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International Law Article | Free International Law Essay

Department of Law

International Sales Transactions

Analysis of Article 74 of the United Nation Convention on Contracts for the International Sale of Goods (1980)

• Introduction

This paper will analyze Article 74 of the United Nations Convention on Contracts for the International Sale of Goods (1980). Article 74 contemplates damages for the breach of Contract. The key features of the provision that have been analyzed in detail in this paper are the basic principles governing this provision, its relation with other provisions of the convention, scope under this provision, calculation of loss and damages, foreseeability rule and its feature of limiting the compensation and finally the burden of proof. The connotation of the term damage is very wide in the legal context and Article 74 of the CISG deals with the claim of either the buyer or the seller for compensation for the breach of the contractual obligations. Article 74 lays down the basic foundation for the calculation of damages and the compensation for the loss due to the breach which is suffered by the injured party. The provision states that when there is a breach of contract then the damages claimed pursuant to the breach by the party must be monetary and should be the sum equal to the loss including the loss of profit but only those damages are to compensated which the party foresaw or ought to have been foreseen at the time of conclusion of the contract which he knew or ought to have known. Thus we can see that the provision contains two basic concepts: full compensation principle and the foreseeability rule limiting the liability of the parties. The basic concept behind of the action for damages is that if the contract would have been performed then what would have been the position of the injured party, the party injured should be put in the same economic position as he would have been if the contract would have been performed. These two concepts of full compensation including loss of profits and the foreseeability rule limiting the damages form the sum and substance of the provision under the CISG. This rule of limitation of damages and its development has been always subject to the commentaries in the present and as well as in the past and,

“the underlying idea is that the parties, at the conclusion of the contract, should be able to calculate the risks and potential liability they assume by their agreement”.

This essay will focus on some of the important aspects relating to damages under Article 74 of the CISG.

• The principle of full compensation

The principle of full compensation is expressed in the first sentence of the provision which states that compensation has to be given not only for the loss but also for the loss of profits and the promisee has a right to get full compensation owing to the breach of contract for which he suffered all the disadvantages. The term “loss” is nowhere defined in the convention but there has been a lot of discussion as to what constitutes loss under the CISG. There are three kinds of damages which can be claimed as a result of breach of the contract like non-performance damage, incidental damage and consequential damage. Non performance damage is caused when the contract is either not performed or the performance is defective and in this case delay also constitutes loss and entitles the party for compensation but such a loss has to be specifically proved, incidental damages are not as such mentioned under article 74 but it arises when a party without any justification refuses to perform and in a way the other party incurs additional costs. When the rights are pursued there arises a special problem of reimbursement of costs and the costs of litigation claimed under compensation is exclusively governed under the lex fori and if there are no such express provisions relating to the reimbursement of the lawyers or the court fees then these costs cannot be claimed under article74 of the CISG. No doubt that the provision assures full compensation and the rule is expressly provided in the Article but still there are some ambiguity when the concept narrows down to few aspects like future loss and attorney's fees, in my point of view law is still not so clear about these two aspects where the former involves calculation of profits and is the most difficult thing to assess without any straight jacket formula and the latter is dependant on the lex fori which varies in different jurisdiction but there has been a lot of cases, discussions and commentaries which have taken this aspect to a different level altogether. The third type of damage is consequential damage; this is a kind of loss that the promisee bears because of non performance when he has already made some considering the performance of the contract. Attorney's fee, whether it can be considered as a consequential damage and whether it comes under the ambit of Article 74 has been the area of discussion. In Zapata v Hermanos case the U.S courts had got the opportunity to determine that whether the attorney's fee can also be considered as damages under article 74 of the convention. Under most of the U.S state procedural laws the successful claimant often pays some or all of his legal costs because of the no “loser pays” doctrine but under the CISG Article 74 provides for full compensation and if the attorney's fees are classified as damages then they have to be awarded. The main area of concern was that whether it was to be interpreted according the CISG or lex fori had to be relied upon. The District court considered CISG to be applicable and extended the meaning of Article 74 but on appeal the Circuit court reversed the decision applied the lex fori. Coming to the European context there have been cases where the European courts have awarded compensation in form of damages towards the attorney's fees. There has been a big conflict among the scholars regarding this issue, some of the CISG scholars have argued that this is issue comes under the ambit of Article 74 and it was intended to encompass this issue but other scholars strongly deny this motion with an argument that Article 74 should not encompass this issue because its purely a procedural issue and should be resolved by the lex fori. The discussion still persists as to whether it should be brought under the auspices of CISG or not and the text of Article 74 is “ambiguous on this issue”.

“Referring to the travaux preparatoires of the CISG, as commentators agree one must to maintain an international perspective on the text”.

It clearly shows the picture that the drafters and the approvers of CISG did indicate that whether attorneys' fees will fall under the wordings of Article 74 and this can be considered as a significant omission which lacked in the international consensus for recovery of costs. Therefore it is clearly depicting the picture that in the history of this convention the drafters never contemplated that Article 74 might provide for damages compensating attorneys' fees. Article 74 of the CISG contains as such nothing specific regarding attorneys' fees but it is regulated by the domestic laws therefore a strong claim of uniformity by the CISG comes to a standstill on this point because there is no such single global answer to this question of recovering attorneys' fees as damages under the convention. Loss of profits are rather more complicated and difficult to prove than the actual loss suffered which can be easily proved by bills, receipts or invoices but to calculate loss of profits it need some hypothetical figures in the future or past. The best way to find out the compensable disadvantages are to compare the position of the promisee after the breach and the position he would have been if the contract had been performed. The promisee must be compensated with the expectation interest which arises out of performance and as well as the indemnity interest and article 74 also protects reliance interest if the promisee relies on the contract and the expenses incurred thereon. But there is no compensation for the loss of a mere chance of profit. However there should not be any compensation where the advantage gained by the party has no adequate connection with the loss but are related to the injured party's own expenditure because it would be contrary to the principle of good faith as under Article 7(1) of the convention. The calculation of the lost profits attributes hugely for the non uniformity of the decision because there is no such universal rule to calculate the actual loss of profits. The wording of Article 74 provides beyond any shadow of doubt that the compensation must be made in money and it doesn't allow a right to restitution in kind.

• Foreseeability rule and limitation of compensation

One of the methods of limiting damages, which has received an extensive application in various legal systems and international acts, is the principle of foreseeability. Sinclair Refining Co. v. Hamilton & Dotson expressly points out that the "foreseeability" limit "is known as the rule in Hadley v. Baxendale and is sometimes spoken of as having originated in that case, though it is in reality an embodiment of civil law principles, and is substantially a paraphrasing of a rule on the subject as it had been stated at an earlier date in the Code Napoleon, by Pothier." There are many reasons supporting the motion that Article 74 is not based on the common law principle that is the rule laid down in Hadley v Baxendale which is the contemplation rule because some scholars argue that the Hadley rule has its source from the French Law but Article 74 talks about foreseeability which has a widened source for recovery rather than the Hadley rule which talks about contemplation. A lot of divergence can be found between the two rules but

"the CISG ostensibly widens the area of liability imposed upon the breaching party." The foreseeability rule is set out in the second sentence of Art. 74 which provides that the damages recoverable

"may not exceed the loss which the party 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."

This line gives a clear indication that the party who commits the breach will be liable for the loss which he foresaw consequential to the breach and he will also be considered liable in cases where as a reasonable person he ought to have foreseen the loss as a consequence of the breach.

“Foreseeability under the Convention is measured at the time of the conclusion of the contract in the light of the facts and matters of which the breaching party then knew or ought to have known, the underlying idea being that the 'parties, at that point in time, should be able to calculate the risks and potential liability they assume by agreement.”

Therefore the loss is foreseeable when the party in breach foresaw or ought to have foreseen the breach and in the light of the facts and matters which he knew or ought to have known it occurred at the time of the conclusion of the contract. As a consequence of the breach the party in breach is only liable for the foreseeable loss and not all the loss and the party claiming damages is only required to prove that the party in breach was in such a position that he could very well foresee the loss he need not prove that the party in breach really foresaw it. Objective standards should be used to judge basically the foreseeability of the damages arising from the breach of the contract but the important question here is that what a reasonable person who has all the knowledge about the surrounding circumstances relating to the conclusion of the contract who is in the position of a promisor ought to have foreseen at the time of conclusion of the contract. There are so many normative elements which must be taken into consideration without judging foreseeability solely on the empirical criteria such as

“allocation of risks, under the contract, its purpose and the specific protective purpose of the individual obligation under the contract”.

The question of what must be foreseeable has been the area of concern but commentators have generally agreed that fact and nature of the loss should be foreseeable but here also there is a disagreement on the fact that whether the nature of the loss must be foreseeable. Foreseeability does not extend to the precision in the amount of the loss but according to Professor Stroll and Gruber,

"attempts to restrict the notion of foreseeability solely to the type of loss and to exclude its extent are not convincing."

“To the contrary, others have argued that the foreseeability requirement should be restricted to the fact and nature only: extent need not be foreseeable as price fluctuation, which is often significant, is an established fact of life in international trade and it would be unacceptable for a defendant to escape liability on the ground that he could not foresee the full extent of the loss caused by such a fluctuation.”

• Foreseeability of different kinds of damages

The first kind of loss that should basically be regarded as foreseeable loss is the non-performance loss. The promisor must take into account some of the generic factors like market conditions on which primarily the amount of loss depends although these factors tend to change after the conclusion of the contract those changes in the circumstances will be considered as a part of the contractual risk that the promisor takes at the conclusion of the contract. A reasonable measure is what the limits of liability brought about by the foreseeability coincides but this reasonable measure should not be construed objectively but it should take into account all the circumstances that the promisee was aware of. This is clear that the aggrieved party can claim any pecuniary loss suffered due to non performance but now the question is can non material interests be claimed under this Article, this question is still an unsolved issue under the convention. There is one case where moral harm has been denied under the convention. Another form of loss under here is the loss of goodwill or reputation which often cases and scholars have agreed that it can be claimed under the convention but the main difficulty here is proving and substantiating the loss and its extent and due to this difficulty of proving and substantiating the loss of repute or goodwill many scholars have denied the fact that this type of recovery comes under the ambit of Article 74.

The next type of loss is the incidental loss which are the expenditures suffered by the aggrieved party as a consequence of the breach but it has to be reasonable enough in the eyes of law to be recoverable. But however such restriction is not found in the wordings of Article 74 of the CISG. Incidental loss points towards the scenario where the party suffers loss because of breach and the estimation is done by putting the party in the same position if the contract instead of being breached would have been performed properly and thus foreseeability of those expenses incurred to reach that position is incident loss.

“Recoverability depends on whether the promisor ought to have reckoned with the measures taken by the promisee because they were a reasonable reaction to the breach of the contract or reasonable measure to perform the contract”.

The rule of foreseeability is strongly relevant when it comes to consequential losses which are the third type of loss. When the promisee makes some arrangements relating to the contract or the economic environment of the promisee which the promisor is aware of or he knows those relevant circumstances or any reasonable person in that place who would have reckoned with them, only these losses are recoverable. In some cases the seller can also be held liable for additional losses which normally exceed the defined level only if the buyer while concluding the contract points out to the seller the risk of such loss and he also has to establish whether the seller wishes to take the liability for the risk or not.

• Burden of proof

The concept of burden of proof is purely procedural but the way it is allocated between the parties, it can sometimes determine the outcome at an early stage. According to Saidov identification of a general principle of allocation of burden of proof is necessary to determine who bears the burden of proving the standards of limiting damages. But the general view on this principle is quite interesting; many commentators believe that CISG doesn't provide for such rules and there also a number cases to support this motion and on the other hand many commentators believe that CISG deals with the burden of proof principle and several courts have also stated that though it doesn't expressly deal with the principle but it governs the issue. The party who claims damages or who has suffered the loss bears the burden to prove that there was actual amount of loss and the main cause for the occurrence of the loss was the breach of contract but it is not necessary on his part to prove that breach of contract has occurred but the party who is allegedly in breach has to prove that he performed all his obligations in accordance with the contract. The aggrieved party who has suffered the loss bears the burden of proving the foreseeability of the loss and in order to discharge it he has to substantiate the amount of loss he suffered. The principle is quite clear and is also in accordance with the general principle of burden of proof that a party who asserts a claim bears the burden of proving all the circumstances favorable to him. Thus when we apply these principles to damages it can be very well stated that the party who seeks damages due to non performance bears the burden of proving the non-performance and the existence of such damages and then it depends on him to prove foreseeability of loss by the other party.

• Conclusion

The main purpose of this essay was to analyze in detail the exact nature of Article of the CISG which throws more questions rather than providing answers, no doubt this is the best convention drafted which aims at a uniform sales law but still article 74 in the light of the above discussion still needs some amendments in my point of view. There are many aspects which are governed by Article 74 and are very well settled within it like right to damages under the breach of contract, full compensation under measure of damages and foreseeability of loss but still there are some aspects which are though governed by the convention but have note been yet expressly settled in it like: whether loss can be offset because of some gains by the other part, there is no exact stipulation about this in the convention but the full compensation principle answers this in affirmative; joint responsibility for the loss is another factor, there is no such express wording under the convention which can affirm that loss can be partly attributed to the aggrieved party; proof of non-pecuniary loss as discussed above is another example; Article 74 does not provide for any currency in which damages are to be paid and there are many other matters like the degree of loss of profits and incidental loss which have been discussed above in details. There are also some important factors which have not been taken into consideration at all by the convention like civil liability for personal injury, reliance interest and punitive damages and penalty clauses. CISG has been a great success beyond any shadow of doubt but despite its practical use in the field of trade still there are many questions which remain unsolved which were not considered during its drafting. Through this essay I have highlighted some areas which are fully equipped and need no further developments but there also some areas which need some further development. In the end I would like to throw light on basically how important these problems are and they need to be resolved or developed in order to attain a level where CISG can be called a uniform sales law.

Bibliography
Books
C B Anderson	C B Anderson, Uniform application of the international sales law: Understanding uniformity, the global jurisconsultorium and examination and notification provisions of the CISG( kluwer law international, Netherlands 2007) p122
P Schlechtriem and I Schwenzer	P Schlechtriem and I Schwenzer, Commentary on the UN Convention on International Sale of Goods (CISG) (Second English edition, oxford university press, oxford 2005) p745
Journals
A Mullis	A Mullis, 2007 Twenty-Five Years On -- The United Kingdom, Damages and the Vienna Sales Convention, in: The Convention on the International Sale of Goods -- The 25th Anniversary: Its Impact in the Past -- Its Role in the Future. German Society of Comparative Law -- Private International Law Division Conference 2005: 22-24 September 2005, Würzberg, in: 71 Rabels Zeitschrift für ausländisches und internationales Privatrecht (January 2007) 35-51
Arthur G. Murphey	Arthur G. Murphey, Jr., Consequential Damages in Contracts for the International Sale of Goods and the Legacy of Hadley, 23 Geo Wash J Int' L & Econ 415, 415 (1989)
D. Saidov	D. Saidov, Methods of Limiting Damages under the Vienna Convention on Contracts for the International Sale of Goods, (December 2001), available at: <http://www.cisg.law.pace.edu/cisg/biblio/saidov.html>
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F Blase and P Höttler	F Blase and P Höttler, Remarks on the Damages Provisions in the CISG, Principles of European Contract Law (PECL) and UNIDROIT Principles of International Commercial Contracts (UPICC) December 2004 available at < http://cisgw3.law.pace.edu/cisg/biblio/blase3.html >
Franco Ferrari	Franco Ferrari "Burden of Proof under the CISG", Revue de droit des affaires internationales/International Business Law Journal, No. 5 (2000); <http://www.cisg.law.pace.edu/cisg/biblio/ferrari5.html

F Ferrari	F Ferrari, 1993 Comparative Ruminations on the Foreseeability of Damages Contract Law, 53 Louisiana Law Review (March 1993) 1257-1269 available at< http://cisgw3.law.pace.edu/cisg/biblio/ferrari9.html >
HM Flechtner	HM Flechtner, Recovering Attorneys' Fees as Damages under the U.N. Sales Convention: A Case Study on the New International Commercial Practice and the Role of Case Law in CISG Jurisprudence, with Comments on Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Co. available at < http://cisgw3.law.pace.edu/cisg/biblio/flechtner4.html >
John O. Honnold	John O. Honnold, Uniform law for international sales under the 1980 united nations convention § 92 (3d ed. 1999); Franco Ferrari, CISG Case Law: A New Challenge for Interpreters?, 17 J.L & COM. 245, 247 & n.18 (1998)
P Schlechtriem	P Schlechtriem, 1986 Uniform Sales Law: The UN-Convention on Contracts for the International Sale of Goods, Vienna: Manz (1986) 120 p. available at < http://cisgw3.law.pace.edu/cisg/biblio/schlechtriem-74.html
Schlechtriem	Schlechtriem, ‘Anwaltskosten als teil des ersatzähigen schadens', in Praxis des internationalen privat- and Verfahrensrechts (May 2002), ‘Interpretation of Article 74 – Zapata v Hearthside baking – Where next?' Nordic journal of commercial law (2004/1)
S. Eiselen	S. Eiselen, Unresolved damages issues of the CISG, a comparative analysis: Comp. Int. L.J. Southern Africa 38 (2005) 32-46, available online at: <http://www.cisg.law.pace.edu/cisg/biblio/eiselen5.html
Treitel	Treitel, "Remedies for Breach of Contract: A Comparative Account", 1988, p. 76
V Knapp	V Knapp, 1987 Comments on Article 74 CISG [Damages in general], in: Bianca-Bonell Commentary on the International Sales Law, Giuffrè: Milan (1987) 538-548 available at <http://cisgw3.law.pace.edu/cisg/biblio/knapp-bb74.html>

Web

• All the articles referred above are available at

http://cisgw3.law.pace.edu/

• Review of Conventions on Contracts for the international sale of goods (CISG) 2004-2005 Pace law review (Sellier European law publisher) available at

<http://books.google.com/books?id=1h1HO2k1Z6sC&printsec=frontcover&dq=non+performanc e+loss+under+article+74#PPP6,M1>

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