CISG Advisory Council Opinion No. 9

Consequences of Avoidance of the Contract

C) Restitution of the Fruits of Performance

      aa) General

3.19  After the contract has been avoided, Article 84 imposes correlative duties on the seller to pay interest to the buyer, if the price has to be refunded, and on the buyer, to account to the seller for benefits derived from the goods. These duties apply where restitution in full occurs, but they may also be brought into play in cases of partial restitution, whether or not partial restitution occurs further to Article 82. They apply in favour of each party to the avoided contract, whether or not that party was a performing party, an exempted non-performer or an unexempted non-performer.[59]

3.20  The mutual restitution of interest and benefits will usually be financial on both sides. Mutual restitution raises a number of questions. The first question is whether the rule of concurrency expressed in Article 81 for the goods and money, but not referred to in Article 84, nevertheless applies in the latter case to benefits. If concurrency does apply, the second question is whether restitution under Article 84 is to be integrated with restitution under Article 81 or is separate. The third question is whether set-off takes place with respect to the two Article 84 payments, so as to leave only one payment to be made representing the balance. The fourth question, if set-off is permissible, is whether payments to be made under Articles 81 and 84 can be the subject of a consolidated set-off.

      bb) Separation of Articles 81 and 84

3.21  The process of calculating interest and benefit under Article 84 may in some cases be difficult and time-consuming. The avoidance of business disruption and economic waste may fairly be inferred from the Convention as principles on which it is based. If these losses are to be kept to a minimum, then restitution under Article 81 should be effected as quickly as possible and indeed before any complex calculations required by Article 84 are completed. Nevertheless, in those cases where the buyer has to return benefits in lieu of the original goods, a one-sided concurrency would arise under Article 81 if the seller's repayment of the price were made in return for only part of the goods delivered to the buyer. The most practical solution, if the seller is unwilling in these circumstances to return the price in full, is to prorate the price so as to match the quantity of goods that the buyer is able to return.[60] The remainder of the price would then become concurrently repayable when the buyer accounted for the benefits received from the missing goods. By this means, the process of restitution under Article 81 is kept as separate as is possible from the process of restitution under Article 84.

      cc) Concurrency

3.22  Concurrency is the means by which mutual restitution can take place under the Convention without account having to be taken of proprietary considerations. Although the principle of concurrency is not expressed in Article 84, consistency therefore requires it also to be the rule under Article 84 following on from the general principle laid down in Article 81.[61]

      dd) Set-off Issues

3.23  Although there are numerous decisions stating that set-off is not dealt with by the Convention,[62] there are many different ways in which set-off or something akin to set-off might arise between a buyer and a seller. Consequently, a general denial of set-off as a subject dealt with by the Convention is too widely stated. Set-off, broadly understood to include permissible deductions, is explicitly permitted in one case where a buyer avoids the contract. Where a buyer is permitted to sell the goods for one of the reasons stated in Article 88, the expenses of preserving the goods and selling them may be deducted from the proceeds of sale, prior to their remittance to the seller. So far as there has to be concurrency in making restitution, and so far as payments have to be made by both buyer and seller as part of the restitutionary process, then concurrency is most effectively promoted by permitting set-off.[63] Set-off serves the purpose of minimising business disruption and avoiding economic waste. To the extent, however, that the process of restitution under Article 81 needs to be implemented before the calculations are made under Article 84, it follows that set-off in respect of amounts that will or might fall due under the Article 84 process ought not to be allowed as against payments to be made under Article 81. Various claims for damages might arise under or pursuant to the contract of sale, either before or during the implementation of the restitutionary process. This opinion does not take a view on whether set-off might take place between a restitutionary claim and a damages claim.

      ee) Commencement of Interest

3.24  The seller's duty to pay interest under Article 84 runs from the date that payment is made. In the case of a seller who fails to deliver, it does not run from the time that the seller was in breach of contract for failing to deliver.[64] If payment is made on the buyer's behalf by a third party, the seller's duty to pay interest runs from this date.[65] The Convention does not define when payment is made but the purpose underlying the restitutionary provisions of the Convention is best served by treating payment as having occurred when the seller is able to start earning interest on the money paid by the buyer. If, for example, a transfer of funds is made to an account nominated by the seller, then payment should in principle be treated as occurring when the seller is able to draw on the account with incurring interest charges to the bank.

      ff) Rate of Interest

3.25  The Convention does not state from where the rate of interest is to be derived: seller and buyer will usually be located in different countries. Interest is payable by the seller whether in fact interest has been earned or not, according to the use that the seller could have made of the money paid by the buyer.[66] The seller's duty to pay interest therefore is based on an irrebuttable presumption that the seller has invested the money in an interest-bearing account or has benefited from the money in some other way. This presumption avoids any inquiry into the actual use made by the seller of the money paid by the buyer and thus also avoids difficult questions arising out of tracing the money through the seller's commercial activities.[67] Because of this presumption, and because the seller's duty to account for interest is a restitutionary one, the commercial investment rate current at the seller's place of business should normally be applied.[68] In the majority of cases, the rate at the seller's place of business has been arrived at by applying the forum's rules of private international law.[69] A preferable justification is to infer the rate at the seller's place of business directly from Article 84 itself.[70] A minority of tribunals have favoured the rate of interest prevailing at the buyer's place of business,[71] which is inconsistent with the restitutionary character of the seller's duty to pay interest. One tribunal has held that the interest rate should accord with the currency in which restitution of the price has to be made, since it should reflect the use that the creditor (the buyer) could have made of the money.[72] This approach seeks to indemnify the buyer for the loss of use of its money and is again inconsistent with the restitutionary character of the seller's duty to pay interest.[73] In some cases, by default, the rate of interest prevailing under the local law has incorrectly been applied.[74]

      gg) Currency of Interest

3.26  Payment of interest should presumptively be in the currency of account and payment, where these are the same,[75] and should be in the currency of payment if this is different from the currency of account. Since the seller's duty to pay interest is a restitutionary one, interest should be paid in the currency in which the seller earned the interest if this differs from the currency of payment.

      hh) Cessation of Interest

3.27  The Convention does not state when the seller's duty to pay interest should cease. In principle, the restitutionary character of the seller's duty ought to mean that interest runs until the buyer has been reimbursed,[76] but it has been held in one case, incorrectly, to run to the date of commencement of the proceedings.[77] A difficult case arises where restitution is unduly delayed by the buyer. One argument favours allowing the seller to retain the interest accruing after the due date of restitution, in order to give an incentive to the buyer to effect timely restitution, but the better view is that the seller should account for interest even in this case since the seller has incurred no loss arising from the buyer's delay.[78]

      ii) Benefits Flowing from the Goods

3.28  The buyer's duty to account for benefits received under Article 84, unlike the seller's duty to pay interest, is based on actual benefits and not notional benefits. These benefits should also be net benefits, after the cost of using or enjoying the goods has been taken into account.[79] There will be many cases where a buyer, despite delivery having occurred long before avoidance, will have received no measurable benefits. An example is where the goods have been sold on to a domestic sub-buyer who has eventually rejected them or who may yet reject them.[80] Any money derived from that sub-buyer does not count as a benefit under the head contract of sale if it has to be returned to the sub-buyer, since Article 84 concerns only retained benefits.[81] The burden of proof is on the seller to show that the buyer has obtained benefits.[82] There may be difficult cases arising out of the supply of durable machines and similar goods that yield profits over a lengthy term. The calculation of benefits in such cases would require a close examination of the buyer's business and a calculation of its profit margin and its fixed and variable overhead. There are no decided cases quantifying benefits that the buyer must restore to the seller.

3.29  The buyer's duty to account for benefits is stated to apply not only in cases of avoidance. It applies also where the buyer has required the seller to deliver substitute goods.[83] The meaning of this provision is obscure. The buyer's duty to account for benefits is the counterpart to the seller's duty to pay interest on money received by the buyer, and no mention is made of the any duty of the seller to pay interest in cases where the buyer requires substitute goods. If substitute goods are delivered, perhaps some time after the first delivery, the seller will have had the use of the buyer's money in the meantime. The provision appears to contemplate goods with a limited commercial life where the buyer gets value from the rejected goods, despite the existence of a fundamental breach,[84] in excess of the seller's value derived from payment and in a way that replicates the value stemming from the substitute goods. This provision has not given rise to any decided cases and is unlikely to do so.