Calculating Damages Under the United Nations Convention on the International Sale of Goods

John Y. GotandaVillanova University School of Law

List of States that have adopted theCISG as of June 2009

Argentina Armenia Australia Austria Belarus Belgium Bosnia- Herzegovina Bulgaria Burundi

Canada Chile China (PRC) Colombia Croatia Cuba Cyprus Czech Rep. Denmark

Ecuador Egypt El Salvador Estonia Finland France Gabon Georgia Germany

Greece Guinea Honduras Hungary Iceland Iraq Israel Italy Japan

South Korea Kyrgystan Latvia Lebanon Lesotho Liberia Lithuania Luxembourg Macadonia

Mauritania Mexico Moldova Mongolia Montenegro Netherlands New Zealand Norway Paraguay

Peru Poland Romania Russian Federation

Saint Vincent & Grenadines Serbia Singapore Slovakia Slovenia

Spain Sweden Switzerland Syria Uganda Ukraine United States Uruguay Switzerland

Uzbekistan Zambia

CISG Damages Presentation

Overview of the damages and interest provisionsCISG damages provisions in practice: Who is winning and what are they winning?Controversial issues

Attorneys’ Fees & CostsCertainty of LossInterest

CISG Damages Provisions: Articles 74 - 77

Article 74 - Basic Damages Provision for Breach of Contract

Measurement: “damages for breach of contract … consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach.”

Types of Damages

Direct lossIncidental lossConsequential loss

Offsetting Gains

Damages also must not place the aggrieved party in a better position than it would have enjoyed if the contract had been properly performed.

In calculating the amount of damages owed to the aggrieved party, the loss to the aggrieved party resulting from the breach is to be offset by any gains to the aggrieved party resulting from the non-performance of the contract.

General Measure of Damages under Article 74

Damages = Direct + Incidental + Consequential Gains to Aggrieved

Loss Loss Loss Party from Breach

Foreseeability

Article 74: “Damages for breach of contract . . . 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 light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach.”

Articles 75 and 76

Article 75Applicability: Avoidance + Substitute TransactionDamages = contract price - the price in the substitute transaction + “any further damages recoverable under article 74”

Articles 75 and 76 cont.

Article 76 Applicability: Avoidance; No Substitute TransactionAbstract Calculation• Damages = price fixed by the contract -

the current price at the time of avoidance + “any further damages recoverable under article 74”

Article 77An aggrieved party must take appropriate measures to mitigate its loss.Failure to do so may preclude that party from recovering damages for loss that it could have avoided.Scope: “Reasonable” Mitigation EffortsReasonable Expenses Recoverable

Article 78 - Interest

“If a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it, without prejudice to any claim for damages recoverable under article 74.”

Who’s Winning?: CISG CEITAC Cases

CISG Damages Provisions in Practice

Who’s Winning?: Investment Arbitrations - Franck Study

S. Franck, Empirically Evaluating Claims About Investment Treaty Arbitration, 80 N.C. L. Rev. 1 (2007).  

Who’s Winning?: Investment Arbitrations - GFA Study

Global Financial Analytics, Investment Arbitration Update (2007),

 http://www.gfa-llc.com/images/Investment_Arbitration_Update_12-31-07.pdf 

Who’s Winning?: A Comparison

What Are They Winning?: CISG CEITAC Cases

What Are They Winning?: Investment Arbitrations - Franck Study

S. Franck, Empirically Evaluating Claims About Investment Treaty Arbitration, 80 N.C. L. Rev. 1 (2007).  

What Are They Winning?: Investment Arbitrations - GFA Study

Global Financial Analytics, Investment Arbitration Update (2007),

 http://www.gfa-llc.com/images/Investment_Arbitration_Update_12-31-07.pdf 

What Are They Winning?: A Comparison (Percentage of Recovery to Claims)

Controversial Areas

Attorneys’ Fees & CostsCertainty of LossInterest

Attorneys’ Fees & Costs

The Controversy Zapata Hermanos Sucesores v. Hearthside Baking Company: U.S. Court of Appeals (Judge Posner) rules litigation costs are procedural matters outside the scope of the CISG’s substantive damages provisionsCourts outside the U.S. have allowed recovery under article 74

Attorneys’ Fees and Costs Controversy

1. View 1: Recovery of litigation costs are governed by domestic (procedural) law, not the CISG

2. View 2: Litigation costs are recoverable under CISG Article 74

Certainty of Loss Controversy

1. View 1: Certainty of loss is associated with level of proof and is governed by domestic (procedural) law

2. View 2: Certainty of loss is a matter governed by the CISG

Interest Controversy

1. View 1: The calculation of interest, particularly the interest rate, is governed by domestic law

2. View 2: The calculation of interest is a matter governed by the CISG

The Interpretative Approach

Discard the Substance/Procedure Distinction

CounterproductiveArtificialAllows for application of familiar law

Interpretative ApproachExamine text of articleDetermine if issue was left to domestic lawApply analogical applicationApply domestic law

Attorneys’ Fees & Costs

Applying an Interpretative ApproachArticle 74 text is silent on issueNo evidence of exclusionAnalogy based on Article 74: An aggrieved party is entitled to recover litigation expenses because of the CISG’s principle of full compensation.Analogy based on Articles 45 and 61: An aggrieved party cannot recover litigation expenses under Article 74 because allowing recovery would be contrary to the CISG’s principle of equality between buyers and sellers.

Under Article 74, an aggrieved party cannot recover legal expenses associated with litigation.

Certainty of Loss

Applying Interpretative ApproachArticle 74 text is silent on issueNo evidence of exclusionCISG provides damages consist of “a sum equal to the loss suffered, including lost profit…”CISG addresses foreseeabilityCISG provides requisite standard

The aggrieved party has the burden to prove, with reasonable certainty, that it suffered damages.

Interest RateApplying an Interpretative Approach

Article 78 text is silent on issueEvidence inconclusive on exclusion Analogous Provisions• Article 74• Article 76• Reasonableness Standard

Interest should accrue at a rate that compensates a party for the loss of the use of money but does not provide a windfall

Proposed ApproachInterest should accrue at a savings rate commonly used in the country of the currency in which payment is to be made

Places claimant in position it would have been in had it invested the moneyFunction of Article 78 would be similar to Article 76Provides reasonable compensation for loss of the use of money while avoiding a windfallProvides a uniform, easily applied approach, creating certainty

Applying CISG’s Economic Remedies Provisions

Discard Substance/Procedure DistinctionApply an Interpretative Approach

John Y. GotandaVillanova University School of Law

299 North Spring Mill Rd., Villanova, PA, 19085, USA; Tel.:+1.610.525.3716; Email: gotanda@law.villanova.edu