There are occasions when the buyer or seller does not make a replacement purchase or resale, respectively, but instead, due to a breach of contract, prefers to avoid the contract. In such cases the question arises as to how compensation should be calculated. This situation is known in all legal systems; in the civil law countries the so-called abstract damages are calculated, as opposed to concrete damages which occur when a purchase in replacement or resale took place and are thus easier to calculate. 897
Under the CISG, it is Art. 76 that measure such abstract damages, which reads: "(1) If the contract is avoided and there is a current price for the goods, the party claiming damages may, if he has not made a purchase or resale under article 75, recover the difference between the price fixed by the contract and the current price at the time of avoidance as well as any further damages recoverable under article 74. If, however, the party claiming damages has avoided the contract after taking over the goods, the current price at the time of such taking over shall be applied instead of the current price at the time of avoidance. (2) For the purposes of the preceding paragraph, the current price is the price prevailing at the place where delivery of the goods should have been made or, if there is no current price at that place, the price at such other place as serves as a reasonable substitute, making due allowance for differences in the cost of transporting the goods." Thus, instead of gauging damages by the price differential of a substitute transaction, Art. 76 CISG authorizes damages on the basis of the market price at the time of avoidance.
This provision corresponds to Art. 84 ULIS, but differs from it in some important respects. 898 With regard to its original provision, i.e. 1978 Draft Art. 72, it has been noted that: "Paragraph (2) of CISG article 76 and paragraph (2) of 1978 Draft article 72 are substantively identical. Nevertheless, the Secretariat Commentary on 1978 Draft article 72 is only of limited utility, as paragraph (1) is significantly different." 899 In the UNIDROIT Principles, Art. 7.4.6 provides under the heading "Proof of harm by current price" that: "(1) Where the aggrieved party has terminated the contract and has not made a replacement transaction but there is a current price for the performance contracted for, it may recover the difference between the contract price and the price current at the time the contract is terminated as well as damages for any further harm. (2) Current price is the price generally charged for goods delivered or services rendered in comparable circumstances at the place where the contract should have been performed or, if there is no current price at that place, the current price at such other place that appears reasonable to take as a reference." This article is said to "corresponds in substance to Art. 76 CISG", and is prescribed to "facilitate proof of harm where no replacement transaction has been made, but there exists a current price for the performance contracted for." 900 This provision and its Comments may thus play as a potential aid to the interpretation of CISG Art. 76. As is the case for Art. 9:507 PECL, which reads briefly: "Where the aggrieved party has terminated the contract and has not made a substitute transaction but there is a current price for the performance contracted for, it may recover the difference between the contract price and the price current at the time the contract is terminated 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 abstract calculation established under Art. 76 CISG below.
Just like Art. 75, Art. 76 CISG presupposes that the original contract has actually been avoided. However, the abstract calculation of the damages provided for in Art. 76 is possible only when the obligee has not effected a substitute transaction. The reasons for his inaction are irrelevant here. 901 To meet the requirement, it is enough that no resale or cover purchase took place in fact or where it is impossible to determine which was the resale or purchase contract in replacement of the contract which was breached or where the resale or purchase was not made in a reasonable manner and within a reasonable time after avoidance, as is required by Art. 75. 902
The abstract method of calculating damages does not require the obligee to have tried concluding a substitute transaction. Unless the loss can be mitigated in comparison to the calculation under Art. 76. The obligee cannot ignore the results of an actual resale or covering purchase and claim higher damages. In other words, if the obligee effects a cover transaction and then measures his damages according to the abstract method because this is more favourable to him, he acts dishonestly and violates the principle of good faith. In such a case, the obligor can remind him of his duty to mitigate losses under Art. 77. On the other hand, it cannot be excluded that the obligee first measures the loss abstractly and then proceeds to a cover transaction. There can be no objection against it if this is more favourable to him and if, in so doing, he uses the market developments in his favour. Should it become clear, however, that a cover transaction is possible only under more unfavourable terms and this is transaction carried out within a reasonable time, additional differences in price can be claimed as further damages. In addition, when the obligee purchases and sells continuously and, therefore, no contract can be qualified as a substitute purchase or sale, losses can also be calculated abstractly under Art. 76. Some authors assume that it is always at the buyer's discretion to decide whether he measures his losses according to the abstract or the concrete method, hence an abstract calculation would be admissible in the case of a substitute transaction. But an abstract calculation that is preceded by a cover transaction is admissible and advisable only when the cover transaction was not effected in a reasonable manner. 903
It appears that a party that has entered into a substitute transaction within the meaning of Art. 75, therefore, must proceed under that provision and cannot claim damages under Art. 76. An attempt at resale or cover that does not meet the requirements of Article 75 (e.g., because the substitute transaction did not occur within a reasonable time after avoidance), however, does not prevent the aggrieved party from claiming market price damages under Art. 76. To avoid over-compensating the aggrieved party, nevertheless, such substitute transactions should be deemed to establish an upper limit on the amount of damages recoverable under Art. 76, although the text of the Convention does not mandate this result. 904
A third requirement contained in Art. 76 calling for abstract damages is that "there is a current price for the goods". The concept of "current price" is essential when applying Art. 76, since the abstract calculation is based on "the difference between the price fixed by the contract and the current price".
Art. 7.4.6 (2) UPICC defines the "current price" as "the price generally charged for goods delivered or services rendered in comparable circumstances at the place where the contract should have been performed or, if there is no current price at that place, the current price at such other place that appears reasonable to take as a reference". Its Official Comment states accordingly: "current price" is the price generally charged for the goods or services in question. The price will be determined in comparison with that which is charged for the same or similar goods or services. This will often, but not necessarily, be the price on an organised market. Evidence of the current price may be obtained from professional organizations, chambers of commerce, etc. 905
In this respect, Knapp notes that: "The concept of a current price does not presuppose official or unofficial market quotations as is required in the case of stock exchange goods. Any goods that are available on the market or elsewhere do have a market price. An exception could be goods which are made under special order by the buyer and for which damages would have to be calculated under Article 74 and not Article 76." 906
As for the reference point for the measure of damages, the 1978 Draft stated as the decisive time such time at which the injured party first had the right to declare the contract avoided. This was supposed to prevent speculation on the part of the obligee. "The rule was found to be objectionable in Vienna, however, because it was too uncertain and gave too much discretion to the courts, especially in cases of anticipatory breach. These objections finally led to choosing the 'declaration of avoidance' or the 'taking over' of the goods as the reference point for calculating damages, the earlier of the two being decisive." 907 Thus, CISG Art. 76 now contains two tests to determine the time of the current price and damages are thus generally measured by the market price "at the time of avoidance"; if the aggrieved party avoids the contract after "taking over the goods", however, the reference point is "the time of such taking over". 908
However, the time of avoidance of contract may in practice be difficult to ascertain and could therefore lead to abuse. For instance, the party who plans to avoid the contract may speculate by waiting to avoid the contract at a time which, financially speaking, is more favorable for him. 909 To avoid speculation, the time limit for avoidance has to be taken into consideration. Insofar as there are no time limits for avoidance of a contract, Art. 77 is to be consulted in regard to the obligation to mitigate losses. 910 If a party delays in declaring avoidance and the difference between the market and the contract price increases, he may be held to have violated his duty to mitigate damages. 911 On the other hand, to largely exclude speculations, at least on the part of the buyer, another time was fixed for the taking over of the goods. 912 The intention of fixing such an early time is to prevent the buyer from speculating on the movement of market prices and delaying avoidance of the contract. 913 In order to keep possible abuses to a minimum, Art. 76 provides that in cases where the party claiming damages has avoided the contract "after taking the goods", the "current price of such taking over shall be applied instead of the current price at the time of avoidance". 914
However, the latter alternative reference point of "after taking over the goods" is hardly understandable according to some other commentators. 915 Nonetheless, it is broadly recognized that this alternative "prevents an avoiding buyer who has received delivery from manipulating the time of avoidance in order to increase the seller's liability." Moreover, Honnold holds that: Despite this apparent purpose, Art. 76(1) does not limit the application of the alternative measuring point to buyers. It might therefore apply, e.g., to an avoiding seller who delivered and then "took over" the goods after they were wrongfully rejected by the buyer. However, the alternative should not apply when an aggrieved buyer rejects the goods immediately after the inspection permitted by CISG Art. 38. 916
In regard to the place where the current price is to be determined, Art. 76 refers to: a) "the place where delivery of the goods should have been made", or alternatively b) "if there is no current price at that place", then "such other place as serves as a reasonable substitute". It should also be mentioned that Art. 76 reminds the contracting parties that "the allowance for differences in the cost of transporting the goods" should be added. 917
In other words, the decisive place is the place where the delivery was supposed to take place or the place, if the goods were taken over, where the delivery actually took place. According to Art. 31, this is the place of delivery. While this place may indeed be reasonable to the seller, it may well entail difficulties for the buyer. Since the place of delivery in many cases, e.g. handing over to the first carrier, is located in the seller's country, it can be difficult for the buyer to prove damages based on market prices in the seller's country. 918 Sutton notes in this respect: "In traditional international sales contracts, the place of delivery is the port of the first carrier for transportation to the buyer. For the seller, this rule poses few problems, as the port is likely to be in his or her country, and the market information for the goods will normally be readily available. The buyer, on the other hand, often will be far removed both from the seller's country and from current information concerning the markets in the seller's country. In a destination contract, in which the seller is obligated to deliver the goods to a port in the buyer's country, the reverse problem arises; the buyer has easy access to the local market, but the seller is often far removed from it." Sutton thus advises that: "One solution to these problems is to seek cover under article 75, which eliminates the burden on the buyer or seller of establishing the market price of the goods in what may be a distant country. Another option is to include in the contract a more predictable reference point for measuring the current market price by, for example, establishing a specific locale as the determinative market." 919
On the other hand, if no current market price exists at the place where delivery of the goods should have been made, Art. 76(2) states that the parties should look to another market that represents a "reasonable substitute". When another place is found, the differing cost of transportation is to be included in calculating the price difference. It cannot be generally defined which other place might be considered as reasonable. One may find it difficult to imagine why there should be no current price at the contractual place of delivery. Rather it suggests that there is no current price at all. 920 Presumably there is some flexibility in Art. 76(2) and a court may be able to substitute the price obtaining at the place of arrival of the goods where that is a more reasonable market for a hypothetical covering purchase. 921 However, if a reasonable substitute market cannot be found, then the parties will not be able to measure damages under Art. 76. If no such price exists, damages must be calculated under Art. 74. 922
897. Supra. note 1, p. 250.
898. ULIS treats abstract assessment of damages under the current price rule as having the same standing as concrete assessment of damages under Art. 85 ULIS, so that the promisee is free to choose between those methods of assessment where the goods have a current price. "Article 84 ULIS [sets abstract damages as] the current price on the day on which the contract was avoided. [CISG Article 76 applies a different formula]. ... Article 84(2) ULIS provides that the current price to be taken into account is that prevailing the market in which the transaction took place, or, if this is inappropriate, the price in a market which serves as a reasonable substitute. The [CISG] made this rule more precise. ..."See the match-up available online at ‹http://www.cisg.law.pace.edu/cisg/text/matchup/matchup-u-76.html› Art. 84 ULIS reads: "1. In case of avoidance of the contract, where there is a current price for the goods, damages shall be equal to the difference between the price fixed by the contract and the current price on the date on which the contract is avoided. 2. In calculating the amount of damages under paragraph 1 of this Article, the current price to be taken into account shall be that prevailing in the market in which the transaction took place or, if there is no such current price or if its application is inappropriate, the price in a market which serves as a reasonable substitute, making due allowance for differences in the cost of transporting the goods."
899. See the match-up, available online at ‹http://www.cisg.law.pace.edu/cisg/text/matchup/matchup-d-76.html› Art. 72 of the 1978 Draft reads: "(1)If the contract is avoided and there is a current price for the goods, the party claiming damages may, if he has not made a purchase or resale under article 71, recover the difference between the price fixed by the contract and the current price at the time he first had the right to declare the contract avoided and any further damages recoverable under the provisions of article 70. (2)For the purposes of paragraph (1) of this article, the current price is the price prevailing at the place where delivery of the goods should have been made or, if there is no current price at that place, the price at another place which serves as a reasonable substitute, making due allowance for differences in the cost of transporting the goods."
900. See Comment 1 on Art. 7.4.6 UPICC.
901. Supra. note 10, p. 305.
902. Supra. note 15, Comment 3.
903. Supra. note 10, pp. 305-306.
904. Supra. note 24.
905. See Comment 1 on Art. 7.4.6 UPICC.
906. See Knapp, Commentary on the International Sales Law: The 1980 Vienna Sale Convention, Cesare Massimo Bianca and Michael Joachim Bonell eds. (1987) [hereinafter Bianca and Bonell]; p. 557.
907. Supra. note 3.
908. The reasons for the adoption of the double test were apparently based on the fact that some delegates felt that the test in the draft article (the time when the aggrieved party first had the right to avoid the contract) was too vague, and because others were concerned that the substitution of the time of actual avoidance might enable the aggrieved party to postpone avoidance to take advantage of a fluctuating market. On the other hand, the time of delivery was not generally suitable either because there might not have been any delivery as in the case of an anticipatory repudiation. Thus the version of art. 76 eventually adopted was regarded as an appropriate compromise. (See Jacob S. Ziegel in "Report to the Uniform Law Conference of Canada on Convention on Contracts for the International Sale of Goods". Available online at ‹http://www.cisg.law.pace.edu/cisg/text/ziegel76.html)›
909. Supra. note 1, pp. 250-251.
910. Supra. note 32.
911. Supra. note 3.
912. Supra. note 10, p. 306.
913. Supra. note 10, p. 307. On the other hand, an economic disadvantage may result for the buyer because of price movements from the time of the taking over of the goods to the time of avoidance. He may prevent this, however, in carrying out a cover transaction and claiming damages under Art. 75.
914. Supra. note 1, p. 251.
915. For example, Schlechtriem submits that: "It is more difficult to justify the second reference point - the 'taking over' of the goods (Article 76(1) sentence 2). In the event of a delayed or non-conforming performance, the buyer who can neither undertake nor prove a definite cover transaction under Article 75 uses the reasonable time period permitted by Article 49(2) at his own risk. In the case of Article 49(2)(b)(i), the reference point actually precedes the moment when the buyer could avoid the contract because the buyer, at that time, still did not know of the breach. The solution is thus difficult to understand." (Supra. note 3.) "Thus this can only be the buyer. To ensure the symmetry of the rights and obligations of both the seller and the buyer the Convention generally uses an abstract language. This is criticized by Hellner who considers it a serious mistake to believe that impartiality could be achieved in establishing identical rules to govern the obligations of both parties and breaches of contract by both sides." (Supra. note 44.)
916. See J. Honnold, Uniform Law for International Sales Under the 1980 United Nations Convention (1982); p. 414.
917. Supra. note 45.
918. Supra. note 44.
919. Supra. note 4.
920. Supra. note 44.
921. Supra. note 13.
922. Supra. note 15, Comment 7.
Eric von Hippel
Erik S. Raymond