14.2 FORESEEABILITY OF LOSS

14.2.1 In General

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, or so-called contemplation principle. This principle has a long history. It was first established in Roman law. Much later, it was established in the Code Napoleon and, consequently, adopted by a number of legal systems. This rule has been adopted by the Common law as well. It was established in a famous case Hadley v. Baxendale and further restated in Victoria Laundry v. Newman Industries.  ⁷⁶⁵ 

Considering numerous versions of foreseeability in particular legal systems,  ⁷⁶⁶  it is decided in this section to focus on such a test as similarly established under the three studied instruments. In this respect, the second sentence of Art. 74 CISG closely resembles the common law foreseeability requirement: "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." It is also adopted in the two Principles. Art. 7.4.4 UPICC prescribes that: "The non-performing party is liable only for harm which it foresaw or could reasonably have foreseen at the time of the conclusion of the contract as being likely to result from its non-performance." Art. 9:503 PECL stipulates that: "The non-performing party is liable only for loss which it foresaw or could reasonably have foreseen at the time of conclusion of the contract as a likely result of its non-performance, unless the non-performance was intentional or grossly negligent."

Clearly, these provisions cited above resemble in substance. I, therefore, will focus on the approach taken on by the CISG, with a comparison with the other instruments where the approach developed or worded differently. According to the second sentence of Art. 74 CISG, "the only damages that must be compensated are those which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract. [...] 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."  ⁷⁶⁷  This rule encourages the injured party to disclose any special circumstances and is therefore consistent with the cooperation and communication goals. It is also consistent with the purpose of not penalizing a breaching party who did not know of special circumstances and could not take special precautions.  ⁷⁶⁸ 

Texually speaking, in considering ways to limit the liability of the breaching party under Art. 74 CISG, there is "seven clauses" referred to as "bare bones" which a court must analyze. These clauses are: "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 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".  ⁷⁶⁹  And in the following paragraphs the author will selectively lucubrate into some of these "bare bones".

14.2.2 Test for Foreseeability

It is clear that the second sentence of Art. 74 CISG provides for both subjective and objective standards with respect to foreseeability by using the wording "foresaw or ought to have foreseen". What is meant here is to foresee subjectively, but the Convention does not stop at that. Insofar as damage is a completely normal consequence of a breach of contract, it should have been foreseen.  ⁷⁷⁰ 

In order to determine the foreseeability, it will be sufficient to prove either that the party actually foresaw the loss, or was objectively in a position to foresee it. Therefore, it is not necessary to prove that the party in breach actually foresaw the loss. The proof of an objective element will be sufficient to make the party liable for loss.  ⁷⁷¹  However, such liability may be restricted on the basis of a reasonable allocation of risks under the contract. In particular, it is not quite exact to state that the subjective foreseeability does not matter. Subjective foreseeability plays a role when the resulting loss is above what would have been regarded as the normal measure by any reasonable person, but actually was foreseen by the party in breach.  ⁷⁷²  On the other hand, "it may explicitly or implicitly follow from the terms of the contract that certain losses should not be covered by the party's liability, even though they were foreseen or objectively foreseeable."  ⁷⁷³ 

In short, the breaching party would be liable when proved either that the party actually foresaw the loss, or was objectively in a position to foresee it, in consideration of particular circumstances. To clarify this double test, there are more details needed discussing in the following paragraphs.

14.2.3 Party Concerned and Reference Point

The first question is: who is required to foresee or to be in a position to foresee? It is said that "foreseeability, as understood in Article 74, depends on the knowledge of facts and matters which enable the party concerned to foresee the results of the breach".  ⁷⁷⁴ 

In this regard, it's only "the party in breach" whose knowledge matters. This is clearly shown by the wording in Art. 74 "the loss which the party in breach foresaw or ought to have foreseen". This position is somewhat different in English law. In particular, in Hadley v. Baxendale, the requirement was that the loss be "in the contemplation of both parties".  ⁷⁷⁵  What's the idea underlying this formula of Art. 74 in stating that it is only"the party in breach" who is required to foresee or to be in a position to foresee? It is said that, "[t]he C.I.S.G. article, in limiting reference to the party in breach, surely does not envision delivering a windfall to the plaintiff, because the plaintiff recovers something not foreseen. Rather, this language reflects the view that the focus should be on the party who will have to answer for the amount of the loss."  ⁷⁷⁶ 

Then the second issue arises: What's the relevant time for evaluation of foreseeability? Adopting the same position as that set out in the Hadley rule or English law (where the relevant time for evaluation of foreseeability is generally the time of making the contract), Art. 74 CISG directly refers foreseeability to "the time of the conclusion of the contract" for determining what is foreseeable.

It follows: "It is not sufficient that the party in breach could at the time of the delivery of the defective goods or at the time of performance of the non-delivered goods foresee the damage to be caused by the breach of contract. The party in breach rather should have been able to foresee the damage at the time of the conclusion of the contract. He should at the time of the conclusion of the contract be in a position to calculate his risk".  ⁷⁷⁷  Generally, the "at the time" language in Art. 74 seems to be "problem-free", this rule is well settled and has proved remarkably resistant to change.  ⁷⁷⁸  The purpose here is to emphasize the important role played by the time precision in assessing foreseeability. The fact that negotiating leading to the conclusion of the contract may last a certain period of time makes it clear that precision in relation to the time becomes very important. It is therefore to be noted that, careful attention should be paid to the requirements of some legal systems governing the conclusion of contract.

In any event, the moment of the conclusion of the contract is the decisive time in determination of the party's foreseeability. "No possible foreseeability, which may take place after this moment, should have any legal consequences."  ⁷⁷⁹  It is only within such limits of the particular period of time, i.e., the time of the conclusion of the contract, that other important elements of foreseeability will be examined.

14.2.4 Evaluation of Foreseeability

Generally, the terms of the contract, together with knowledge of the party in breach, are among the first important factors in evaluation of foreseeability. Moreover, Art. 6 of the CISG clearly shows that in case there are hesitations as to the sequence or priority of application of these elements, precedence should be given to the "express or implied" intentions of the parties with respect to the terms of the contract. However, the party's actual foresight and the ability to foresee may not always be explicitly reflected in the contract. "It would be more correct to say that foreseeability is partly reflected by the terms of the contract. Besides the contract terms, there are other elements, which are essential in evaluating foreseeability: knowledge and trade usage. These two elements may or may not be explicitly reflected in the contract."  ⁷⁸⁰ 

As mentioned above, the foreseeability was established at common law in the famous case Hadley v. Baxendale and further restated in Victoria Laundry v. Newman Industries. In this regard, it was once thought that Hadley v. Baxendale (1854) should be understood as establishing two rules, namely that "the damages should be such as may fairly and reasonably be considered as arising either: a) naturally, i.e. according to the usual course of things from such breach of contract itself; or b) as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach." This test was reformulated in Victoria Laundry v. Newman in what has been referred to as a classic statement of the law: The aggrieved party is only entitled to recover such part of loss actually resulting as was the time reasonably foreseeable as liable to result from the breach. What was at the time so foreseeable depends on the knowledge that the parties had at the time of the conclusion of the contract, or, "at all events", the party in breach had at that time. The two rules of Hadley v. Baxendale become one. There is the imputed knowledge which every reasonable person is taken to know in the ordinary course of things and the actual knowledge of special circumstances of which the contract-breaker was aware at the time of entering into contract.  ⁷⁸¹ 

It follows that under English law, knowledge can be of two kinds: imputed knowledge (which in "the ordinary course of things" is possessed by any reasonable person (regardless of whether the party in breach actually possesses it or not) and actual knowledge (which means knowledge the party in breach actually has of some special circumstances, which lie beyond "the ordinary course of things"). In turn, the CISG does not directly establish the two parts of the Hadley rule, which subsequently gave way to the doctrine of two types of knowledge. Nonetheless, as to be furthered below, analogous subjective and objective standards have been established with respect to the party's knowledge: "the facts and matters of which he then knew or ought to have known". Therefore, such wording is likely to cover "the ordinary course of things" case as well as "the special circumstances" case.  ⁷⁸² 

It is here recalled the manifestation of objective and subjective standards with respect to the foreseeability test. What are the standards with respect to the knowledge itself, which has been established as an essential element for evaluation of foreseeability? It suggests that a similar approach has been taken on when Art. 74 uses the wording "in the light of the facts and matters of which he then knew or ought to have known" to define the foreseeability formula. "This wording serves to objectify the foreseeability. What matters is not anymore the actual foreseeability, rather, it is the foreseeability which can be expected from a reasonable party in the same situation."  ⁷⁸³ 

Interpreting this wording may involve the consideration of several sources as regards the "knowledge" available to the breaching party at the time of the conclusion. From one source, based on a subjective standard: "The party in breach will also be considered as having known the facts and matters enabling him to foresee the possible consequences of the breach, and therefore, as having foreseen them, whenever the other party to the contract has drawn his attention to such possible consequences in due time. Should a party at the time of the conclusion of the contract consider that breach of contract by the other party would cause exceptionally heavy losses or losses of an unnatural nature, he may make this known to the other party with the result that if such damages are actually suffered they may be recovered."  ⁷⁸⁴  Sutton also submits that, a party to a contract that may lead to unusually large losses may want to make these dangers known to the other contracting party in order to implicate the subjective prong of the Art. 74 foreseeability test. It is obvious that a party who fears suffering an extraordinary loss as a consequence of the breach of contract by the other party, should make this known to the latter at the conclusion of the contract so as to enable him to calculate the risk.  ⁷⁸⁵ 

However, it is not the only available source. The CISG does not stop at actual knowledge but establish the imputed one as well. This is the other source, from which the breaching party will have the knowledge that merchants in general have. The party in breach will be considered as knowing the facts and matters enabling him to foresee the consequences of the breach of contract if such knowledge generally flows from the experience of a merchant or, in other words, if such knowledge can in the given case be expected of him having regard to his experience as a merchant. "Generally, knowledge, in the light of an objective standard, should be generally imputed to the party in breach if it can be objectively considered that such knowledge is based on the experience of the party as a 'merchant'."  ⁷⁸⁶  At that, the circumstances of a concrete case should be taken into account as well. In this respect, to what extent the party in breach is capable of taking the circumstances into consideration may depend on his position, especially which has been affected greatly by advances today in technology. "Modern business practices (and equipment), accounting methods, and the extensive communication of information make more knowledge available to both parties. This increased knowledge may make potential amounts of loss easier to compute. A potential breacher today will have available a great deal more information about what can happen concerning the contract and hence 'ought to know' a great many more facts than a potential breacher in the nineteenth century."  ⁷⁸⁷ 

It seems that in some cases, a trade usage can also serve as an additional factor for evaluation of foreseeability. A trade usage can be relevant for determining both subjective and objective standards with respect to foreseeability.  ⁷⁸⁸  Where a trade usage is relevant in evaluation of foreseeability, the applicability of an objective or a subjective standard of foreseeability can be linked to the grounds provided for in Art. 9 CISG, which contains both subjective and objective grounds for applicability of a usage to the parties' legal relationships.  ⁷⁸⁹ 

In this regard, Saidov states as follows: "If a subjective ground is applicable, i.e. if the parties have specifically agreed to a particular trade usage, or established a practice between themselves, or knew of a usage, then such a usage or practice will be likely to determine the actual knowledge of a party in breach. The actual knowledge, in turn, can, on the one hand, establish the actual foresight. On the other hand, the fact that a party actually knew of something does not necessarily mean that he actually foresaw the consequences in question. The actual knowledge can as well lead to the establishment of an objective standard, i.e. that a party, having known of certain conditions, was in a position to foresee the consequences of the breach, but did not in fact foresee them. If an objective ground for applicability of a usage comes into play, then this ground is likely to impute the knowledge of the party in breach. Provided that a party did not actually possess the knowledge, the imputed knowledge will be more likely to lead to determination of an objective foreseeability('ought to have foreseen'), rather than of an actual foresight. The reason for this conclusion is that it is highly unlikely that a party will actually foresee the consequences if he does not actually have necessary knowledge."  ⁷⁹⁰ 

In any event, "in deciding whether the party in breach can be considered as having known 'the facts and matters', a right balance has to be found in relying on available sources. This means that we will need to assess the proportion, in which each of the sources of information can be said to have contributed to the formation of the party's knowledge. However, ultimately, the specific circumstances of a particular case should be decisive."  ⁷⁹¹ 

14.2.5 Content of Foreseeability

The foreseeability established under Art. 74 CISG, directly refers to the loss "as a possible consequence of the breach of contract". "The phrase 'as a possible consequence' appears in Article 74, while Hadley chose 'as a probable result'. [...] Thus the language of the C.I.S.G. ostensibly widens the area of liability imposed upon a breaching party. Hopefully, 'possible' will not cause in international sales cases the same speculation that 'probable' has caused in the British cases."  ⁷⁹² 

This makes it clear that, the foreseeability does not refer to a certain sum of money equal to the loss, even though the wording of this rule may suggest it, but to the possibility of a loss as a consequence of the breach of contract as such and the extent of the possible loss.  ⁷⁹³  It follows that foreseeability is a flexible concept falling within the wide discretion of the judge. What should have been foreseen in each case will often have to be judged retroactively by a court or an arbitral tribunal. Already in the jurisdiction in regard to ULIS, which in Art. 82 contained the same rule of foreseeability, the following cases became apparent: (a) the cost of a substitute transaction and the loss of resale profit are foreseeable; (b) missed uses of the goods to be delivered are also part of the generally foreseeable damage; (c) additional costs for transportation, storage and insurance are also foreseeable; and (d) even the loss of clients of the buyer because of the defect in the goods was characterized as foreseeable. Only the loss suffered from a decline in the currency which occurred as a consequence of the delay in payment was predominantly rejected as not foreseeable.  ⁷⁹⁴ 

And with regard to the crucial question on what concrete factors the party in breach had to foresee or ought to have foreseen to be liable for the loss, it is further summarized: "The first such factor is the possibility of the loss. This conclusion flows directly from Article 74, which provides that the loss must be foreseen as 'a possible consequence of the breach'. There is no doubt that the risk of loss is in direct connection with the type of a potential loss. Therefore, the second factor, which the party had to foresee or ought to have foreseen, is the type of the loss. It is further submitted that foreseeability should also relate to the possible extent of the loss (the third factor). The party in breach should not be held liable for the full extent of the loss, if he could not have reasonably foreseen or was not in the position to foresee that such extent would follow from the type of the loss which he foresaw or ought to have foreseen. The party should be liable only to the extent which he foresaw or ought to have foreseen as the possible extent of the loss. It is also to be noted that in evaluating the possible extent of the loss, the manner in which the loss was caused, or the events which led to the loss having acquired the extent in question, can often be decisive. Therefore, arguably, these aspects can be regarded as necessary factors that the party had to foresee or ought to have foreseen to be liable for the extent of the loss in question."  ⁷⁹⁵ 

On the other hand, it can be inferred from the wording "as a possible consequence of the breach of contract" that there is a requirement as to the presence of causal link between the breach and the loss. Although the concept of causation in different legal systems gave rise to the development of various theories of causation, the causal link, established in Art. 74, strongly overlaps the foreseeability rule. Thus, a loss may be considered to be caused by an event if the event is appropriate to bring it about and if a third person in the light of general experience and with knowledge of all the facts could have foreseen the possibility of loss. Foreseeability and causation are closely inter-related and hardly does it seem possible to rigidly separate them from each other. Indeed, foreseeability largely consists of an element of causation. Without an understanding of how events can affect each other and of "a degree of uniformity of sequence of events", it would be impossible to foresee anything whatsoever.

However, as criticized by some authors, such an inter-connection cannot serve as a basis to consider the two concepts as mutually exclusive. Nor is it correct to regard foreseeability as being capable, at least on a theoretical level, of fully replacing the potential effect of causation. Causation as a phenomenon exists on its own regardless of our knowledge of the world. It is an objective phenomenon. Therefore, it seems incorrect to bring an objective process, which exists independently of our perception of the world, entirely down to the way a person could foresee the potential causal processes. The foreseeability rule under the CISG includes both subjective and objective standards. The way a person had actually foreseen or been in the position to foresee the potential development of events, at the time of the conclusion of the contract, does not necessarily coincide with the way such a development has, in fact, taken place. Rather, these concepts should supplement and balance each other. The doctrines on foreseeability and causation could be applied in a rather consistent manner and Art. 74 is certainly flexible enough to accommodate an application of general principles.  ⁷⁹⁶ 

14.2.6 Concluding Remarks

Under the foreseeability formulae, restricting the extent of the liability of the non-performing party, as provided for in Art. 74 CISG, "the emphasis is on loss which was actually foreseen or which the party ought to have foreseen in the light of circumstances known to him or of which he should have known as a possible consequence of the breach."  ⁷⁹⁷ 

What was foreseeable is to be determined by reference to the time of the conclusion of the contract and to the non-performing party itself (including its servants or agents), and the test is what a normally diligent person could reasonably have foreseen as the consequences of non-performance in the ordinary course of things and the particular circumstances of the contract, such as the information supplied by the parties or their previous transactions. This limitation is related to the very nature of the contract: not all the benefits of which the aggrieved party is deprived fall within the scope of the contract and the non-performing party must not be saddled with compensation for harm which it could never have foreseen at the time of the conclusion of the contract and against the risk of which it could not have taken out insurance. Foreseeability relates to the nature or type of the harm but not to its extent unless the extent is such as to transform the harm into one of a different kind. In any event, foreseeability is a flexible concept which leaves a wide measure of discretion to the judge.  ⁷⁹⁸ 

Also, it must be noted that, in some legal systems, the limitation of damages by foreseeability as such is restricted when the breach of contract was committed intentionally. Although in general the non-performing party is liable only for loss which it foresaw or ought to have foreseen at the time of the contract, the last part of Art.9:503 PECL, which reads: "The non-performing party is liable only for loss which it foresaw or could reasonably have foreseen at the time of conclusion of the contract as a likely result of its non-performance, unless the non-performance was intentional or grossly negligent", lays down a special rule in cases of intentional failure in performance or gross negligence. In this case the damages for which the non-performing party is liable are not limited by the foreseeability rule and the full damage has to be compensated, even if unforeseeable.  ⁷⁹⁹ 

However, no such rule exists in the CISG.  ⁸⁰⁰  The UNIDROIT Principles also stresses that the concept of foreseeability must be clarified since the solution contained therein does not correspond to certain national systems which allow compensation even for harm which is unforeseeable when the non-performance is due to willful misconduct or gross negligence. Unlike certain international conventions, particularly in the field of transport, the UNIDROIT Principles follows the CISG in not making provision for full compensation of harm, albeit unforeseeable, in the event of intentional non-performance. Since the present rule of UPICC Art. 7.4.4, which reads: "The non-performing party is liable only for harm which it foresaw or could reasonably have foreseen at the time of the conclusion of the contract as being likely to result from its non-performance", does not provide for such an exception, a narrow interpretation of the concept of foreseeability is called for.  ⁸⁰¹  This is also important for the restrictive interpretation of article 74 CISG in the light of the wide phrasing of Art. 74.  ⁸⁰²