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Ch.8 Calculation of Losses under Article 74

From: Damages Under the Convention on Contracts for the International Sale of Goods (3rd Edition)

Bruno Zeller

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 06 June 2023

Subject(s):
Breach of contract — Calculation of damages — Loss of profit and damages — UN Sales Convention and damages

(p. 141) Chapter 8  Calculation of Losses under Article 74

Overview

8.01  This chapter explains how losses pursuant to Article 74 are to be calculated. Specifically, it will be demonstrated that

  • •  the aim of Article 74 is to put the aggrieved party in the position he would have been in had the contract been performed

  • •  the tone of Article 74 suggests that losses must be concrete ones but that an abstract calculation of losses is not totally rejected

  • •  a distinction must be made between notional losses and losses that are based on an abstract calculation

  • •  loss of profit includes future profits as well as loss of chance.

I.  Introduction

8.02  When we consider the calculation of direct or indirect damages, it needs be stressed again that the theory of causation as used in civil law systems has no place, as it is excluded from the sphere of the CISG because of the introduction of the foreseeability rule. The only relevant question is whether the loss is caused by the breach of the contract and is an assessable consequence of that breach.

8.03  The ‘but for’ rule is the most appropriate way to look at losses suffered by the promisee that can be claimed pursuant to Article 74. The Helsinki Court of Appeals specifically pointed to Finnish scholarly writing where the central form of ‘damages is seen as compensation for positive contractual interest’. The aim ‘is (p. 142) to place the contracting party in a position where he would have been if the contract had been duly performed’.1 Losses as a result of non-performance can take the form of direct losses, incidental losses, or other losses consequential upon the breach.2

8.04  Losses arising out of a breach of a contract should be calculated in a real sense, as only actual losses (and therefore definable losses) can be claimed by the promisee. The only exception to this observation is contained in Article 76, which allows an abstract calculation, but only in relation to a substitute purchase and not to a hypothetical sub-sale and subsequent loss of profit. This leads to an interesting argument.

8.05  Article 74 does not specifically mention a concrete calculation and therefore does not directly disallow an abstract one either. However, the tone of the Article certainly suggests that losses, in order to be proven, should be calculated on a concrete basis. Generally speaking, abstract calculations are not allowed, especially if they are speculative—such as a merchant’s comment that he could have sold the goods more favourably than he did but for the breach. Such an argument is necessarily speculative, as there is no guarantee that this sale would have taken place. The Helsinki Court of Appeals, for example, pointed out that sales goals cannot be used as a basis for estimating lost profits.3 If an argument is based on hindsight, then an abstract calculation is not allowed, and such claims must be dismissed. The Handelsgericht Zürich discussed this point.4 The promisee argued that fluctuation in currency should be recoverable under Article 74. The court did not deny this, but it pointed out that the relevant currency value in the future cannot be determined and hence that the claim was not allowable. Furthermore, no abstract calculation was possible because Swiss domestic law does not allow such a calculation. The court confirmed in general that only damages that are liquidated at the time of the judgment can be taken into consideration. There is, however, an interesting point to consider here. The court also discussed a claim for an interest payment and noted that in France the rate is approximately 10 per cent. The promisee was willing to claim only 6 per cent, which was accepted.

8.06  There was arguably an inconsistency in calculating damages in this case: The exchange rate calculated at dates suggested by the promisee was rejected, but a rate of interest suggested by the promisee was accepted. Arguably, a hypothetical or (p. 143) abstract calculation can be accepted if both parties agree to it, but any unilateral suggestion of an abstract nature appears to be rejected by the courts.

8.07  Given the foreseeability factor, it could be argued that there are certain circumstances where an abstract calculation is defensible. Situations that are foreseeable (but not so subject to uncertainty as exchange rate fluctuations) could be subjected to abstract calculations, as by analogy Article 76 allows such a calculation. But this applies only in cases of avoidance of contract.5

8.08  The important consideration in calculating any losses is that overcompensation is not allowed. The CISG, as mentioned above, does not recognize penalty damages unless they are agreed upon by the parties and form part of the contract. The court in BRI Production ‘Bonaventure’ v Pan African Export was patently wrong when it granted 10,000 francs for abusive and unjustified actions against the principle of good faith in international trade promulgated by Article 7 of the CISG. The sum, the court argued, was justified as damages for the inconvenience caused by the trial.6

8.09  The fact remains that not all losses can be calculated on an actual basis. Courts have recognized that in general an aggrieved party will try to inflate claims such as loss of goodwill or loss of reputation. The Helsinki Court of Appeals agreed that a loss of goodwill is claimable, but not the amount claimed by the buyer. They estimated the loss by taking into consideration that the buyer had not done business in this trade but was still doing business in another trade sector.7 Simply put, as Article 74 calls for full compensation as a general principle, the loss of goodwill or reputation must be included. This is underscored by the UNIDROIT Principles and the Principles of European Contract Law, which in Articles 7.4.2(2) and 9:501(2)(a), respectively, acknowledge the recovery of goodwill and reputation. The only thing that needs to be said is that courts and arbitrators must be careful that the burden of proof is discharged properly when claiming losses that cannot be quantified.

8.10  In summary, an actual calculation of losses is preferred but not always possible. Courts take the pragmatic view. If losses have a concrete basis, they are allowed. If, on the other hand, a loss is clearly established but the actual amount cannot be determined, a court will estimate the loss. This must be contrasted with losses that either have no basis at all or are yet to be fully established, such as currency (p. 144) fluctuations. Furthermore, damages could be incurred, but they are not presented in line with municipal procedural law. In such cases, courts ought to dismiss the claim. However, an estimation of claims seems to be the preferred solution to overcome some impediments to their inclusion. In a Finnish case the expense account was in English and did not conform to the Law of Procedure. On the basis of that impediment, the court estimated the amount of legal expenses.8 This case is also noteworthy because the court correctly dismissed the application of domestic procedural law—a ‘result that is in line with the position taken by most legal scholars’.9 The interesting point (and it is a question at the same time) is whether the certainty of loss is a substantive rather than a procedural question. As the Finnish case has shown, the answer is yes and no. Form is procedural, but the calculation of losses is a question of substantive law.

8.11  The question of which currency is to be used needs to be discussed. The CISG does not provide for the currency to be used, and hence the currency stipulated in the contract is the relevant one. Failing such express stipulation, the currency that has the closest relationship to the loss is to be used. This is relevant if a purchaser sells goods and his customers are in a different country. Exchange rate fluctuations need to be treated in the same fashion. Furthermore, if the currency used to pay damages differs from the currency of the payment of the contract price, good faith under Article 7(1) will dictate that without prejudice to the contract such losses are permitted to be calculated in that currency provided it is a convertible currency.10

8.12  A word of caution is appropriate at this point. Article 74 clearly stipulates that the claimant can claim only losses, including loss of profit, that have been suffered as a consequence of the breach. Therefore, only one category of losses is recognized by the CISG. However, courts and writers do from time to time use terms such as ‘direct losses’ or ‘incidental losses’ as aids to explain the calculation of losses permitted under Article 74.

8.13  For convenience, losses are divided or categorized into direct losses, incidental losses, consequential losses, and loss of profit. Most important, losses must be actual and not hypothetical. In other words, notional losses should as a rule be rejected. However, jurisprudence shows that courts are willing to estimate losses if they are convinced that a loss actually occurred, but the amount is uncertain.

(p. 145) II.  Direct Losses

8.14  If either a contract has not been performed or the performance is defective, the promisee can claim all those damages that will bring him into the position he would have been in if the contract had been performed. Great care must be taken that the remedial system of the CISG is understood. For example, if the goods are defective and the buyer repairs the goods, he may not be able to claim the costs of the repair if the seller was not given the opportunity to repair the good or if the seller was willing to repair pursuant to Article 48. Article 45 is the substantive rule for the regime of damages. Articles 75 and 76, as will be explained in detail, are available only if the contract has been avoided. If there is no avoidance, then the right to the remedies in these Articles is lost. However, that may not be the case in all circumstances, as Article 49 allows the breaching party to remedy the breach subject to Article 48. Simply put, if the breaching party is willing to remedy the defects and it is not causing the buyer unreasonable inconvenience, then Article 48 may override a fundamental breach. The function, therefore, of fundamental breach is to force the parties to either cure the contract or agree on an avoidance. Courts have used this interplay to deny fundamental breach.11

8.15  Several decisions are relevant, but as an example a decision of the Handelsgericht Aargau is instructive,12 particularly as the appeal went from a Swiss court to a German court, the Oberlandesgericht Koblenz,13 which affirmed the prior decisions. It further highlights the emergence of a truly international jurisprudence where courts in different fori take note of each other.

8.16  The facts of the case are simple. The buyer ordered three arches filled with air for advertising purposes at a car race. At the first race one of the arches collapsed, and the buyer attempted to avoid the contract. The seller was prepared to remedy the situation so that the arches would be ready for subsequent races. The court considered that a fundamental breach should be judged not only on the severity of the breach but also on whether the breach could be cured. If a breach could be cured, the detriment to the buyer would not deprive him substantially of what he was entitled to expect, and therefore avoidance should have been the remedy of last resort. In essence, it is argued that the equitable doctrine or the principle of good faith should always dictate that avoidance is the remedy of last resort.

8.17  The losses that can be claimed must fall within a reasonable range. It is a matter of fact and not law as to which claims will be accepted and which will not. A good (p. 146) example is a claim for non-commercial losses. In essence, only commercial losses are allowable; a contract for the sale of goods is in nature commercial because Article 2 excludes sales of a private or domestic nature. There are, however, situations where the parties are aware that a commercial sale has a domestic aspect. For example, if a commercial motor vehicle is bought and the purchaser intends to use it first for a holiday trip, then any nonmaterial losses could become part of the losses falling under Article 74.

III.  Incidental Losses

8.18  Incidental losses are those incurred as a result of the other party’s unjustified refusal to perform.14 Typical losses are those incurred in tendering or storing goods that are rejected. All costs involved in returning goods when a contract has been avoided would also fall under this category. This leads to an interesting point: If a contract has been avoided, then all expenses that have been incurred, even those that are legitimately incurred in a valid contract, can be claimed as damages. Only by claiming back all expenses can a promisee be put back into the position he would have been in had he not entered into the contract. This must be distinguished from claiming damages where a contract has not been avoided. In these circumstances, expenses that are due to normal circumstances cannot be claimed as they are not damages. For example, if faulty goods are delivered that need repair, then only the costs associated with the repair can be claimed. The shipping or insurance costs associated with bringing the goods into the country, assuming of course the contract was FOB (free on board), cannot be claimed.

8.19  Incidental costs are in essence costs that are necessary to mitigate losses by the promisee or to avoid any further disadvantage. In this context, claims for extrajudicial costs in pursuing rights are a normal reaction to the unlawful conduct of the breaching party and are admissible. The point is whether the incidental costs prove to be reasonable.

8.20  This view has been challenged as serving no real purpose. The general principle of reasonableness, although contained within the four corners of the CISG, is not included in Article 74. Arguably, therefore, there is no reason not to include it. However, the answer lies in the fact that Article 74 contains the general principle of foreseeability, which in this case serves the same purpose, namely to restrict costs to those that are foreseeable and hence reasonable. This view is supported by the UNIDROIT Principles and the Principles of European Contract Law, both of which do not rely on the reasonableness test. It must be noted that in US domestic law, incidental losses must pass the test of reasonableness but not the test of (p. 147) foreseeability.15 This illustrates again that the CISG must be interpreted without recourse to any domestic laws.

8.21 

IV.  Consequential Losses

8.22  In this context the word ‘consequential’ is not to be interpreted as meaning damages that arise ‘as a consequence’ of a breach. As pointed out above, the classification is merely a convenient way to explain losses that arise as a ‘consequence’ of a breach.

8.23  Consequential losses in general, therefore, are those damages owed to third parties as a result of the breach of the contract. Such losses include loss of goodwill and any injury to indemnity interests. However, care must be taken to include only those indemnity losses that are not excluded by Article 5 and that are foreseeable. Jurisprudence indicates that the idea that ‘the foreseeability doctrine cannot be adequately utilized in the case of … consequential damages’16 is not always correct.

8.24  Two interesting examples will illustrate this point. One is the US decision in Delchi,17 and the other is a decision of the German Federal Supreme Court.18 The two cases are distinguished by the fact that in Delchi the US court was not prepared to set aside municipal thinking and, in effect, awarded damages pursuant to New York law, whereas the German court applied ULIS Article 82 without recourse to domestic law. The ULIS forerunner of CISG Article 74 has a predictive value. This decision must be interpreted cautiously, as many factors in the development of damages within the German legal system appear to have found their way into the decision. It certainly demonstrates the difficulty of ascertaining consequential damages that will put the claimant in the position he would have occupied but for the breach.

8.25  The relevant facts of the German case, laid out in Chapter 5, are simple. Recall that only 3 per cent of a cheese delivery was faulty, which was never denied by the defendant. But because there was intense competition in the market, end buyers were quick to change suppliers for any small problem. The lower court denied the claim for consequential damages and allowed only a 3 per cent price reduction. The court of appeal affirmed the decision; it argued that the claim for consequential damages failed because the seller could not foresee the loss of (p. 148) goodwill and consequential loss of customers. The Federal Supreme Court, on appeal, found that the lower courts erred in their definition and application of the foreseeability principle.19 The court correctly concluded that consequential damages, including lost profits, can be claimed only if, at the time of the formation of the contract, the seller knew, or ought to have known, the possible consequences of a breach. The test that was applied was what the ‘reasonable, ideally typical obligor … [would] expect to happen under the circumstances’.20 ULIS Article 82 requires a subjective as well as an objective investigation into the foreseeability issue. The result was that consequential damages were allowed.

8.26  However, as noted in Chapter 3, at the time of the decision, German law on consequential damages was in a state of transition or developmental change, and the result was that German courts began to apply the foreseeability limitation to certain types of contract damages.21 Schneider alludes to the developments of international law and changes to the domestic law. He comments:

Given the contemporaneous development by German courts of a foreseeability limitation, it is difficult to determine if the German Supreme Court’s decision in the cheese case was a faithful application of [ULIS] or merely an application of a developing doctrine of German national law.22

At the time, the court may have used an objective test resembling domestic developments, but subsequent developments in interpretation under the CISG are not far removed. This case is an example of a court’s use of scholarly writing and a willingness to at least consider international laws without blatant recourse to domestic principles.

8.27  If we consider a decision by a Finnish court in 2000, it can be argued that despite historical interference, the German Supreme Court did apply ULIS faithfully. The Helsinki Court of Appeal allowed damages to a buyer for a loss resulting from liability to a third party, despite the fact that the seller had not delivered the goods owing to a dispute. Of importance was the fact that the seller was aware that the buyer had committed himself to supplying a third party, as the promisee was an importer. The court held that ‘the operation cannot be based on a risk of an abrupt ending of a contract’.23 To extrapolate the decision of the Finnish court, it could be argued that damage to a machine as a result of using delivered defective raw material could fall under the category of consequential damage.

(p. 149) 8.28  In this context, losses resulting from late payments need special consideration. Normally, such losses are cured by granting interest to the aggrieved party. Interest is considered under Article 78, which will be discussed below. However, the question is whether a claim falls under Article 74, which operates on the principle of full compensation, or under Article 78. Article 78 states that interest can be claimed ‘without prejudice to any claim for damages recoverable under Article 74’. Arguably, therefore, a claim for excess interest, such as on bridging loans, ought to be claimed under Article 74 and not Article 78, as many courts simply equate the allowable rate to the discount rate of the lex fori.

8.29  Two further issues are claims for changes in exchange rates and the loss of purchasing power. Both claims are possibly allowable. However, the foreseeability factor would play an important part in any consideration. The question that needs to be considered specifically is whether an abstract calculation is allowable. It is argued that only a concrete calculation of damages is allowable.24 This distinction is particularly important in relation to Article 74 and Article 78. Under Article 78, an abstract calculation appears to be frequently used, as the current exchange rate of a currency is considered, which may or may not equate to the actual loss. Article 74, on the other hand, stipulates that a ‘sum equal to the loss’ must be paid by the breaching party. In other words, Article 74 makes it clear that damages must be calculable in monetary terms only. However, if loss of purchasing power or losses owing to changes of exchange rates are considered, then an abstract calculation must be used. For example, an exchange rate might suffer a dramatic change as a result of an unforeseen political factor. It cannot be denied that exchange rate fluctuations are foreseeable. The problem here is not the change per se but the degree of the change. Undoubtedly, the exact change is unforeseeable, but not the fact that there can be a change in the rate. A court has two possible courses of action: to dismiss the request on the grounds of unforeseeability or to consider that an abstract calculation is appropriate (that is, what could be foreseeable as a change). The decision does not need to be entirely speculative, as the history of exchange rate fluctuations can be used to estimate the change without the unexpected political factor.

V.  Loss of Profits

8.30  Losses of profits are the only losses specifically mentioned in Article 74. This in itself is not unusual, as many other legal systems and international instruments allow for such damages. An Indonesian arbitrator using UNCITRAL rules noted that:

(p. 150)

Indonesian law, like numerous other legal systems, provides for the recovery of lost profit as a component of the damages to which the innocent party is entitled in case of inexcusable breach of contract, in addition to the other damages component.25

This comment suggests that the remedial system of the CISG is not unique; the thinking appears to be widespread. This is not surprising, as the convention was a work of comparative analysis. Furthermore, many legal reforms have taken note of the CISG, including the new Chinese contract law, which includes elements of the CISG. Furthermore, the Estonian Law of Obligations used the CISG as a source of inspiration, specifically Article 74.26

8.31  Again, care should be taken, as many similarities are only superficial. In the end, interpretations must be confined to the four corners of the CISG.

8.32  As mentioned above, losses must be actual losses and hence should be able to be concretely calculated. The law exhibits a general reluctance to get involved in the calculation of profits. The English system developed a method whereby the loss of profit is calculated on the basis of the market value on the day of the breach. This method has its problems, but it at least is certain.27 This method is not advocated in the CISG. However, as noted above, not all losses can be calculated on a concrete basis, in which case abstract extrapolation needs to be employed. This is in line with English courts, which do not impose the control that profits must have been certain.28 As loses are a factual issue it does not matter how they are calculated and arguably even if a particular domestic law is used to do so is perfectly within the four corners of the CISG. A good example is found in Orica Australia Pty Ltd v Aston Evaporative Services, LLC,29 where the court applied the CISG, noting that:

Orica does not explicitly argue for a different standard, [to calculate lost profit] but instead focuses on showing that it has evidence to satisfy the Colorado standard. Accordingly, the Court will assume that the Colorado lost-profits requirements apply equally well in the CISG context. Thus, Orica must have enough evidence to go to a jury on the fact of lost profits and a reasonable method for calculating such lost profits.

A loss of profit is simply the difference in value of the assets before and after the breach. A distinction ought to be drawn between a calculation and the existence of a loss. Undeniably, after a breach of contract an actual loss of profit will occur, but a concrete or actual calculation may not always be possible. It has been argued (p. 151) that the CISG does not include, or is silent on, the matter of liability for the loss of a chance or opportunity and on future or prospective profits.30 However, it can equally well be argued that loss of profit in itself can be determined in most cases only in the future and cannot be calculated on a concrete basis.

8.33  The most important fact is that loss of profit is subject to the foreseeability principle, and hence unusual or excessive losses of profit are not in line with the full compensation principle. Specifically, the risk of consequential losses such as loss of goodwill and the possibility of unrealized profits of an unusual nature must be communicated to the other party at the conclusion of the contract. Otherwise, the breaching party can claim that they fall outside the foreseeability principle.

V.1.  Future Profits

8.34  If a promisee can show that the goods he bought were already sold at an agreed price, a calculation of a loss of profit is easy. However, if a purchaser merely replenishes his stock, a calculation of loss of profit is more difficult, especially in a volatile trading environment. Then a calculation of such losses poses problems, and an abstract calculation may need to be applied. The suggestion that the CISG does not provide for loss of future profits is not an issue. The UNIDROIT Principles, in Article 7.4.3, state that ‘compensation is due only for harm, including future harm that is established with a reasonable degree of certainty’. Arguably, the UNIDROIT Principles do not fill a gap but state expressly what the CISG, by implication, included in Article 74, as most claims for loss of profit will be for profits hoped for in the future.

8.35  This is not a new approach; it is used in other legal systems, including the English common law, which can be used as an illustrative example. As far back as 1868, in Cory v Thomas Ironworks and Shipbuilding Co.,31 the court recognized that the potential for future profits, which may not be the loss the claimant actually suffered, must be taken into account. The seller of a barge was late in delivery, and as a result the buyer lost a lucrative opportunity to trans-ship coal from the mines to barges. The use of the barge as a floating warehouse was not contemplated, but it would have been reasonable. The court awarded damages on the basis that the innocent party might otherwise have been left undercompensated and the seller’s breach without sanction.32

8.36  In the end, the relevant court or tribunal will use its discretion to determine the method. The actual amount is of little consequence. The important issue at hand (p. 152) is that each court and tribunal recognizes that Article 74 allows loss of profit as being part of the total compensation package. The amount is not and never was a substantive matter of law but a question of fact. The facts will change from case to case. A degree of speculation will determine the actual amount. The foreseeability principle determines the extent of losses, but Article 74 determines the type of loss (that is, loss of profit) that must be compensated. The CISG, like the English system, must carefully consider the foreseeability principle and the remoteness rule. It is no accident that it is true for both applications that ‘[t]oo rigorous an application of the [rule] will cut down rather than expand the claimant’s expectancy and would undermine fatally the law’s commitment to the expectation principle of recovery’.33 As to the evidence of the loss, such matters are left to the procedural law of the lex fori.

8.37  We must also consider whether compensation for loss of profit pursuant to Article 74 extends to consequential losses such as loss of repeat business. There is nothing in the CISG that prevents such claims, but their inclusion will be subject to the foreseeability principle. In England the courts apply the remoteness rule strictly and have come closest to the US rule that requires certainty if a loss is to be recovered.34 No doubt the CISG will apply the foreseeability rule in the same fashion.

V.2.  Compensation for Loss of Goodwill and Reputation

8.38  The admissibility of recovery of damages for loss of goodwill and reputation caused by the ‘fallout’ of a breach of a contract requires careful consideration. Arguably, loss of goodwill and reputation is linked to the loss of future profits, as loss of reputation will inevitably reduce the volume of business and hence the volume of profit. As seen above, loss of future profit—provided it is tied to the foreseeability rule—is allowable under the CISG.

8.39  In relation to goodwill and reputation, an investigation again logically starts with an examination of Article 74, and specifically the foreseeability rule. The first impression from looking at Article 74 is that the matter is not clear. Indeed, case law and academic writing are divided on this issue, and hence no clear position has been established.

8.40  Losses of goodwill and reputation are not what can be termed ‘first-line’ damages, which are the damages that flow directly from the breach. Losses of goodwill and reputation can be more easily explained through the causation theory, which is inapplicable under the CISG. Furthermore, it is understood that

(p. 153)

the full compensation of the expectation and reliance interest would operate either as too strong a disincentive to the assumption of contractual obligations, or to an undue raising of charges to cover such unlimited liability.35

Such views strengthen the impression that Article 74 does not extend to covering what may be termed ‘second-line’ losses. However, the second part of the first sentence of Article 74 is also clear that all damages suffered as a consequence of the breach can be claimed; thus, full compensation for losses is guaranteed. Loss of goodwill and reputation is certainly the result of a failure of the buyer to supply his customers and ought to have been foreseen at the time of the conclusion of the contract. Every business person is fully aware of this fact, as the purpose of all business transactions is to make profits by supplying third parties either directly, through selling on, or indirectly, by using the purchase to produce goods that are then sold on. It can, therefore, be argued that loss of reputation and goodwill is an integral part of the knowledge of buyers and sellers when they enter into contractual obligations and is hence foreseeable.

8.41  As loss is not defined in the CISG, the question has been left open. Guidance can be sought not only from the general principles embedded within the CISG but also typically from the UNIDROIT Principles. Article 7.4.2 is relevant, as it widens the rule laid down in Article 74 to include

any gain of which [the aggrieved party] has been deprived a consequence of the non performance … and must be understood in a wide sense … [and] may cover a reduction in the aggrieved party’s assets or an increase in its liabilities.36

The CISG covers the increase in liability through Article 78 by claiming interest on sums in arrears. Sums in arrears do increase the liabilities, and if one part of the balance sheet is recoverable, then logically the other side, namely the asset side, should also be included within the sphere of the CISG. This, of course, leads to the question of how reputation and goodwill are defined.

8.42  A useful starting point is a comment by the District Court of Darmstadt:

[T]he buyer cannot claim a loss of turnover, on the one hand—which could be reimbursed in the form of lost profits—and then, on the other hand, try to get additional compensation for a loss in reputation. A damaged reputation is completely insignificant as long as it does not lead to a loss of turnover and consequently lost profits. A businessperson runs his business from a commercial point of view. As long as he has the necessary turnover, he can be completely indifferent towards his image.37

(p. 154) The court was completely correct in its assessment of how to measure losses. The problem left unaddressed is the question of time and the cause of the loss. There is no question that loss of profits that is the direct result of the breach of the contract can be claimed. Such losses are what may be termed direct losses and are easily determined. Whether the reputation of the buyer among his customers is affected is of little concern provided it does not affect the balance sheet.

8.43  The effect of Article 74 is to compensate for losses that are financial losses only. If a contract is breached but the breaching party cannot point to losses, no compensation will be awarded via Article 74. The CISG does not compensate a party only because a contract has been breached. Losses must be proven. The question is whether losses from downstream customers owing to loss of confidence in the business can be compensated. These losses are certainly not flowing directly from the breach of the contract but are a cause of the breach of contract.

8.44  Article 4 makes it clear that the CISG governs ‘all the rights and obligations of the seller and the buyer arising from such a contract’. It follows that consequences of a breach of a contract can reach beyond the narrow confines of the direct effect of a breach on the two parties involved.

8.45  It further follows that if loss of goodwill and reputation is to be governed by the CISG, downstream losses are also recoverable. An example can illustrate this point. A purchases goods from B and then sells them on to C. C sells on in his country, which is also a signatory of the CISG. The effect is that we have two contracts which are affected by the breach of contract by A. If C compensates his customers, he can claim compensation for breach of goodwill from B. B, on the other hand, will claim damages from A for breach of contract. If all direct losses are compensated, then the costs incurred by B in satisfying the claim of C should be fully recoverable by B, together with his potential loss of goodwill and reputation. This example could be seen as a backdoor introduction of the causation principle, which is inapplicable because it is replaced by the foreseeability principle. However, in this case the causation principle and the foreseeability concept come to the same conclusion, and hence Article 74 can be used as a ‘long-arm’ instrument to recover damages that have gone beyond the confines of a breach between A and B. The conclusion is that full compensation, which is an agreed principle of Article 74, can be extended to downstream or upstream relationships that are affected by a breach of the main contract.

V.3.  Loss of Chance

8.46  An interesting question is whether the mere chance of profit can be compensated. Stoll argues that in some cases where the contract in itself is clear, such as the late delivery of a racehorse that failed to participate in an important race, claims for such losses may be allowable. Whether the horse, which was the favourite in the (p. 155) race, would have won is a matter of speculation, but it is certainly possible.38 The UNIDROIT Principles allow for such damages to be compensated. The principles, in Article 7.4.3(2), specifically state that ‘compensation may be due for the loss of a chance in proportion to the probability of its occurrence’. However, it should be noted that this is not a mandatory Article; the crucial words are ‘may be’ and not ‘must be’. The UNIDROIT Principles arguably only state the obvious, namely that business profits are a matter of chance.

8.47  If we consider English law comparatively, the opinion is that common law follows the UNIDROIT Principles. The CISG allows some measure of damages in cases of chance. Comparatively, therefore, it is of value to investigate the paths English law and Australian law take to reconcile a chance of profit with the fact that losses must be positively ascertainable. The whole matter of chance is closely linked to situations where a defendant has a measure of discretion, such as in the paying of a bonus in addition to the normal salary. On this issue, the law is clear; it is concerned only with legal obligations ‘not with the expectations, however reasonable, of one contractor that the other will do something that he has assumed no legal obligation to do’.39

8.48  However, the High Court of Australia has broken the factual expectation barrier.40 In The Commonwealth v Amann Aviation Pty Ltd,41 the facts were relatively simple. The respondent expected the renewal of a three-year border surveillance contract. The expectation was a strong one, as the respondent already had the necessary experience and aircraft in place. He had spent a considerable sum of money that would have deterred any new entry into the market.

8.49  The respondent claimed that he relied on the renewal and could quantify the expected profits he would have received but for the breach by the appellant. The High Court agreed with this view and endeavoured to put the respondent into the position he would have been in but for the breach. The view simply was that the appellant should not be allowed to minimize its liability.

8.50  The CISG views the matter in a similar philosophical vein. This is an interpretation not only of Article 74 but also of Article 7, which demands that the convention and the behaviour of individual contractual parties must be interpreted with good faith. It is difficult to recognize a claim where there is little substance or proof but for the fact that a breaching party has an obligation that is difficult to quantify, although an obligation or expectancy exists.

(p. 156) 8.51  It must be remembered that Article 74 states that damages include loss of profit and not loss of sale price. There is a difference between recouping the sale price and recouping the profit. Hence, a party claiming loss of profit must show that he actually, or most likely, would have made a profit. In other words, the claimant has to establish with a reasonable degree of certainty that a profit is possible and that a loss of that profit will occur owing to the breach of the contract. This in itself has an element of chance, as not all business ventures end up with profits. At question is the extent to which courts and tribunals are prepared to consider ‘a chance’. The CISG arguably allows for the inclusion of such matters, as Stoll explained.

VI.  Concluding Argument

8.52  Losses can be categorized for convenience’s sake, but the fact remains that Article 74, as a general principle, allows for full compensation for damages. The proviso, of course, is that these losses must be foreseeable and that the claimant has mitigated any losses. For example, in one case damages were denied where the buyer was warned by the complaints of his customers that there were problems and he failed to examine a second shipment in a timely manner to mitigate damages.42

8.53  The ‘but for’ test can also be used to explore the range of damages that will fall under the principle of full compensation. Jurisprudence shows that courts and tribunals have awarded a variety of expenses and disallowed others. It is not the nature of the expense, such as claiming costs for debt collection, that is important but whether it falls under the concept of full compensation. The Amtsgericht Berlin-Tiergarten disallowed a claim because the claimant did not mitigate the loss; that is, it did not adopt the most economical method to collect the debt.43

8.54  Costs have been awarded for expenses in relation to a dishonoured cheque.44 Costs of obtaining credit to cover the breach of a contract have also been allowed.45

8.55  Damages cannot be claimed when the claimant is in breach of an Article of the CISG, such as failing to ‘specify the nature of the lack of conformity’46 of the goods.47 Also, where the burden of proof cannot be met, damages cannot be claimed, as when a buyer could not prove that the seller knew or ought to have (p. 157) known of the conditions contained in the contract between the buyer and a third party.48

8.56  Keeping the above in mind, it is somewhat unproductive to debate whether reliance interest falls outside the scope of the CISG.49 The CISG does not distinguish between different classes of damages but seeks full compensation. Therefore, the question is simply whether the damage is caused by the breach of the contract and is an assessable consequence of that breach. The UNIDROIT Principles and the Principles of European Contract Law do suggest that reliance interest must be seen ‘as different and separate from damages awarded with respect to a contractual non-performance’.50 Article 4.117 of the Principles of European Contract Law and Article 3.18 of the UNIDROIT Principles specifically deal with damage claims that put the aggrieved party into the same position it would have been in if it had not concluded a contract. The CISG does not do that at all. Reliance interest arguably is a surrogate for expectation recovery anyway,51 and hence is covered under the CISG. Furthermore, as discussed above, any losses that can be proven to be part of a breach of contract can be claimed under Article 74. For matters of this kind, Articles 8 and 7, specifically good faith, would play an important role.(p. 158)

Footnotes:

1  Helsinki Court of Appeals, Finland (26 October 2000) http://cisgw3.law.pace.edu/cases/0010261f5.html.

2  P Schlechtriem, Uniform Sales Law: The UN Convention on Contracts for the International Sale of Goods (Manz 1986) 559.

3  Helsinki Court of Appeals, Finland (26 October 2000) http://cisgw3.law.pace.edu/cases/0010261f5.html.

4  5 February 1997, HG 95 0347 http://cisgw3.law.pace.edu/cases/970205s1.html.

5  For example, if we assume that damages as a result of exchange rate fluctuations are foreseeable but that some dramatic unforeseen event panics the stock market and affects the exchange rate beyond expectations, this fluctuation would arguably be outside the foreseeable damage. Some damage was foreseen, and it would not be just or equitable to merely refuse any damages because they are not concretely calculable.

7  Helsinki Court of Appeals, Finland (26 October 2000) http://cisgw3.law.pace.edu/cases/0010261f5.html.

8  District Court of Kuopio, Finland (5 November 1996) 95/3214 http://cisgw3.law.pace.edu/cases/961105f5.html.

9  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 (UPPIC)’ http://www.cisg.law.pace.edu/cisg/biblio/blase3.html.

10  Schlechtriem (n 2) 566.

11  For an interesting treatment see C Fountoulakis, ‘Das Verhältnis von Nacherfüllungsrecht des Verkäufers und Vertragsaufhebungsrecht des Käufers im UN-Kaufrecht’ (2003) 4 Internationales Handelsrecht 160.

12  5 November 2002, OR2001.00029.

13  ibid.

14  Schlechtriem (n 2) 560.

15  R R Anderson, ‘Incidental and Consequential Damages’ Journal of Law and Commerce 7 (1987) 338 and 343.

16  L Vekas, ‘The Foreseeability Doctrine in Contractual Damages’ (2002) 43(1–2) Acta Juridica Hungarica 165.

17  No 88-CV-1078 WL 495787 (NDNY September 9 1994).

19  Judgment of 24 October 1980, 1981 IPRax 98.

21  E Schneider, ‘Consequential Damages in the International Sale of Goods: Analysis of Two Decisions’ (1995) 16 Journal of International Business Law 615 http://cisgw3.law.pace.edu/cisg/wais/db/articles/schnedr2.html.

22  ibid.

23  Helsinki Court of Appeals, Finland (26 October 2000) S 00/82 http://cisgw3.law.pace.edu/cases/001026f5.html.

24  Schlechtriem (n 2) 562.

25  para 121.

26  P Varul, ‘CISG: A Source of Inspiration for the Estonian Law of Obligations’ (2003) 8(1–2) Uniform Law Review 209.

27  M Bridge, ‘Expectation Damages and Uncertain Future Losses’ in J Beatson and D Friedman (eds), Good Faith and Fault in Contract Law (Clarendon Press 1995) 449.

28  ibid 450.

30  S Eiselen, ‘Remarks on the Manner in Which the UNIDROIT Principles of International Commercial Contracts May Be Used to Interpret or Supplement Article 74 of the CISG’ http://cisgw3.law.pace.edu/cisg/texty/anno-art-74.html.

31  (1868) LR 3 QB 181.

32  Bridge (n 27) 451.

33  ibid.

34  ibid 452.

35  D Saidov, ‘Methods of Limiting Damages under the Vienna Convention on Contracts for the International Sale of Goods’ (2002) 14(2) Pace International Law Review 333.

36  UNIDROIT Principles 2010 art 7.4.2, 267.

38  See Schlechtriem (n 2) 563.

39  Lavarack v Woods of Colchester Ltd [1967] 1 QB 278, 294 (Diplock LJ).

40  Bridge (n 27) 458.

41  (1991) 174 CLR 64.

42  Landgericht Stuttgart, 3 KfH O 97/89 (31 August 1989).

43  2 C 22/97 (13 March 1997) http://cisgw3.law.pace.edu/cases/970313g1.html.

44  OLG Stuttgart (21 August 1995) http://cisgw3.law.pace.edu/cases/950821g1.html.

45  ICC Arbitration Case No 7531.

46  CISG art 39(1).

47  LG Köln (30 November 1999) http://cisgw3.law.pace.edu/cases/9991130g1.html.

48  ICA Arbitration Tribunal 406/1998 (6 June 2000) http://cisgw3.law.pace.edu/cases/000606r1.html.

49  CISG art 74(3).

50  Blase and Höttler (n 9).

51  Bridge (n 27) 462.