Larry_A_DiMatteo_-_International_Sales_Law_A_Global_Challenge-Cambridge_University_Press_2014

VI. Conclusion

This chapter reviewed the various approaches used by courts in making fundamental breach determination. Establishing a single approach for determining fundamental breach under CISG Article 25, instead of applying the numerous existing approaches for different types of breaches, would contribute to a greater uniformity in application in this important area of CISG coverage. The hybrid approach presented in this chapter would prevent the contradictory and inconsistent results currently found in CISG case law. This proposed approach would best define a vague concept in the CISG and help resolve the issue of when contract avoidance should be given.

Part IV Remedies and Damages

it is unavoidable that flexibility is required to make any remedial scheme work, which requires some vagueness – as to the seriousness of the breach irrespective of whether avoidance requires a serious breach or is only excluded where the breach is of minor or negligible importance. Without flexible terms, such as fundamental breach, it would be impossible to cover the breadth of breach of contract scenarios. Only through the analysis of international case law, on a case-by-case basis, can detailed subrules be recognized for specific situations, and to a remarkable extent this has already happened in the field of CISG remedies.

II. Elements Common to All CISG Remedies

Under the CISG, all remedies have certain basic elements in common: first, they presuppose a breach of a contractual duty. It does not matter whether the duty is specifically agreed by the parties or follows from the text of the CISG or from usages or is made by a judge. Though the breach of a duty is a necessary condition, it is as such not sufficient to entitle the innocent party to a specific remedy. The further requirements vary from remedy to remedy and are discussed in this chapter for each remedy separately.

Second, under the CISG, none of the remedies requires fault of the breaching party. Especially in the area of damages, this is in stark contrast to most civil law jurisdictions, which followed the Roman law tradition to require fault as a basis for claiming damages.4 Under the CISG, in the common law tradition, a purely objective breach suffices. No subjective element such as intent or negligence is needed for determining breach or its consequences.

Third, despite its system of objective liability, in certain though rare circumstances, the CISG exempts a party from the consequences of its breach. Two different reasons can lead to an exemption from liability: first, if an impediment that hinders correct performance (within a party’s sphere of risk) and is beyond the control of that party, then the party is relieved if the impediment was unforeseeable, unavoidable, and cannot be overcome without incurring undue expense (Article 79 CISG).5 The courts have applied this exemption clause with utmost reluctance. A party is only excused in truly extraordinary circumstances.6 The second ground of excuse is that the creditor itself caused the debtor’s failure to perform (Article 80 CISG). Normally, such conduct is already an impediment in the sense of Article 79(1). Article 80 applies even when this conduct was foreseeable and when the debtor could overcome its consequences. This ground of exemption is warranted under the general principle of good faith (Article 7(1)) and of the broader maxim that no party should profit from its own wrongdoing, such as impeding the other party’s performance.

that installment,” but note the overall contract, then only that installment can be avoided and not future installments. This is closer to the CISG standard.

4An example is German law, which adapted its codified law of obligations in 2002 to a wide extent to conform with the CISG still, §280, para. 1 Civil Code (Burgerliches¨ Gesetzbuch [BGB]), requires fault as precondition for any claim of damages. However, the provision also states that in case of breach of contract the fault of the breaching party is presumed. The party in breach must rebut this presumption if it wants to avoid liability. The threshold for such rebuttal is relatively high, though not as high as in CISG Article 79.

5However, peculiarities apply with respect to Article 79 and the remedy of avoidance and price reduction; see later.

6See infra Part III C.

Fourth, the formal structure of the CISG distinguishes between the remedies of the buyer where the seller has breached the contract (Articles 45 et seq.) and the remedies of the seller in case of the buyer’s breach (Articles 61 et seq.). However, the general requirements for damages and avoidance are identical irrespective who breaches the contract. Thus, due to this commonality of the requirements of buyer–seller remedies, most CISG remedies can be viewed as constituting general remedies, which apply to any breach of a CISG contract by either party. On the other hand, price reduction is only provided for where the seller breached the contract by delivering nonconforming goods.7 It could be argued that this remedy should be available in other situations as well, even where the buyer did not fully perform its obligations so that the seller should be entitled to reduce its performance under the contract.8 But price reduction is commonly construed as a buyers’ remedy. It is difficult, although not entirely impossible, to imagine cases where the seller may reduce its performance because the buyer has not fully performed its obligations. However, to develop price reduction into a remedy of general application would overstretch the wording and aims of the CISG. Under the CISG, price reduction is considered a one-sided remedy that is only available to buyers.

Fifth, it must always be kept in mind that the CISG allows the parties to derogate from or vary the effect of any of its provisions (Article 6).9 The parties are free to regulate remedies for breach of contract in a specific way or to provide for specific mitigation or preservation duties. For this reason, contracts have to be examined and interpreted first to determine if they contain specific provisions dealing with remedies, mitigation, and preservation. The validity of any such variation of CISG provisions depends, however, on the applicable national law.10 Using CISG interpretive methodology, the application of domestic validity standards should use the CISG as the yardstick against which to measure any possible invalidity.

III. Damages

Under practical aspects, damages are the most relevant and most popular remedy. They are almost always available where a breach has occurred and the other party is almost never exempted from liability. The requirements the claimant must meet are limited in number and often reasonably easy to prove. Uncertainties and restrictions often linked to the remedies of avoidance and specific performance do not play a role in the assessment of damages. To make good the damage caused by a breach will in most cases satisfy the aggrieved party’s interest. Moreover, the creditor can combine damages with any other remedy insofar as the other remedy leaves uncompensated losses unsettled.11 It is the common understanding of the CISG’s damages provisions that damages consist of a sum of money12 and that creditors cannot claim restitution in kind.

7See CISG Article 50.

8See infra Part V.

9The only express exception is Article 12 CISG, which the parties cannot modify. They can also not derogate from the principle of good faith (CISG Article 7(1)).

10See Article 4 lit. b CISG.

11See CISG Article 45, para. 2, and Article 61, para. 2.

12See the text of CISG Article 74: “Damages for the breach of contract by one party consist of a sum equal to the loss”; see also Peter Schlechtriem and Petra Butler, UN Law on International Sales: The UN Convention on the International Sale of Goods (Springer: Berlin, Heidelberg 2009), para. 286; John

A. The Concept

The CISG’s concept of damages is mainly modeled after the common law. Articles 74, 75, and 76 resemble the well-known formulations of the seminal English decision in Hadley v. Baxendale.13 Despite this background, English decisions on contractual damages cannot simply be applied to interpret the CISG provisions on damages. This would run counter to the aim of uniform interpretation of the CISG. This is especially true considering that the foreseeability principle enunciated in Hadley v. Baxendale had its origin in Article 1150 of the French Civil Code.14 That 1804 French Civil Code provision as formulated required that in order to recover losses, the losses must have been foreseeable at the time of conclusion of the contract. The underlying idea of this principle is evident and convincing: when concluding a contract, a party should be able to calculate and compare the risk linked with a breach of contract with the expected profit of the contract. For the CISG, however, autonomous interpretations must be found for its damages rules and the criteria by which they are to be applied. Decisions in English and French law of contractual damages may perhaps give some inspiring interpretative guidance, but by no means do they provide precedents.

B. Requirements

1. Breach of Obligation

The CISG provides a basis for a claim for damages in Article 45(1)(b) for the buyer and in Article 61(1)(b) for the seller. The CISG’s regulation of damages is found in Articles 74 through 77. As mentioned previously, a breach of contract is an indispensable condition for liability in damages. It does not matter which duty has been breached (“any of his obligations under the contract or the Convention”),15 including violations of additional duties that the parties have agreed on. In addition, breaches of the duties to return the goods after termination of the contract16 or to preserve the goods17 may result in damages. Only the breach of duties against the interests of the breaching party,18 such as the buyer’s “duty” to examine the goods and notify the seller of a nonconformity,19 do not lead to damages (but to the loss of rights by the “breaching” party).

2. Damages

According to Article 74 CISG (“loss, including loss of profit”), the CISG neither provides for nominal or de minimis damages – where the aggrieved party suffered no loss

Gotanda in UN Convention on Contracts for the International Sale of Goods (CISG) (ed. S. Kroll,¨ L. Mistelis, and P. Perales Viscasilllas) (Munich, Oxford: Beck, Hart, Nomos, 2011), Article 74, para. 37; Ulrich Magnus, “Wiener UN-Kaufrecht (CISG),” in Julius von Staudingers Kommentar zum Burgerlichen¨ Gesetzbuch mit Einfuhrungsgesetz¨ und Nebengesetzen (Munich: Sellier, 2005), Article 74, para. 24.

13(1854) 9 Exch. 341.

14Hadley v. Baxendale was inspired by comments in the U.S. textbook of Theodore Sedgwick, A Treatise on the Measure of Damages, 2nd ed. (New York: J.S. Voorhies, 1852), who in turn had relied on Article 1150 French Code civil (in its Louisiana version).

15See Articles 45(1) and 61(1) (emphasis added).

16See Article 81, para. 2.

17See Article 85 et seq.

18Apparently, only German law has a special legal term for such kinds of duty, namely “Obliegenheit.”

19See Articles 38 and 39.

at all and damages are a symbolic sum for the violation of a right – nor for punitive or supracompensatory damages. It is the consensus view of international case law and legal writing that the “loss” in the sense of Article 74 can include immaterial or intangible loss, for instance, the loss of good will.20

The aim of compensating the damage caused by the breach does also not allow for stripping the gain that the debtor made by its breach. It is the creditor’s actual loss that counts and sets the standard for compensation.

3. Duties of the Creditor

In general, damages for the delivery of nonconforming goods or of goods with title defects further require that the buyer fulfill its “duty” to examine the goods and give notice of defects. Without satisfying this precondition or fitting into one of the recognized exceptions to it,21 no damages claim can be sustained. The creditor must further observe its duty (Obliegenheit) to mitigate any loss pursuant to CISG Article 77, to be discussed in Section VI. Failure to mitigate damages prevents the nonbreaching party from collecting the damages that would have been prevented by the mitigation.

C. Exemption from Liability

In rare situations, the party in breach is exempted from its liability to compensate for losses resulting from the breach (Article 79). The exemption does not enter automatically and is not to be recognized ex officio; the party in breach must invoke and prove it. Although not often granted, the CISG’s exemption provision is always theoretically applicable. Because of Article 79(5) it has particular – theoretical – importance for damages claims and is, therefore, discussed here.

1. Impediment

The central prerequisite for exemption is an impediment beyond the debtor’s control that it could not reasonably be expected to have taken into account at the time of the conclusion of contract or to have avoided or overcome it or its consequences. This is a high evidentiary threshold that a debtor rarely overcomes. In principle, impediments such as natural catastrophes, acts of war, terror attacks, strikes, or boycotts can result in an exemption; however, only if they were unforeseeable at the conclusion of the contract and if the contract did not expressly or implicitly allocate the risk to the debtor. The general possibility “that something can happen” does not make an event foreseeable. The debtor must have been able to foresee the event and its impact in the way in which it occurred. If, for example, a seller sells next year’s crop and the crop is then partly destroyed by flooding, this is no excuse for nondelivery if such flooding is a relatively common occurrence. Only an extraordinary flood that destroyed the whole crop would be unforeseeable and exempt the seller from liability. A further issue is the question of how far the debtor is obliged to overcome the impediment or its

20 See Bundesgericht (Swiss Federal Court [BG]) Schweizerische Zeitschrift fur¨ Internationales und Europaisches¨ Recht (SZIER) 1999, 179; contra, see, e.g., Gotanda in UN Convention, Article 74, para. 39 (against compensation of immaterial losses) but see, id. at para. 63. (compensation for loss of good will).

21 See CISG Article 40 or 44.

consequences.22 In the given example, even if the flood was extraordinary, is the seller expected to buy at higher prices crops from other sources in order to overcome the impediment and its consequences? It is advocated here that such a duty exists, though narrow in scope. The CISG does not oblige the debtor to bear extra burdens where impediments beyond his or her control hinder performance. Only where it is easier for the debtor than for the creditor to overcome the impediment can it be reasonably expected. This expectation corresponds to the duty of cooperation and the commandment of good faith.23 Where, in the example, the seller can easily find substitute crops at no higher price, then it should be obliged to buy and deliver the substituted goods.

2. Excuse Due to Third-Party Conduct

Where third parties outside the control of the debtor unforeseeably caused the nonperformance of the debtor’s contract, this may lead to an exemption from liability. For the debtor’s own personnel and suppliers, the debtor regularly remains responsible.24 It is, for instance, no excuse for a seller of vine wax that its supplier changed the mixture of the wax, without notice, so that the wax became dangerous and damaged the vine plants of a buyer of the wax.25

3. Hardship

It had been disputed whether Article 79 comprises also cases of hardship, cases where the sale has become an economic burden for one party, in particular because market prices have dramatically changed. In general, each party has to take into account economic risks when concluding a contract and bear the risks allocated to them. This is most evident in the commodities trade characterized by rapidly changing prices. The party disadvantaged by the fluctuation of prices is nevertheless bound by the contract. Only in extreme situations where the economic existence of the debtor is otherwise endangered may an exemption from liability – or, first, rather an adaptation of the contract – be granted. Thus far, the courts have not exempted a party because of economic hardship. An Italian court held that a thirty percent escalation in steel prices did not provide an excuse for a seller’s nondelivery. The seller remains obliged to deliver at the agreed price.26

4. Exemption from Damages

According to the text of Article 79(5), the excuse applies to damages claims and does not prevent a party from exercising any other of its rights. Excuse, however, also extends

22See Yesim Atamer, UN Convention, supra note 12, Article 79, para. 55.

23See CISG Article 7(1); see also CISG Article 80, which recognizes a duty to cooperate; Thomas Neumann,

The Duty to Cooperate in International Sales Law (Sellier, 2012).

24CISG Article 79(2) exempts the contract party from liability only when the party and the third party both meet the requirements of Article 79; see Atamer, UN Convention, Article 79, para. 62; Magnus, “Wiener UN-Kaufrecht,” Article 79, para. 75.

25Bundesgerichtshof (German Federal Court [BGH]) NJW (Neue Juristische Wochenschrift) 1999, 2440.

26See Tribunale di Monza, January 14, 1993, Giurisprudenzia italiana 1994 I 145; see also Rechtbank van Koophandel t’Hasselt, May 2, 1995, Rechtskundig Weekblad (1995–6) no. 40, 1378 (price for raspberries had sharply dropped and the buyer unsuccessfully requested an adaptation of the price).