CISG Advisory Council Opinion No. 10

Agreed Sums Payable upon Breach of an Obligation in CISG Contracts

 5. Whether an impediment exempts the obligor from payment of the agreed sum is primarily a matter of interpretation of the contract under Articles 8 and 9 CISG. Unless otherwise agreed, Article 79(1) CISG exempts the obligor from the obligation to pay an agreed sum.

5.1 Rule 5 addresses the constellation where the breach of the obligor triggering the agreed sum is caused by an impediment beyond control that it was neither able to foresee nor to overcome or at least its consequences. In such situations, absent any agreement to the contrary, Article 79 CISG exempts the obligor from the obligation to pay damages. Rule 5 provides the same result with regard to the agreed sum.

5.2 Attempts to expressly extend Article 79 CISG to agreed sums at the Vienna Conference were not successful.[40] In court practice on the CISG, this problem has apparently only arisen in one case but was left open by the court as the results would not have differed in that case.[41] Article 7(1) CISG dictates that its interpretation has to give due regard to the international character of the CISG. In light of the fact that Article 5 UNCITRAL Rules, the official Comment 2 on Article 7.4.13 PICC and the vast majority of domestic legal systems hold the obligor only liable for the agreed sum where it is liable for the non-performance, Article 79 CISG should be interpreted – absent any indications by the parties to the contrary – as relieving the obligor from an agreed sum where the requirements of that provision are met.[42]

6. Where the obligee has contributed to the failure of the obligor triggering the agreed sum, it is barred by Article 80 CISG from relying on agreed sums to the extent that it has caused the breach.

6.1 Rule 6 addresses situations where the oblige of the agreed sum has contributed to the breach triggering the agreed sum. This may for instance occur where the FOB-buyer is late in naming the vessel or gives wrong instructions regarding loading points and schedules thus delaying delivery. In these instances Article 80 CISG prevents the aggrieved party from relying on the breach to the extent that it has contributed to it.

6.2 Rule 6 clarifies that Article 80 also applies to agreed sums. Hence, the contribution of the obligee made to the breach must be reflected in a proportional reduction of the agreed sum.

7. A failure to take reasonable measures to mitigate the loss (Article 77) does not affect the amount recoverable as an agreed sum.

7.1 Rule 7 deals with the interplay of the general duty to mitigate losses and the agreed sum payable by the breach of the obligor. The CISG clearly distinguishes contribution to breach by the obligee and mitigation of losses incurred. As a starting point – and in contrast to Article 80 – Article 77 does not have any impact on the fact that the agreed sum is triggered in its full amount. Under the CISG the failure to mitigate losses on the side of the obligee does not impact the amount that must be paid by the obligor. Agreed sums are payable upon breach independent of whether an actual loss has occurred. If it is generally irrelevant, whether a loss has occurred it cannot be of relevance, whether that loss is an unmitigated or a mitigated one. Articles 74 – 77 are rules for calculating damages. Where, however, an agreed sum is stipulated in the contract, the parties have taken care of this necessity in advance. In particular, Article 77 does not contain a reduction mechanism.[43]

7.2 In addition, if Article 77 CISG were considered relevant to the amount of the agreed sum, would then be necessary to determine the actual loss and the amount that could have been avoided. These questions are prone to lead to disputes between the parties and prevent a quick and efficient resolution of the dispute. This, however, would defeat the exact purpose of the agreed sum. At the domestic level this issue has been raised in statements to the effect concepts of liquidated damages and mitigation are fundamentally different and do not influence each other.[44]

7.3 Furthermore, it appears preferable to leave it to the obligee whether it decides to take mitigation measures. The economic incentive to take mitigating measures is to reduce the actual loss and recover the sum in full.[45] The economic risk of not taking mitigating measures is that the actual loss may exceed the agreed sum and that the obligee then cannot recover the outstanding part.

8. The relationship of agreed sums to the default remedies of the CISG for breach of contract is primarily a matter of interpretation of the contract under Articles 8 and 9 CISG. Unless otherwise agreed the following rules apply:
(a) Specific performance may be claimed in addition to the agreed sum, only if the agreed sum is not meant to replace performance of the contract.
(b) Avoidance of the contract does not affect an agreed sum (Article 81(1) CISG).
(c) In addition to the agreed sum no further damages may be claimed.

8.1 General

8.1.1 Rule 8 addresses the relationship of the agreed sum triggered by the breach to the general remedies available in case of breach of contract.

8.1.2 This is not a question of validity[46] and despite recurring statements to the contrary[47] should therefore not be dealt with under domestic law. The CISG is exclusively in charge of determining its sphere of application and thus of its remedies for breach of contract. Naturally, it is first and foremost up to the parties to make provision for the remedies available (Article 6 CISG)[48] subject to the boundaries set by the applicable domestic law (Article 4 sentence 2(a) CISG). The first step is thus always the interpretation of the clause in dispute in accordance with Articles 8, 9 CISG.[49] If this does not lead to a solution the following guidelines apply.

8.2 Specific Performance

8.2.1 Legal systems agree that the mere presence of an agreed sum does not in and of itself exclude the remedy of specific performance.[50] The majority of legal systems provides by default that the obligee cannot cumulatively claim the agreed sum and specific performance where the agreed sum was incorporated into the contract precisely to remedy total non-performance, eg non-delivery, as this would lead to double recovery.[51]

8.2.2 Where on the other hand the agreed sum is incorporated to remedy improper performance, the obligee can cumulatively request payment of the agreed sum and specific performance.[52] This is particularly the case where the agreed sum is stipulated for situations of delay, which have been hat issue in the vast majority of cases dealing with agreed sums in CISG contracts.

8.2.3 An interpretation of the Convention under Article 7(1) CISG having regard to the international character of the CISG suggests that this approach to specific performance also has to be adopted as the default rule under the Convention.

8.3 Avoidance of the Contract

8.3.1 Under Rule 8 b. avoidance of the contract does not bar the obligee from recovering the agreed sum triggered by the breach of contract. This is consistent with the general concept of the CISG to allow for the combination of avoidance of contract and damages for breach of contract.

8.4 Damages

8.4.1 Rule 8 c. clarifies that unless the parties agree otherwise, the obligee may not recover any losses exceeding the agreed sum. The matter is therefore first of all one of interpretation of the parties' agreement under Articles 8 and 9.

8.4.2 At the domestic level the position among legal systems is split with regard to the relationship of agreed sums to the remedy of damages for breach of contract. One view is that as a general rule the obligee should not be entitled to any additional losses.[53] Exceptions are typically only made where the obligor has acted intentionally or fraudulently.[54] In other legal systems, courts are granted the possibility to increase the sum. In some systems courts seem to enjoy broad discretion, as the right to adjust the agreed sum in question appears not to be subject to any qualifications.[55] Other legal systems granting this possibility to courts, however, require that the agreed sum be disproportionately low (‘dérisoire’, ‘ínfimo’).[56] In systems prohibiting penalties, the obligor may not be able to invoke an unreasonably low agreed sum on the grounds of unconscionability,[57] thus leaving the obligee with its ordinary claim for damages.

8.4.3 The other view is that a claim for additional damages is generally admissible with the sum being set off against the claim by default.[58]

8.4.4 At the international level the UNCITRAL Rules attempt to strike a balance between both positions on the availability of a claim for additional losses. First of all, Article 7 sentence 1 states that no damages may be claimed to the extent the loss is covered by the agreed sum. This is parallel to domestic rules setting off the agreed sum against the damage claim. E contrario – ‘to the extent’ – it follows that beyond the extent of the loss covered by the agreed sum damages may be claimed. The middle ground approach taken by the UNCITRAL Rules is then evidenced in Article 7 sentence 2. This provision restricts the availability of a claim for additional damages to cases where the loss ‘substantially exceeds the agreed sum’.

8.4.5 Also in this context it is up to the parties to make provision for this issue. It is highly advisable that phrases such as “to the exclusion of additional claims” or “without prejudice to other claims” be used. On account of Article 6 CISG, the Convention does not object to either of the two solutions.[59] However, the applicable domestic law may take a different stance and strike down clauses which allow for cumulative requests for the agreed sum and damages for breach of contract.[60]

8.4.6 It follows from this result that where under the CISG additional claims may not be recovered, because the agreed sum is exclusive in nature, domestic provisions allowing courts and arbitral tribunals to increase the amount payable are pre-empted. The results found by the Convention must not be circumvented by domestic law. If a sum is unreasonably low a legal system is not prevented from declaring these clauses invalid for reasons of unconscionability or equivalent concepts.

FOOTNOTES

40. See Schwenzer, Commentary (n 1), Art 79 CISG, para 51.

41.See OLG Hamburg, 25 January 2008, CISG-online 1681.

42. See Schwenzer, Commentary (n 1), Art 79 CISG, para 51; Schwenzer, Force majeure and hardship in international sales contracts, (2009) 39 Vict U Wellington L Rev 719 et seq; Schwenzer, Die clausula und das CISG, in: Wiegand/Koller/Walter (eds), Festschrift für Eugen Bucher zum 80. Geburtstag, Zurich: Schulthess (2009), p 734. Contra Mankowski, MünchKommHGB (n 1), Art 79 CISG, para 15.

43. See Gerechtshof Arnhem, 22 August 1995, CISG-online 317.

44. See for England McGregor, Damages, para 13-015: ‘entirely foreign’; Whincup, para 13.34. For the USA Lake River Corp v Carborundum Co, US Ct App (7th Cir), 9 August 1985, 769 F2d 1284 at 1291 per Judge Posner; Oscar de la Renta, Ltd v Mulberry Thai Silks, Inc, US Ct App (SD NY), 17 April 2009, 2009 WL 1054830.

45. At the domestic level fears have been voiced that this would then lead to wasteful failures to mitigate or, if mitigation is successful, overcompensate the obligee, see Beale, Remedies, p 57.

46. Mohs/Zeller, Penalty and Liquidated Damages Clauses in CISG Contracts Revisited, (2006) 21 Mealy’s Int Arb Rep 2.

47. See ICC Ct Arb, 7197/1992, CISG-online 36 (domestic Austrian law applied); CIETAC, 9 November 2005, CISG-online 1444 (domestic Chinese law applied); Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, 11 April 2006, CISG-online 1944 (domestic Russian law applied); Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, 27 May 2005, CISG-online 1456 (domestic Russian law applied); Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, 4 April 2003, CISG-online 1547 (domestic Russian law applied); Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, 18 February 2002, CISG-online 890 (domestic Russian law applied); Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, 10 January 1998, CISG-online 2122 (domestic Russian law applied); Foreign Trade Court of Arbitration attached to the Serbian Chamber of Commerce, 30 October 2006, CISG-online 2081 (domestic Serbian law applied). Not discussed in Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, 24 May 2004, CISG-online 1210 (additional damages awarded).

48. Mohs/Zeller, op cit (n 46), at p 2.

49. Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, 13 January 2006, CISG-online 1622; Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, 13 May 1997, CISG-online 2121. No discussion on the law applicable to the interpretation of the agreed sum was made in Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, 1 March 2006, CISG-online 1941; Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, 27 July 1999, CISG-online 779; Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, 23 November 1994, CISG-online 445; Foreign Trade Court of Arbitration attached to the Yugoslav Chamber of Commerce, 9 December 2002, CISG-online 2123.

50. For details see Hachem, op cit (n 7), p 155 et seq.

51. See for Austria § 1336(1) sentence 3 CC; Bolivia Art 533(1) CC; Brazil Art 410 CC; Chile Art 1537 CC; Colombia Art 1594 CC; Costa Rica Art 426 Com C; Ecuador Art 1580 CC; El Salvador Art 1408 CC; France Art 1229(2) CC; Georgia Art 419(1) CC; Germany § 340(1) CC; Italy Art 1383 CC; Latvia Art 1718(1) CC; Lebanon Art 266 Code of Obligations and Contracts; Lithuania Art 6.73(1) sentence 1 CC; Mexico Art 1846 CC, Art 88 Com C; Moldova Art 626(1); the Netherlands Art 6.92(1) CC; Paraguay Art 458 CC; Peru Art 1341 CC; Portugal Art 811(1) CC; Spain Art 1153(2) CC, Art 56 Com C; Switzerland Art 160(1) CO; Uruguay Art 288 para. 2 Com C; USA Perillo, Corbin on Contracts. A Comprehensive Treatise on the Rules of Contract Law, vol XI Damages, Newark/San Francisco: LexisNexis Mathew Bender (2005), p 513; Venezuela Art 1258 CC. In China this follows e contrario from Art 114(3) Contract Law.

52. See for Argentina Art 659 CC; Austria § 1336(1) sentence 3 CC; Bolivia Art 533(1) CC; Brazil Art 411 CC; Chile Art 1537 CC; China Art 114(3) Contract Law; Columbia Art 1594 CC; Ecuador Art 1580 CC; France Art 1229(2) CC; Georgia Art 419(1) CC; Germany § 341(1) CC; Italy Art 1383 CC; Latvia Art 1720 No 2 CC; Lebanon Art 266 Code of Obligations and Contracts; Lithuania Art 6.73(1) sentence 1 CC; Mexico Art1846 CC; Moldova Art 626(1) CC; Switzerland Art 160(2) CO; USA Perillo, op cit (n 51), p 513; Art 170(3) ECC.

53. See for Algeria Art 185 CC; Argentina Art 655 CC; Bahrain Art 227 CC; Belarus Art 313(2) CC; Brazil Art 416 sentence 2 CC; Costa Rica Art 426 Com C; Egypt Art 225 CC; England Diestal v Stevenson [1906] 2 KB 345; Italy Art 1382 CC; Iraq Art 171 CC; Kuwait Art 304 CC; Libya Art 228 CC; New Zealand Burrows/Finn/Todd, op. cit. (n. 15), para 21.2.6(a); Paraguay Art 454(2) CC; Portugal Art 811(2) CC; Qatar Art 267; Syria Art 226 CC; USA Farnsworth, Contracts, p 304 et seq; Yemen Art 355 CC.

54. See for Algeria Art 185 CC; Bahrain Art 227 CC; Costa Rica Art 427 Com C; Egypt Art 225 CC; France Steltmann, Die Vertragsstrafe in einem Europäischen Privatrecht, Berlin: Duncker & Humblot (2001), p 174 et seq with an overview of the discussion; Iraq Art 171 CC; Kuwait Art 304 CC; Libya Art 228 CC; Qatar Art 267; Syria Art 226 CC; Yemen Art 355 CC.

55. See for China Art 114(2) Contract Law; Jordan Art 364(2) CC; Morocco Art 264 Code of Obligations and Contracts; the Netherlands Art 6.92(2) CC; United Arab Emirates Art 390(2) CC.

56. France Art 1152(2) sentence 1 CC; Argentina Alterini, Contratos Civiles – Comerciales – de Consumo – Teoría General, Buenos Aires: Abeldedo-Perrot (2005), p 602.

57. See for the USA Farnsworth, Contracts, p 301 et seq.

58. See for Austria § 1336(3) sentence 1 CC; Bulgaria Section 92 OCA; Estonia § 161(2) Law of Obligations Act; Georgia Art 419(2) CC; Germany § 340(2) sentence 2 CC; Lithuania Art 6.73(1) sentence 3 CC e contrario; Moldova Art 625(2) sentence 1 CC; Switzerland Art 161 CO; Schwenzer, Schweizerisches Obligationenrecht Allgemeiner Teil, 6th edn, Bern: Stämpfli (2012), para 71.12.

59. Mohs/Zeller, op cit (n 46), p. 2.

60. See for the USA See for the USA H & M Driver Leasing Service, Unlimited, Inc v Champion International Corporation, Il Ct App, 17 March 1989, 536 NE2d 858 at 860: ‘Here, the contract expressly provided that the USD 10,000 ‘liquidated damages’ was recoverable in addition to ‘any and all actual damages’ resulting from breach. As such, that clause imposed a clear penalty which cannot be enforced.’ Hachem, op cit (n 7), p 163.