LUMSA – International Commercial Law
November 19, 2015
Prof. Avv. Roberto Pirozzi
Email: robertopirozzi13@hotmail.com
LUMSA – International Commercial Law
DAMAGES
Article 74 sets forth the general principle by which the CISG
measures liability for breach:
“Damages for breach of contract by one party consist of a
sum equal to the loss, including loss of profit, suffered by the
other party as a consequence of the breach. Such damages
may not exceed the loss which the party in breach foresaw or
ought to have foreseen at the time of the conclusion of the
contract, in the light of the facts and matters of which he
then knew or ought to have known, as a possible
consequence of the breach of contract.”
LUMSA – International Commercial Law
DAMAGES
The basic CISG formula is quite simple: damages for breach of
contract are designed to compensate (and are thus measured
by) the loss suffered by the other party as a consequence of
breach. Assuming a causal connection between the breach
and the loss, the Convention scheme seeks to place the
injured party in the position he would have enjoyed if the
breach had not occurred. Like the remedy of specific
performance, substitutionary relief serves to protect the
promisee's expectation of full performance, i.e., his or her
'expectation interest.
LUMSA – International Commercial Law
DAMAGES
General rules for measuring damages are recited in Article 74
CISG. Cross-references to this provision include:
Articles 45(1)(b) and 61(1)(b) which establish the right to
claim damages;
Articles 75 and 76 which define methods of calculating
damages in certain cases;
Article 77 containing the rule of mitigation of damages;
LUMSA – International Commercial Law
DAMAGES
General rules for measuring damages are recited in Article 74
CISG. Cross-references to this provision include:
Article 79 setting forth the rules on exemption from liability
for damages because of an impediment to performance; and
Article 78 which provides that a claim for interest shall be
"without prejudice to any claim for damages recoverable
under article 74."
LUMSA – International Commercial Law
DAMAGES
Articles 4 and 5 can also affect claims for damages: Art. 4
(sentence one) limits such claims to those of the buyer and
the seller; Art. 4(a) by virtue of its validity proviso can, in
certain cases, permit domestic law to determine the validity
of exculpatory clauses such as contract clauses that exclude
liability for damages; and Art. 5 indicates that the CISG does
not apply to damage claims "for death or personal injury
caused by the goods to any person."
LUMSA – International Commercial Law
DAMAGES
Other general provisions of the CISG relating to damages
include: Art. 6 (primacy of the contract); Art. 7 (interpretation
of the CISG, applicability of its general principles); Art. 8
(intent of the parties); and Art. 9 (usages and practices). See
also, Art. 66 (loss or damage after risk passed to buyer) and
Art. 80 (failure of performance caused by the other
party). The CISG also imposes requirements such as those
regarding the preservation of the goods (Art. 85 through 88)
under which claims for damages can arise.
LUMSA – International Commercial Law
DAMAGES - NOTE
In accordance with article 6 a seller and buyer may agree to
derogate from or vary article 74. Several decisions enforce
contract terms limiting or liquidating damages.
The validity of these contract terms is, by virtue of article 4
(a), governed by applicable domestic law rather than the
Convention.
LUMSA – International Commercial Law
DAMAGES – SELLER’S REMEDY
In addition to money damages under Art. 61(1)(b), an
aggrieved seller may require performance under Art. 62, fix
an additional time for performance under Art. 63, avoid or
cancel the contract under Art. 64, or have goods identified to
the contract under Art. 65.
In addition to any of these remedies, seller may seek
consequential damages under Art. 74.
LUMSA – International Commercial Law
DAMAGES – BUYER’S REMEDY
An aggrieved buyer, in addition to damages under Art.
45(1)(b), may require performance or substitute performance
under Art. 46(2), demand repair of defective goods under
Art. 46(3), fix an additional period of time for performance
under Art. 47, accept seller's cured performance under
Articles 48 and 37, avoid or cancel the contract under Art.
49, or reduce the sales price under Art. 50. In addition to
these remedies, buyer may seek consequential damages
under Art.74. The right to all remedies for lack of conformity
of the goods, including claims for damages, is related to the
inspection requirement recited in Art. 38 and subject to
compliance with the notice requirement recited in Art. 39.
LUMSA – International Commercial Law
DAMAGES
Under CISG Article 74, only foreseeable consequential
damages are recoverable. There is no mention of incidental
damages. Nothing in the legislative history of the CISG
suggests an intention to abolish incidental
damages. Damages which would be characterized as
incidental in other legal systems should be recoverable as
consequential damages under the CISG. It seems, however,
that only foreseeable incidental damages are recoverable
under Article 74 as consequential damages.
LUMSA – International Commercial Law
CONSEQUENTIAL AND INCIDENTAL DAMAGES
Under CISG Article 74, only foreseeable consequential
damages are recoverable. There is no mention of incidental
damages. Nothing in the legislative history of the CISG
suggests an intention to abolish incidental
damages. Damages which would be characterized as
incidental in other legal systems should be recoverable as
consequential damages under the CISG. It seems, however,
that only foreseeable incidental damages are recoverable
under Article 74 as consequential damages.
LUMSA – International Commercial Law
FORESEEABILITY
CISG’s Foreseeability Test is both subjective and objective.
Liability is based on what a party foresaw, AND liability
is based on what a party “ought to have foreseen.”
Note: the test should not be based on the reasonable
person, but rather on the reasonable foreseeability of the
non-performing party.
“[T]he loss which the party in breach … ought to have
foreseen.
LUMSA – International Commercial Law
DAMAGES
The Convention only allows monetary damages.
Article 74 states that “Damages…consist of a sum equal to
the loss,…”. Even though it is clear that the Convention
provides for damages for loss, including loss of profit, it is not
entirely clear which losses shall be compensated since they
are not specified in the Convention.
When considering a loss there are two opposite principles
that one shall keep in mind; the principle of full
compensation and the rule of foreseeability, which functions
as a limit to the first principle.
LUMSA – International Commercial Law
DAMAGES
Once decided that a loss shall be compensated the question
is where it shall be paid. This is not expressed in the
Convention but it can be assumed that it shall be at the same
place as where the price is payable according to Article
57(1)(a), namely at the obligee’s place of business. This is also
in accordance with the general principles in Article 7(2).
LUMSA – International Commercial Law
DAMAGES
As a rule, non-material losses will not be compensated.
According to Prof. Schlechtriem this is a rule with exceptions.
If a contract has a non-material purpose and the nonmaterial loss is to be considered a typical consequence of a
breach of this specific contract it may be compensated. It also
has to be shown that both parties understood the purpose of
the contract by the time of its conclusion.
LUMSA – International Commercial Law
DAMAGES
Example: the case where the purpose of a contract for the
sale of a motor vehicle is to enable the buyer to undertake a
holiday trip. If the seller does not perform according to the
contract he may be held liable also for non-material losses.
Foreseeable damages shall then be compensated as
consequential damages.
LUMSA – International Commercial Law
DAMAGES
As mentioned above, a breaching party is only liable if there
is an actual loss that can be proven and a causal relation
between the breach and the loss.
It is irrelevant whether the damage is caused directly or
indirectly by the breach. However, it can be more difficult to
prove and foresee an indirect loss.
LUMSA – International Commercial Law
CONSEQUENTIAL DAMAGES
Any loss due to a breach of contract is normally compensated
as consequential damages according to the wording of Article
74. By definition, consequential damages compensate those
losses that flow from the particular situation of the particular
contract. A typical example of this kind of loss is when a
breach of the seller results in liability for the buyer as he has
agreed on reselling the same goods to a third person.
LUMSA – International Commercial Law
CONSEQUENTIAL DAMAGES TO THE BUYER
In this situation the first seller may be held responsible for
the first buyer’s liability if he knew that the goods where to
be resold. Even in the case that a buyer suffers a loss of
goodwill, because of defective goods, this loss may be
compensated as a consequential loss according to
Schlechtriem. This statement can be debated. If it is to be
compensated the buyer must have made the risk of this type
of loss clear to the seller before concluding the contract. As I
see it the principle of full compensation is pro compensation
for lost goodwill but against is the difficulty of quantifying
such a loss
LUMSA – International Commercial Law
CONSEQUENTIAL DAMAGES TO THE SELLER
A seller can also suffer consequential loss and this often
happens in the case of delay of payment. In a LG Aachen, 3
April 1990, where a seller had prefinanced the sale, and the
buyer did not pay on time, the court awarded the seller
damages corresponding to the interest incurred by him as a
result of the delay.
LUMSA – International Commercial Law
CONSEQUENTIAL DAMAGES TO THE SELLER
In another German case, the buyer did not pay the price
since he, wrongfully, claimed that the goods were not as per
the contract. Because of this, the seller could not use the
monies owing and the court awarded the seller damages,
corresponding to the interest on the money owed, to
compensate his loss. Costs for actions taken by the seller to
receive payment, i.e. contracting a collecting agent, shall also
be recovered as damages if it contributes with legal
proceedings that are superior to those of the seller.
LUMSA – International Commercial Law
CONSEQUENTIAL DAMAGES TO THE SELLER
Apart from these losses of interest and profit caused by delay
in payment a seller can suffer a loss because of a fall in the
rate of exchange during the period of delay. Claims for
compensation for such a loss shall only be recognised where
the seller can prove an actual loss.
LUMSA – International Commercial Law
CONSEQUENTIAL DAMAGES
When judging in cases concerning consequential damages
one should bear in mind that, in general, it is easier for a
seller to borrow substitute capital, for a certain cost of
interest, than it is for a buyer to find substitute goods.
Because of this the seller ought to be able to prevent
consequential damages easier than a buyer.
LUMSA – International Commercial Law
CONSEQUENTIAL AND INCIDENTAL DAMAGES
Article 74 does not mention incidental damages. Incidental
damages are expenses incurred when the aggrieved party
tries to avoid further disadvantages from a breach. They may
arise from various situations and are recovered as
consequential damages under the same condition of
foreseeability. Despite this, it seems like the court in the
Delchi case argued for consequential and incidental damages
separately.
LUMSA – International Commercial Law
CONSEQUENTIAL AND INCIDENTAL DAMAGES
In this case an Italian buyer claimed damages from an
American seller due to the fact that the compressors for air
conditioners ordered had lower cooling capacity and
consumed more power that agreed on. When determining if
an expense, for Delchi due to the breach, was a foreseeable
damage they did it to see if it legitimated incidental RU
consequential damage. The reason for this is probably that
the two are separated in US contract law and incidental
damages do not have to be foreseeable to be compensated.
LUMSA – International Commercial Law
INCIDENTAL DAMAGES
Further examples on incidental damages are cost for the
seller of tendering the goods in vain and seller’s preserving
and storing goods as a result of buyers rejection of goods or
refusal to make payment on delivery according to contract.
Apart from above a breaching party is liable for the injured
party’s expenses of ascertaining the damage, avoiding it or
mitigating it. Costs for ascertaining damages may be costs for
inspection of the goods and according to Schlechtriem, these
costs shall be compensated as incidental damages.
LUMSA – International Commercial Law
INCIDENTAL DAMAGES
As mentioned a party may be awarded damages for costs
arising when trying to mitigate his loss. In the Delchi-case,
the buyer was awarded compensation for trying to avoid
damages, although the attempts failed. This is also according
to US Contract law.