15.2 DAMAGES UPON SUBSTITUTE TRANSACTIONS

15.2.1 Introduction

Judicial discretion in the assessment of damages can be reduced by standardizing the damages in question.  ⁸⁷⁴  To this end, Art. 75 CISG measures damages concretely on the basis of a substitute transaction (a purchase in replacement or resale), and reads: "If the contract is avoided and if, in a reasonable manner and within a reasonable time after avoidance, the buyer has bought goods in replacement or the seller has resold the goods, the party claiming damages may recover the difference between the contract price and the price in the substitute transaction as well as any further damages recoverable under article 74."

Briefly speaking, damages under this provision are established by the action of the injured seller in reselling the goods and the action of the injured buyer in obtaining cover, that is, buying the goods elsewhere. The measure of damages is the difference between the price under the contract and the price of the substitute transaction, which allows the injured party to measure damages without having to show the market price for the goods. This article can be traced back to Art. 85 ULIS. However, a change between this provision and Art. 75 CISG has been noted by Stoll: "ULIS places abstract calculation of damages using the market price rule (Article 84) before concrete calculation of damages by reference to a substitute transaction (Article 85), whereas the Convention makes concrete calculation of damages the primary method and abstract calculation of damages using the market price rule is subsidiary to it (Article 76). That indicates the change in the relationship between the two rules. Moreover, Article 85 ULIS merely requires a substitute transaction to have been carried out 'in a reasonable manner', while the Convention adds by way of clarification that the substitute transaction must also have taken place 'within a reasonable time after avoidance'. Finally, Article 75 adds that the party entitled to damages may claim 'any further damages recoverable under Article 74'. This latter addition is not a substantial change, because under Article 86 ULIS the duty to pay damages is extended so as to include all further loss. . . ."  ⁸⁷⁵ 

On the other hand, it is clear that, the only modification of Art. 75 CISG to its original provision, i.e. 1978 Draft Art. 71, was to change a conjunction to "as well as" rather than "and" (apart from an adjustment of the article reference to conform to the new sequence). The Secretariat Commentary on 1978 Draft Art. 71 should therefore be relevant to the interpretation of CISG Art. 75.  ⁸⁷⁶  In the UNIDROIT Principles, Art. 7.4.5 provides under the heading "Proof of harm in case of replacement transaction" that: "Where the aggrieved party has terminated the contract and has made a replacement transaction within a reasonable time and in a reasonable manner it may recover the difference between the contract price and the price of the replacement transaction as well as damages for any further harm." This article is regarded as corresponding "in substance to Art. 75 CISG" and establishing, alongside the general rules applicable to the proof of the existence and of the amount of the harm, one of the presumptions which may facilitate the task of the aggrieved party.  ⁸⁷⁷  The use of this provision and its Commentary as a potential aid to the interpretation of CISG Art. 75 is thus self-evident.  ⁸⁷⁸  The author thinks that it is the case for using of Art. 9:506 PECL, which reads similarly: "Where the aggrieved party has terminated the contract and has made a substitute transaction within a reasonable time and in a reasonable manner, it may recover the difference between the contract price and the price of the substitute transaction as well as damages for any further loss so far as these are recoverable under this Section." and the Comments thereon. With these relevant sources, as well as other scholarly writings concerned, the author will further the concrete calculation established under Art. 75 CISG below.

15.2.2 Presupposed Situations Calling for Concrete Calculation

The wording of Art. 75 makes it clear that, this provision concerns the measure of damages in situations where there has been an avoidance or cancellation of the contract by an aggrieved buyer or seller, and applies when the buyer, after the seller's breach, has bought goods in replacement of those that were the subject of the contract, or when the seller, after the buyer's breach, has sold the contract goods.

"It is a condition for the calculation of damages under Article 75 that the contract has been avoided(before) (c. Articles 49; 61 and 72; 73; and 81). Otherwise, if the seller has declared the contract avoided, he can sell the goods and if the buyer has declared the contract avoided, he can procure the goods."  ⁸⁷⁹  Further, "[t]he presumption comes into play only if there is a replacement transaction and not where the aggrieved party has itself performed the obligation which lay upon the non-performing party (for example when a shipowner itself carries out the repairs to its vessel following the failure to do so of the shipyard which had been entrusted with the work)."  ⁸⁸⁰  However, "[t]he party who is true to the contract does not always have an obligation to effect a substitute transaction, unless the loss can be mitigated in comparison to the calculation under Art. 76."  ⁸⁸¹  Note in particular that Art. 75 imposes no duty on the seller to notify the buyer of his intention to resell and the fact that, literally construed, the article only applies to a resale of goods that have been identified to the contract at the time of the buyer's breach.  ⁸⁸² 

Nonetheless, if the contract has been avoided, the formula contained in Art. 75 will often be the one used to calculate the damages owed the injured party since, in many commercial situations, a substitute transaction will have taken place.  ⁸⁸³  "Where the contract has been avoided, both parties are released from any future performance of their obligations and restitution of that which has already been delivered may be required. Therefore, the buyer would normally be expected to purchase substitute goods or the seller to resell the goods to a different purchaser. In such a case the measure of damages could normally be expected to be the difference between the contract price and the resale or repurchase price as is provided under article 71 [draft counterpart of CISG article 75]."  ⁸⁸⁴ 

In short, it is often appropriate to measure the aggrieved party's loss by the cost of procuring a substitute performance. Where the aggrieved party has in fact made a reasonable cover transaction, PECL Art. 9:506 (as well as Art. 7.4.5 UPICC and Art. 75 CISG) provides that the difference between the contract price and the cover price is recoverable.  ⁸⁸⁵ 

15.2.3 Substitute Transaction must be Reasonable Substitute

As noted above, Art. 75 CISG "sets forth a means of calculating damages when the contract has been avoided and replacement goods have in fact been purchased or the seller has in fact resold the goods".  ⁸⁸⁶  In such cases, damages are to be measured by the difference between the cost of the substitute transaction and the contract price. However, it is subject to some restrictions. "The condition provided for in Art 75 is that the replacement purchase or the resale must be made 'in a reasonable manner and within reasonable time' after avoidance. Here the term 'reasonable manner' is to be interpreted as the duty of the buyer to buy the goods at the lowest possible price and of the seller to sell them at the highest possible price. The 'reasonable time' starts to run at the time when the aggrieve party avoided the contract."  ⁸⁸⁷ 

In other words, it is to be interpreted in such a way that the party who is true to the contract must try to effect the substitute transaction either as the buyer at the lowest possible price or as the seller at the highest possible price. Other contractual stipulations may have to be taken into account, e.g. the duration of the period of guarantee. An unreasonable substitute transaction cannot be considered to measure the damages. This follows, inter alia, from the obligation under Art. 77 to mitigate losses. Jurisdiction in regard to Art. 85 ULIS, which contains a relevant rule, in respect of the reasonable manner, called for a cautious and circumspect businessman. Furthermore, the substitute transaction has to be effected within a reasonable time. This is to prevent the loss from further increasing under worsening market conditions.  ⁸⁸⁸ 

The Secretariat Commentary makes it clear: "For the substitute transaction to have been made in a reasonable manner within the context of article 71 [draft counterpart of CISG article 75], it must have been made in such a manner as is likely to cause a resale to have been made at the highest price reasonably possible in the circumstances or a cover purchase at the lowest price reasonably possible. Therefore, the substitute transaction need not be on identical terms of sale in respect of such matters as quantity, credit or time of delivery so long as the transaction was in fact in substitution for the transaction which was avoided."  ⁸⁸⁹  It should also be noted that the time limit within which the resale or cover purchase must be made for it to be the basis for calculating damages under article 71 [draft counterpart of CISG article 75] is 'a reasonable time after avoidance'. Therefore, this time limit does not begin until the injured party has in fact declared the contract avoided.  ⁸⁹⁰  If the resale or cover purchase is not made in a reasonable manner or within a reasonable time after the contract was avoided, damages would be calculated as though no substitute transaction had taken place. Therefore, resort would be made to article 72 [draft counterpart of CISG article 76] and, if applicable, to article 70 [draft counterpart of CISG article 74]  ⁸⁹¹ 

However, the substitute transaction may occur in a different situation than that provided for in the contract. The amount of damages, therefore, will be altered to reflect any increased costs or expenses saved. On the other hand, the difference in price between the avoided contract and the contract which was newly concluded can, however, be the result of different terms, e.g. guarantee, or of different auxiliary costs, e.g. packaging, transportation). Due account has to be taken of this situation, i.e. the price difference has to be adjusted accordingly.  ⁸⁹²  Under the U.C.C. language, items such as transportation expenses saved by the aggrieved party in a substitute transaction are deducted from cover or resale damages. A similar result can be reached under Art. 75 of the Convention by construing the phrase "price in the substitute transaction" to permit such adjustment. Equitable considerations demand this construction, given that increased transportation costs and similar items of extra expense associated with a substitute transaction would constitute losses suffered "as a consequence of breach" and thus would be recoverable under CISG Art. 74.  ⁸⁹³  It is supported by Art. 7.4.2 (1) UPICC which clearly requires in this respect "taking into account any gain to the aggrieved party resulting from its avoidance of cost or harm" when applying the full compensation rule.

To sum up, where the aggrieved party has in fact made a cover transaction, the difference between the price of the substitute transaction and the price of the avoided original contract is the loss to be recovered. However, the replacement transaction must be performed within a reasonable time and in a reasonable manner so as to avoid the non-performing party being prejudiced by hasty or malicious conduct.  ⁸⁹⁴  If the substitute transaction occurs in a different place from the original transaction or is on different terms, the amount of damages must be adjusted to recognize any increase in costs (such as increased transportation) less any expenses saved as a consequence of the breach.  ⁸⁹⁵  In any event, the aggrieved party cannot recover the difference between the contract price and the price of an alternative transaction which is so different from the original contract in value or kind as not to be a reasonable substitute.  ⁸⁹⁶