, Articles 75 and 76 provide alternative methods for calculating damages. However, these provisions are not mandatory in nature; aggrieved parties can choose whether to calculate damages pursuant to them.[6] Thus, Articles 75 and 76 do not replace Article 74; they supplement and work in connection with it.[7]

1.2.2 An aggrieved party may find it more advantageous to have damages calculated pursuant to Article 75 or 76, as opposed to Article 74, because seeking damages under Article 74 requires an aggrieved party to prove with a requisite degree of certainty that it suffered a loss and may necessitate that the aggrieved party "open its books, i.e., ... disclose its internal calculations, its customers and other business connections, etc."[8] By contrast, Articles 75 and 76 do not require such disclosures in order to recover damages pursuant to them.

1.3 Damages recoverable under Articles 75 or 76 should not place the aggrieved party in a better position than it would have enjoyed if the contract had been performed properly.

1.3.1 Damages under Articles 75 and 76, like those under Article 74, are compensatory in nature and should not provide the aggrieved party with a windfall. Accordingly, recovery under these provisions should not place the aggrieved party in a better position than it would have been in had the contract been performed.[9] For example, an aggrieved buyer that has avoided a contract and made a cover purchase above the contract price in order to fulfill a standing contract for resale to a third party generally may not claim damages of both the difference between the contract price and the price of the cover purchase as well as profits lost on the subsequent resale.[10]

2.1  Under Article 75, an aggrieved party is entitled to recover as damages the difference between the contract price and the price of the substitute transaction.

2.1.1  Article 75 provides a method for calculating damages when the contract has been avoided and the "buyer has bought goods in replacement or the seller has resold the goods."[11] Under these circumstances, an aggrieved party "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."[12]

2.1.2  The purpose of Article 75 is to ensure that the aggrieved party will receive the benefit of the bargain of the avoided contract if the aggrieved party mitigates its damages by engaging in a substitute transaction.[13] The rationale for Article 75 has been explained as follows:

If the contract is declared avoided for breach by the buyer, the seller is free to resell the goods. As a rule, it will be in his interest to do so. Analogously, if the contract is avoided for breach by the seller, the buyer will be interested in purchasing the same goods from another seller if possible. If the non-breaching party succeeds in reselling or replacing the goods, his effective loss will thereby be diminished. Article 75 takes this into account and sets forth special rules for calculating damages in such cases.[14]

2.2  The contract price is the price fixed in the contract or the price as determined under Article 55.

2.2.1  In order to calculate damages under Article 75, there must exist a "contract price." The "contract price" is the price expressly or implicitly fixed in the avoided original contract or the price in the avoided original contract as determined under Article 55.[15] Article 55 provides that when a contract has been "validly concluded" but does not expressly or implicitly fix the price, the price will be the "generally charged" price for those goods at the time the contract was concluded, unless the parties provide otherwise.[16]

2.3  The price in any substitute transaction may be used to calculate damages under the formula set forth in Article 75 only if the aggrieved party made a substitute transaction in a reasonable manner and in a reasonable time.

2.3.1  Damages are only compensable under Article 75 if: (1) in the case of a breach by the buyer, the seller sold the goods or, in the case of a breach by the seller, the buyer has purchased replacement goods; and (2) the substitute transaction was reasonable under the circumstances.[17] Thus, an aggrieved party must act as a "careful and prudent businessman" would act while observing the relevant trade practices.[18] The aggrieved party need not exhaust all possible avenues of research prior to engaging in a resale or cover purchase. All the circumstances surrounding the substitute transaction will be evaluated; therefore, a transaction that was carried out above the market price may, nevertheless, meet the reasonableness standard.[19] The Secretariat Commentary explains:

For the substitute transaction to have been made in a reasonable manner ... it must have been made in such a manner as is likely to cause a resale to have been made at the highest price reasonably possible in the circumstances or a cover purchase at the lowest price reasonably possible. Therefore, the substitute transaction need not be on identical terms of sale in respect of such matters as quantity, credit or time of delivery so long as the transaction was in fact in substitution for the transaction which was avoided.[20]

2.3.2  The substitute transaction also must be made within a reasonable time after avoidance.[21] The time period for a reasonable substitute transaction begins when the aggrieved party in fact declares the contract avoided.[22] The duration of the reasonable time window will depend inter alia on the existence and variability of a market for the goods. For example, if the goods have a fluctuating market price, what constitutes a reasonable period may be relatively short.[23] By contrast, goods that are seasonal or unique may result in a longer period being considered reasonable.[24]

2.3.3  Some courts and commentators maintain that Article 75 may be used to calculate damages in cases where the substitute transaction occurs prior to the avoidance of the contract, if the obligor has unambiguously declared that it will not perform under the terms of the contract.[25] This position, however, is inconsistent with the explicit language of Article 75, which states that the substitute transaction take place "after avoidance" of the contract. Avoidance of the contract is required to conduct a substitute transaction because it is the declaration of avoidance that terminates the rights of the parties under the contract and gives the aggrieved party the freedom to seek its performance interest elsewhere.[26]

2.3.4  In addition, the substitute transaction must be in fact a replacement for the avoided transaction. Identifying a single transaction as a substitute may be difficult for an aggrieved party that often deals in contracts similar to the avoided one. Such a party has several options, including identifying a substitute transaction prior to engaging in it, choosing the first transaction after avoidance as the substitute, or proceeding abstractly under Article 76.[27] There is no requirement that the terms of the substitute transaction be identical to those of the avoided one, but it may be necessary to adjust damages based on differences in the contract terms and to account for either expenses saved or additional expenditures.[28]

2.4  In the event that the aggrieved party's substitute transaction was unreasonable, damages may be calculated according to Article 76 or Article 74.

2.4.1  A prerequisite to recovery under Article 75 is a finding by the tribunal that the substitute transaction was "reasonable."[29] Controversy exists over the appropriate method for calculating damages when an aggrieved party has made substitute transaction that is found to be unreasonable.

2.4.2  Under one approach, if an aggrieved party entered into a substitute transaction that was not made in a reasonable manner, the situation is viewed as being the same as if no substitute transaction had taken place.[30] Thus, damages may be calculated abstractly under Article 76 without regard to the second transaction, assuming that the requirements are satisfied for calculating damages pursuant to Article 76 (for example, there exists a "price fixed in the contract" and a "current price for the goods").[31] If, however, damages cannot be calculated under Article 76, then damages are to be calculated under Article 74. The decision of OLG Hamm, 16 January 1992, illustrates this approach.[32] In that case, after the buyer breached a contract for the sale of 200 tons of bacon, the seller avoided the contract and resold the goods for approximately 25% of the contract price. The court determined that the contract had been properly avoided, but the resale of the goods had not been done in "in a reasonable manner" and, therefore, did not fall within Article 75. Accordingly, the court calculated damages abstractly under Article 76, rather than concretely under Article 75.[33]

2.4.3  Another approach for determining damages when the substitute transaction is found to be unreasonable calls for a concrete calculation under Article 75, but with an adjustment to the price of the substitute transaction to account for the factor(s) that made it unreasonable.[34] Under this approach, the aggrieved party cannot claim damages that exceed what it would have obtained if the substitute transaction had been reasonable.[35] However, this approach is not consistent with Article 75's expressed prerequisite that the substitute transaction be made "in a reasonable manner and within a reasonable time after avoidance."[36] Additionally, determining the adjustment necessary to achieve a result equivalent to a reasonable substitute transaction requires an inquiry into the market price of the goods. Therefore, if the goods have a market price, calculating the damages in an unreasonable substitute transaction under the adjustment approach to Article 75 will almost always produce the same result as an abstract calculation under Article 76.[37]

2.4.4  Where the aggrieved party has entered into a substitute transaction in an unreasonable manner, it is consistent with the design and purposes of the damages sections of the Convention to bar application of Article 75 and instead allow an aggrieved party to calculate damages abstractly under Article 76 or concretely under Article 74. This approach finds support in the Secretariat Commentary:

If the resale or cover purchase is not made in a reasonable manner or within a reasonable time after the contract was avoided, damages would be calculated as though no substitute transaction had taken place. Therefore, resort would be made to article 72 [the draft counterpart of CISG article 76] and, if applicable, to article 70 [the draft counterpart of CISG article 74].[38]

3.  An aggrieved party entitled to damages under Article 75 may also recover any further damages under Article 74.

3.1  Under Article 75, an aggrieved party may recover any "further damages" under Article 74. The purpose of this provision is to ensure that an aggrieved party can be made whole when its expectation interests are not satisfied by the substitute transaction formula in Article 75.[39] The "further damages" clause allows the aggrieved party to recover incidental and consequential damages in addition to the damages recovered under Article 75.[40] "Further damages" may include, inter alia: (1) costs associated with the substitute transaction under Article 75;[41] (2) loss caused by the delay in locating a substitute transaction;[42] (3) loss due to a change in the interest rates or in the currency exchange rate between the date that the transaction was supposed to have occurred under the contract and the substitute transaction;[43] (4) costs to a seller of an unsuccessful tender of goods or their necessary storage;[44] and (5) costs associated with the failed transaction.[45]

3.2  In certain transactions, it may not be appropriate to award lost profits as "further damages." This may occur when, for example, the substitute transaction provides the aggrieved party with the same opportunity to profit that the avoided transaction provided.[46] In such a circumstance, where the substitute transaction itself replaced the profits lost on the original transaction, allowing an aggrieved party to recover additional lost profits would place that party in a better economic position than if the contract had been performed.

3.3  The decision of LG München, 6 April 2000, illustrates this point.[47] There, the seller breached the contract by failing to deliver furniture the buyer intended to resell to a third party. The buyer was forced to purchase substitute furniture at a higher price. The buyer then fulfilled its agreement with the third party. The District Court denied the buyer's claim for lost profits, reasoning that awarding damages to the buyer based on the substitute transaction formula under Article 75 made the buyer whole.[48] The combination of the profit made on the sale to the third party and the damages under Article 75 satisfied the buyer's expectation interest.

3.4 It would also be inappropriate for an aggrieved party to recover damages under Article 75's substitute transaction formula and, in addition, lost profits caused by lost volume sales under Article 74 as "further damages." The aggrieved party would receive a double recovery if it were to receive damages based on the substitute transaction and lost volume damages which presume that a substitute transaction never took place.[49] An aggrieved party must choose either to proceed under Article 75 or to pursue lost volume damages under Article 74, but it cannot do both.[50] However, in the case of a true lost volume seller, the subsequent transaction may be treated as being one additional to, rather than a replacement for, the avoided transaction.[51] In such a situation where the subsequent transaction would have occurred regardless of the avoidance of the original transaction, the lost volume seller may calculate its damages under Articles 76 or 74 and, in addition, retain the profit made on the subsequent transaction.

4.1   Under Article 76, an aggrieved party is entitled to recover as damages the difference between the price fixed by the contract and the current price.

4.1.1  Article 76 provides that when an aggrieved party has avoided the contract but has not made a substitute transaction under Article 75, it is entitled to damages measured by "the difference between the price fixed by the contract and the current price ... as well as any further damages recoverable under Article 74."[52] This approach has been described as an abstract method for calculating damages, which is in contrast to the concrete method for measuring damages set forth in Article 75.[53]

4.1.2  Article 76 provides an alternative means to Article 75 for determining damages when the contract has been avoided but, (1) in the case of an aggrieved buyer, that party has not bought goods in replacement pursuant to Article 75 or, (2) in the case of an aggrieved seller, that party has not resold the goods pursuant to that provision.[54] It is important to point out, however, that a concrete determination of damages under Article 75 is generally preferred to abstract determination under Article 76, and ordinarily takes precedence if the requirements of Article 75 are met.[55]

4.1.3  The purpose of Article 76 has been explained as follows:

[Under Article 76,] a concrete demonstration of the non-performance loss is not necessary. The rule is based on the premise that the promisee has the right to make a substitute transaction at the current price. The promisor must bear the costs of a substitute transaction. However, he should not gain an advantage if the promisee has not carried out such a transaction but has instead taken another course of action.[56]

4.1.4  Article 76 may be used to calculate damages even if an aggrieved party has made a substitute transaction, if the purchase or resale was not made in a reasonable manner or within a reasonable time after the contract was avoided.[57] Since the requirements for calculating damages pursuant to Article 75 have not been met, and damages may be calculated under Article 76 as though no substitute transaction has taken place.

4.1.5  Article 76 may also be used, instead of Article 75, to calculate damages where the aggrieved party is "continuously in the market" for the particular good of the type in question.[58] In the case of a true lost volume seller, where the aggrieved party engaged in multiple transactions similar to the avoided one, it may not be possible to identify a specific substitute, and, therefore, impossible to calculate damages concretely under Article 75.[59] The aggrieved party may then pursue damages under the abstract calculation of Article 76 and seek further damages under Article 74.[60]

4.2  In order for damages to be calculated pursuant to Article 76, the contract must fix, expressly or implicitly, a price for the goods.

4.2.1  Article 76 states that the contract price is the "price fixed by the contract."[61] Unlike Article 75, which allows the contract price to be determined pursuant to Article 55, Article 76 requires the contract itself to either expressly or implicitly fix a price for the goods as a prerequisite to calculating damages under Article 76.[62]

4.2.2  It has been suggested that Article 76 may be used to calculate damages for contracts with open price terms.[63] This approach derives from the view that the principle of full compensation should allow a price to be fixed pursuant to Article 55.[64] However, this interpretation is contrary to the text of Article 76 and should be avoided.[65] As such, if there is no price fixed in the contract, Article 76 is inapplicable and an aggrieved party that has avoided the contract without making a substitute transaction may pursue damages under Article 74.

4.3  The current price is the price generally charged for such goods sold under comparable circumstances in the trade concerned.

4.3.1  Abstract calculation of loss under Article 76 is only possible if the contract goods have a current price.[66] The requirement that a current price exists does not mandate that there be an official or unofficial market quotation for the goods in question.[67] A current price is established by the price generally charged for the sale of goods of the same kind and on comparable terms.[68] Thus, establishing a current price within the meaning of Article 76 requires an objective basis for determining the value of the goods and is not possible when the goods are valued based on subjective needs.[69] Furthermore, an adjustment may be necessary to account for any differences in terms between the avoided transaction and the market price.[70]

4.4  The time at which the current price is to be established is the time of avoidance, which is the moment when avoidance was declared; provided, however, that if the aggrieved party avoids the contract after taking over the goods, then the current price is to be determined at the time of such taking over.

4.4.1  Under Article 76, the current price is to be determined "at the time of avoidance." The time of avoidance is "the moment in time when the avoidance was declared."[71]

4.4.2  However, if the aggrieved party avoids the contract "after taking over the goods," then the current price is to be determined instead at the "time of such taking over."[72] This applies regardless of whether the buyer knew at the time of "taking over the goods" that there existed grounds to avoid the contract.[73] This provision is designed to "prevent[] an avoiding buyer who has received delivery from manipulating the time of avoidance in order to increase the seller's liability."[74]

4.4.3  Cases of anticipatory breach, when the aggrieved party avoids the contract prior to the date that performance was due, may lead to inaccurate assessments of damages under Article 76.[75] This is because, in a fluctuating market, there is no guarantee that the market price at the time of performance will be the same as the price at the time that the contract was avoided. Therefore, it may be appropriate to calculate damages based upon the current price at the time of avoidance for the goods in the futures market at the time of performance. However, in some cases there may not be such price available. If there is no futures market for the goods, the current price at the time of avoidance should be used to calculate damages even in the case of anticipatory breach.[76] This follows the text of Article 76 as well as the rationale that the market price need not reflect all the terms of the avoided contract.[77]

4.5  (a) The location at which the current price is to be established is the place where the delivery of the goods should have been made.

       (b) If there exists no current price at the place of delivery, the current price is to be established at a reasonable substitute place.

4.5.1  Article 76 specifies determining the current price first by looking to "the price prevailing at the place where delivery of the goods should have been made."[78] The "place where delivery should have been made" is determined pursuant to Article 31.[79]

4.5.2  If no current price exists at the place of delivery, the current price is then determined to be "the price at such other place as serves as a reasonable substitute. ..."[80] There are no universal criteria for determining whether another place serves as a reasonable substitute.[81] In general, a substitute place is reasonable if, taking into account transportation costs to the substitute location, an average merchant under the circumstances (from the point of view of both the buyer and seller) would find such a place suitable.[82] Typically, this place is the location that is the most physically proximate.[83] At first glance, the lack of a current price at the place of delivery may suggest that no current price exists at all.[84] However, if delivery was in the seller's country and the buyer avoided the contract after arrival and inspection in the buyer's country, the buyer may be unable establish a market price in the seller's country.[85] In such a case, the buyer may resort to a reasonable substitute location.

5.  If the contract does not fix a price and there is no current price within the meaning of Article 76, damages may be calculated under Article 74.

5.1  Article 76 does not explicitly state how damages are to be calculated if there exists no price fixed by the contract or a current price cannot be determined. In such event, damages may be calculated under Article 74.[86]

6.  An aggrieved party entitled to damages under Article 76 may also recover any further damages under Article 74.

6.1  Like Article 75, Article 76 states that the aggrieved party is entitled not only to the difference between the price fixed by the contract and the current price, but also to any further damages recoverable under Article 74. These damages may include additional losses, including lost profit, for which the formula set forth in Article 76 alone would not provide compensation.

6.2  The Secretariat Commentary provides the following illustrations of the calculation of damages under Article 76:

    Example [A]. The contract price was $50,000 CIF. Seller avoided the contract because of Buyer's fundamental breach. The current price [at the time of avoidance] for goods of the contract description at the place where the goods were to be handed over to the first carrier was $45,000. Seller's damages ... were $5,000.

    Example [B]. The contract price was $50,000 CIF. Buyer avoided the contract because of Seller's non-delivery of the goods. The current price [at the time of avoidance] for goods of the contract description at the place the goods were to be handed over to the first carrier was $53,000. Buyer's extra expenses caused by the Seller's breach were $2,500. Buyer's damages under articles [76 and 74] were $5,500.[87]

6.3  When an aggrieved party seeks both damages under Article 76 and further damages under Article 74, the total amount of damages awarded should not place the aggrieved party in a better position than it would have been in had the contract been properly performed.[88] For example, assume that a seller rightfully avoided a contract because of the buyer's fundamental breach and did not resell the goods. The price fixed in the contract for the goods was $50,000 and the relevant market price of comparable goods at the time of avoidance of the contact was $45,000. Under Article 76, the seller's damages are $5,000. In this case, the seller still has the goods and, presumably, can resell them for the current price; therefore, if the seller also claims that Article 74 entitles it to recover the profit it would have made on the sale under the contract, the claim for lost profit should be denied.[89] Awarding the seller lost profits would provide it with a windfall because the seller still has the goods and, presumably, can resell them for the current price. If, however, the price at which the seller can now sell the goods has fallen since the time of avoidance, the seller might argue that it is entitled to further damages. Nevertheless, Article 77 requires that a party take reasonable measures to mitigate its loss, including loss of profit, resulting from the breach. Therefore, if it fails to do so, the other party may claim a reduction in the damages of the amount by which the loss should have been mitigated.

6.4  In most cases, "further damages" under Article 76 would be similar to the damages available under Article 75. However, there are some notable differences.[90] If an aggrieved party proceeds under Article 76, it can claim its loss which exceeds the difference between contract price and the market price.[91] For example, if the seller breached the contract in a rising market and thereby caused the buyer to miss an opportunity to resell the contract goods for 50% above the market price, the buyer should theoretically be able to recover this 50% difference as "further damages."[92] These damages would be available if the buyer proceeds under Article 76, but not if it proceeds under Article 75 because conducting a cover purchase would have preserved the opportunity to profit from the third party transaction.[93] Additionally, lost profits may be appropriate as further damages under Article 76 when the aggrieved party claims lost volume damages.