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CISG Advisory Council Opinion No. 8Calculation of Damages under CISG Articles 75 and 76
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
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.
______________________________________________________________________________ OPINION1.1 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. 3. 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. 5. 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. 6. 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 the 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 |
