CISG Advisory Council Opinion No. 6

Calculation of Damages under CISG Article 74

A. The aggrieved party is entitled to any net gains prevented as a result of the breach.

3.10 Lost profits are the only type of damages specifically mentioned in Article 74.[54] Article 74 provides that a claimant may recover for breach of contract, "a sum equal to the loss, including loss of profit, suffered ... as a consequence of the breach."[55] The Secretariat Commentary explains that specific reference to lost profits was included because "in some legal systems the concept of 'loss' standing alone does not include loss of profit."[56]

3.11 ...

3.12 The Convention does not provide specific guidance on calculating lost profits. Individual tribunals are given the authority to calculate damages on a case-by-case basis.[57] Damages for loss of profit are to be calculated in accordance with Article 74's principle of full compensation -- that is, the goal is to place the aggrieved party in the same position it would have been in economically if the contract had been performed.[58] Domestic practices that limit damages for lost profits are not to be applied.[59]

3.13 Determining lost profits is not an exact science, and some of the methods used to calculate lost profits are complicated.[60] Therefore, precise calculation of such damages may not be possible. Moreover, in some cases, the breach may prevent an aggrieved party from being able to prove damages with precision. In these circumstances, the breaching party should not be able to escape liability on the ground that lost profits are uncertain.[61] Thus, an aggrieved party is not required to prove with exact certainty and precision the amount of profits it lost as a result of the breach; it needs only to prove the loss with reasonable certainty.[62]

3.14 Under Article 74, an aggrieved party is entitled to net gains prevented, that is, net profits lost as a result of the breach of contract. In general, net profits are calculated by subtracting from gross profits the expenses saved as a result of the aggrieved party being excused from performance.[63] This practice is consistent with both the UNIDROIT Principles and the PECL.[64] In particular, the Comment to Article 9:502 of the PECL provides:

"The aggrieved party must bring into account in reduction of damages any compensating gains which offset its loss; only the balance, the net loss, is recoverable. Similarly, in computing gains of which the aggrieved party has been deprived, the cost it would have incurred in making those gains is a compensating saving which must be deducted to produce a net gain. Compensating gains typically arise as the result of a cover transaction concluded by the aggrieved party. ... A compensating saving occurs where the future performance from which the aggrieved party has been discharged as the result of the non-performance would have involved the aggrieved party in expenditure."[65]

3.15  Damages for the loss of chance or opportunity to profit are not recoverable under Article 74, unless the contract was purposely entered into for the creation of such a chance or opportunity.

3.16 In certain cases, aggrieved parties may seek damages for the loss of chance or opportunity to earn a profit.[66] This may occur when, following a breach of contract, an aggrieved party claims to have suffered a loss from a missed opportunity to engage in an opportunity for gain.[67] What separates a loss of chance from the general category of loss of profits is the existence of some contingency or unknown fortuitous event between the promisor's performance and the promisee's realization of gain. In this circumstance, a breach by the promisor prevents the promisee's chance of profit from coming to fruition.[68] Because a contingency must occur before profits will be realized, an aggrieved party typically is unable to prove with reasonable certainty that a profit would have been made if the contract had been properly performed. Accordingly, damages for the loss of a chance or opportunity to profit ordinarily are not recoverable under Article 74.[69]

3.17 The prohibition on damages for loss of chance or opportunity does not apply when the aggrieved party purposely enters into a contract in order to obtain a chance of earning a profit.[70] In such a case, the chance of profit is an asset,[71] and, when a party chooses to enter into a contract to obtain such a chance, the party is entitled to compensation when the promisor unjustifiably does not perform. Otherwise, a promisor could breach that contract with impunity [72] and avoid "liability solely on the basis of the [aggrieved party's] difficulty of proving loss where it was clear at the time of formation that such loss would be impossible to prove with reasonable certainty."[73] Moreover, allowing recovery in this circumstance would be consistent with the full compensation principle of Article 74.

3.18 The UNIDROIT Principles provides for recovery of damages for the loss of chance to profit.  Article 7.4.3(2) of the UNIDROIT Principles states that “[c]ompensation may be due for the loss of a chance . . . .”[74] In addition, allowing damages for loss of chance would be consistent with the practice of a number of countries.[75]

B. Lost profits recoverable under Article 74 may include loss of profits that are expected to be incurred after the time damages are assessed by a tribunal.

3.19 Under Article 74, an aggrieved party is entitled to recovery of not only profits lost prior to the judgment, but also for future lost profits, to the extent that such lost profits can be proved with reasonable certainty and subject to the principles of foreseeability and mitigation.[76] While the Convention does not expressly state that future losses are recoverable, its recovery is consistent with the principle of full compensation. This approach is in accord with the PECL Article 9:501(2)(b) and UNIDROIT Principles Article 7.4.3, which allow for recovery of future losses. In particular, the Comment to Article 9:501(2)(b) explains:

"The loss recoverable by the aggrieved party includes future loss, that is, loss expected to be incurred after the time damages are assessed. This requires the court to evaluate two uncertainties, namely the likelihood that future loss will occur and its amount. As in the case of accrued loss before judgment ... this covers both prospective expenditures which would have been avoided but for the breach and gains which the aggrieved party could reasonably have been expected to make if the breach had not occurred."[77]

C. Lost profits include those arising from lost volume sales.

3.20 Under Article 74, an aggrieved party may be able to recover lost profits in a lost volume situation. Traditionally, when a buyer fails to uphold its obligations under the contract, the seller's damages are measured by the difference between the contract price and the price at which the goods can be resold in the market (or the price of the substitute transaction). If the seller resells the goods at the same price, however, it is presumed that the seller suffered no damages. Nevertheless, if the seller was capable of selling to multiple buyers, then the second transaction would not be a substitute for the first, but simply a second sale. Therefore, damages measured under the traditional formula would be "inadequate to put the seller in as good a position as performance would have done," and the aggrieved party should be able to recover damages for lost sales volume.[78]

3.21 The following example illustrates the rationale for awarding lost profits in a lost volume situation:

"If a private party agrees to sell his automobile to a buyer for $2,000, a breach by the buyer would cause the seller no loss (except incidental damages, that is, the expense of a new sale) if the seller was able to sell the automobile to another buyer for $2,000. But the situation is different with dealers having an unlimited supply of standard-priced goods. Thus, if an automobile dealer agrees to sell a car to a buyer at the standard price of $2,000, a breach by the buyer injures the dealer, even though he is able to sell the automobile to another for $2,000. If the dealer has an inexhaustible supply of cars, the resale to replace the breaching buyer costs the dealer a sale, because, if the breaching buyer had performed, the dealer would have made two sales instead of one. The buyer's breach, in such a case, depletes the dealer's sales to the extent of one, and the measure of damages should be the dealer's profit on one sale."[79]

3.22 Accordingly, it is consistent with the principle of full compensation for an aggrieved party to recover lost profits for lost volume sales. However, an aggrieved party may not recover lost profits for lost volume under Article 74 and, in addition, damages under Article 75's substitute transaction formula because, in that circumstance, the aggrieved party would receive double recovery.[80]

4. The aggrieved party is entitled to additional costs reasonably incurred as a result of the breach and of measures taken to mitigate the loss.

4.1 In some circumstance a breach of contract may cause an aggrieved party to incur additional costs in attempts to avoid further loss.[81] These expenses, which are sometimes referred to as incidental damages, are for loss in addition to the aggrieved party's loss in value from being deprived of performance under the contract. While Article 74 does not explicitly provide for the payment of incidental damages, an aggrieved party is entitled to recover these damages under the Article's principle of full compensation provided, among other things, that they are reasonable.

4.2 Article 74 provides no exhaustive list of incidental damages that may be recoverable. In the case where a buyer rejects the goods without justification or refuses to make payment upon delivery of the goods as agreed in the contract, additional costs incurred by an aggrieved party in order to avoid greater loss may include costs incurred in storing or preserving goods.[82] In the case of a breach by the seller, incidental damages may include costs incurred in storing or preserving goods that have been delivered late, or which are defective, and are to be returned to the seller,[83] as well as expenses for the expedited shipment of alternative goods.[84] Furthermore, an aggrieved buyer may be able to recover, as incidental damages, reasonable added expenses incurred in ascertaining whether the goods are in conformity with the contract insofar as a defect was actually established and notice to the other party was given.[85]

5. Under Article 74, the aggrieved party cannot recover expenses associated with litigation of the breach.

5.1 Article 74 does not explicitly address the payment of attorneys' fees and costs incurred by an aggrieved party in connection with seeking relief for the breach of contract from a third party, such as a court or arbitration
tribunal ("litigation expenses"). Some courts and commentators believe that the recovery of litigation expenses is a procedural matter outside the scope of the Convention's substantive damages provisions.[86] However, other courts and commentators argue that based on Article 7(1), the Convention must be interpreted autonomously that characterizations of domestic law are irrelevant, and that recourse to domestic law should be made only as a last resort. Under this view, it is argued that Article 74 must be broadly interpreted in accordance with the principle of full compensation, which necessarily calls for the conclusion that an aggrieved party should be able to recover expenses associated with vindicating its rights. Otherwise, the aggrieved party would remain less than whole.[87]

5.2 The issue of whether litigation expenses should be considered as damages for purposes of Article 74 cannot be resolved through a substance/procedure distinction. Whether a matter is considered substantive or procedural may vary from jurisdiction to jurisdiction and may depend on the circumstances of a particular case.[88] Relying upon such a distinction in this context is outdated and unproductive.[89] Instead, the analysis should focus on whether the payment of litigation expenses is deliberately excluded from the Convention and, if not, whether the issue may be resolved "in conformity with the general principles on which [the Convention] is based or, in the absence of such principles, in conformity with law applicable by virtue of the rules of private international law."[90]

5.3 While Article 74 does not explicitly provide for the recovery of litigation expenses as damages, it does not prohibit their recovery. In addition, the history that led to the drafting of Article 74 is silent on the issue. Thus, the matter is not one that explicitly falls outside the Convention and it is appropriate to consider whether the issue may be resolved through a liberal interpretation of Article 74 or "an analogical application of specific provisions of the Convention."[91]

5.4 Although Article 74's principle of full compensation appears to support the view that litigation expenses should be recoverable in order to make the aggrieved party whole, such an interpretation would be contrary to the principle of equality between buyers and sellers as expressed in Articles 45 and 61.[92] If legal expenses were awarded as damages under Article 74, an anomaly would result where only a successful claimant would be able to recover litigation expenses.[93] The ability to recover damages under Article 74 is grounded on a breach of contract; thus, a successful respondent will not be able to recover its legal expenses if the claimant has not committed a breach of contract.[94] Therefore, the purpose of awarding attorneys' fees and costs, to make a prevailing party whole for costs incurred in litigation, will not be realized in those cases where the respondent prevails.[95] Remedies are the core of contract law, and to interpret Article 74 to create unequal recovery of damages between buyers and sellers is contrary to the design of the Convention.[96] However, Article 74 does not preclude a court or arbitral tribunal from awarding a party its attorneys' fees and costs when the contract provides for their payment or when authorized by applicable rules.

6. The aggrieved party is entitled to damages for pecuniary loss resulting from claims by third parties as a result of the breach of contract.

6.1 A breach of contract may not only cause an aggrieved party to suffer direct and incidental losses, but also losses from dealing with third parties. These losses are sometimes called consequential damages.[97] For example, in the case of a breach by the buyer, a seller may suffer consequential damages resulting from the termination of contracts with suppliers,[98] or fees resulting from a dishonored check.[99] A buyer may be able to recover consequential damages when the seller delivers defective goods, the buyer resells them to third parties, and the buyer incurs liability to the third parties for defective or non-performance.[100]

6.2 Like direct and incidental damages, these damages are subject to limitations of foreseeability and mitigation. However, these concepts may be more likely to limit the availability of consequential damages.[101]

7. The aggrieved party is entitled to damages for loss of goodwill as a consequence of the breach.

7.1 Pecuniary damages caused by a loss of goodwill also are, in principle, compensable under Article 74.[102] However, Article 74 does not permit recovery of non-material loss.[103] Therefore, recovery of damages for loss of goodwill is available only if the aggrieved party can establish with reasonable certainty that it suffered a financial loss because of a breach of contract.[104]

7.2 While Article 74 does not expressly provide for the recovery of loss of goodwill, such damages are permitted under the Article's principle of full compensation.[105] In addition, both PECL Article 9:501(2)(a) and UNIDROIT Principles Article 7.4.2 allow for recovery of goodwill.[106]

7.3 Goodwill, however, is notoriously difficult to define.[107] Thus, its loss is difficult to measure. Loss of goodwill can simply refer to a loss of future lost profits. Loss of goodwill also has been defined as a decline in business reputation or commercial image, quantified by the retention of customers. Alternatively, loss of goodwill has been defined as the decrease in the value of a business interest.[108] Because there is no uniform definition, some tribunals have required a higher level of proof for damages resulting from a loss of goodwill. For example, in the decision of Handelsgericht des Kantons Zürich, 10 February 1999, the Commercial Court stated that damages resulting from a loss of goodwill must be "substantiated and explained concretely."[109] In addition, in the decision of Landgericht Darmstadt, 9 May 2000, the District Court denied damages for loss of goodwill because the buyer was unable to "calculate the exact losses resulting from the damaged reputation."[110] However, the fact that goodwill may be difficult to measure should not result in a requirement of a higher level of proof to obtain such damages. Indeed, requiring that damages for loss of goodwill be calculated exactly would, in many cases, place an insurmountable burden on the aggrieved party and would thwart Article 74's principle of full compensation. It is consistent with Article 74 that, like other damages recoverable under the Article, damages for loss of goodwill may be awarded if, among other things, the aggrieved party can prove with reasonable certainty that its reputation has been damaged by the breach.[111]

7.4 In certain cases, the loss of goodwill may be measured by loss of profits. However, these cases present a potential for double recovery because of the overlap between goodwill damages and lost profits damages. Specifically, compensation for the decrease in the value of the aggrieved party's commercial interest may equal the compensation it would receive for the lost future profits.[112] In this circumstance, the aggrieved party cannot claim damages for the loss of return customers resulting from a loss of goodwill and future lost profits.[113] This situation occurred in the decision of Landgericht Darmstadt, 9 May 2000.[114] In that case, the buyer accused the seller of delivering defective goods and refusing to pay the contract price. In a counterclaim, the buyer claimed damages resulting from a loss of turnover and a loss of business reputation. The District Court explained that there was no basis for the buyer's claim for damages for a loss of goodwill. The court stated that "the [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 of reputation."[115]

7.5 Nevertheless, there may be circumstances when an aggrieved party could recover damages for a loss of goodwill and lost profits. For example, when the promisor's breach eventually causes the promisee's business to fail, the promisee may be able to recover, inter alia, lost profits from the date of the breach until the day the when the business failed, and then damages for the destruction of its business, the value of which may include lost profits and lost goodwill.[116]

8. If there has been a breach of contract and then the aggrieved party enters into a reasonable substitute transaction without first having avoided the contract, the aggrieved party may recover damages under Article 74, that is, the difference between the contract price and the substitute transaction.

8.1 The aggrieved party can sometimes avoid part of its loss as a result of the breach by entering into a substitute transaction.[117] If the aggrieved party avoids the contract and, within a reasonable time and a reasonable manner thereafter enters into a substitute transaction, it may recover damages under Article 75 measured by the difference between the contract price and the substitute transaction together with any further damages.[118] Nevertheless, sometimes an aggrieved party may, either under a duty to mitigate or as a precautionary measure, or both, enter into a substitute transaction after a breach but before avoiding the contract. In this circumstance, the aggrieved party should be able to calculate damages using the same method for recovering damages under Article 75.[119] That is, when the aggrieved party enters into a substitute transaction without first having avoided the contract, the aggrieved party may recover as damages under Article 74 the difference between the contract price and the substitute transaction, provided that such transaction is reasonable.[120] The rationale for this approach has been explained as follows:

"[A] buyer who has received non-conforming goods, the non-conformity not amounting to a fundamental breach of contract allowing avoidance, must be allowed to conclude a cover purchase in order to continue with his production and/or perform his contracts with his clients. Despite the absence of avoidance and, therefore, the inapplicability of Article 75 of the CISG, the buyer must be allowed to calculate its damages on the basis of the costs of the cover transaction."[121]

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

A. 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, in principle, by any gains to the aggrieved party resulting from the non-performance of the contract.

9.1 In some cases, a breach may provide monetary benefits to an aggrieved party by allowing it to avoid some loss or save expenses that it would otherwise have incurred. In that event, the compensable loss suffered by the aggrieved party as a result of the breach is to be offset by the benefits that the aggrieved party received because of the non-performance of the agreement. As commentators point out, "however, advantages gained are not to be taken into account if there is no adequate connection with the loss and are related to the injured party's own expenditure (e.g., insurance); it would be contrary to the principle of good faith (Article 6(1)) for the liable party to be exempted by them."[122]

9.2 This approach is consistent with the practice in most countries,[123] as well as with the UNIDROIT Principles and the PECL. The UNIDROIT Principles Article 7.4.2 states that account must be taken of "any gain to the aggrieved party resulting from its avoidance of cost or harm."[124] The Comment to that article explains that the purpose of this language is to ensure that an aggrieved party is not enriched by damages for non-performance. Accordingly, "account must be taken of any gain resulting to the aggrieved party from non-performance, whether that be in the form of expenses which it had not incurred (e.g., it does not have to pay the cost of a hotel room for an artist who fails to appear), or of a loss which it had avoided (e.g., in the event of the non-performance of what would have been a losing bargain for it)."[125]

9.3 By contrast, the PECL does not explicitly state that any loss to the aggrieved party must be offset by any gain resulting from the breach. However, the Comment to PECL Article 9:502 states:

"The aggrieved party must bring into account in reduction of damages any compensating gains which offset its loss; only the balance, the net loss, is recoverable. Similarly, in computing gains of which the aggrieved party has been deprived, the cost it would have incurred in making those gains is a compensating saving which must be deducted to produce a net gain. Compensating gains typically arise as the result of a cover transaction concluded by the aggrieved party. But it is for the non-performing party to show that the transaction generating the gains was indeed a substitute transaction, as opposed to a transaction concluded independently of the default. A compensating saving occurs where the future performance from which the aggrieved party has been discharged as the result of the non-performance would have involved the aggrieved party in expenditure."[126]

9.4 The Secretariat Commentary provides the following illustrations of the appropriate measure of damages under Article 74:

Example [A]:

The contract provided for the sale for $50,000 FOB of 100 machine tools which were to be manufactured by the seller. Buyer repudiated the contract prior to the commencement of manufacture of the tools. If the contract had been performed, Seller would have had total costs of $45,000 of which $40,000 would have represented costs incurred only because of the existence of this contract (e.g., materials, energy, labour hired for the contract or paid by the unit of production) and $5,000 would have represented an allocation to this contract of the overhead of the firm (cost of borrowed capital, general administrative expense, depreciation of plant and equipment). Because Buyer repudiated to [the] contract, Seller did not expend the $40,000 in costs which would have been incurred by reason of the existence of this contract. However, the $5,000 of overhead which were allocated to this contract were for expenses of the business which were not dependent on the existence of the contract. Therefore, those expenses could not be reduced and, unless the Seller has made other contracts which have used his entire productive capacity during the period of time in question, as a result of Buyer's breach Seller has lost the allocation of $5,000 to overhead which he would have received if the contract had been performed. Thus, the loss for which Buyer is liable in this example is $10,000.
Contract price $50,000 [less] expenses of performance which could be saved $40,000 [equals] loss arising out of breach $10,000.

Example [B]:

If, prior to Buyer's repudiation of the contract in Example [A], Seller had already incurred $15,000 in non-recoverable expenses in part performance of the contract, the total damages would equal $25,000.

Example [C]:

If the product of the part performance in Example [B] could be sold as salvage to a third party for $5,000, Seller's loss would be reduced to $20,000.[127]

B. Punitive damages may not be awarded under Article 74 of the Convention.

9.5 The Convention does not provide for the payment of punitive damages. Punitive damages, also called exemplary damages, are sums awarded in excess of any compensatory or nominal damages in order to punish a party for outrageous misconduct.[128] Such damages may not be awarded under Article 74 because it limits damages to “a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach.”[129] Furthermore, awarding punitive damages is precluded under the Convention even if domestic law permits them for breach of contract because the Convention does not provide for their payment.[130] However, parties may agree to allow a court or tribunal to award punitive damages, to the extent permitted under applicable law.[131] 

FOOTNOTES

54. See CISG art. 74; see also Secretariat Commentary, op. cit., art. 70 [draft counterpart to CISG art. 74], ¶ 3.

55. See CISG art. 74.

56. See Secretariat Commentary, op. cit., art. 70 [draft counterpart to CISG art. 74], ¶ 3.

57. See id.

58. See id., ¶ 3; SCHLECHTRIEM/SCHWENZER/Stoll/Gruber, op. cit., art. 74, ¶ 22.

59. See SCHLECHTRIEM/SCHWENZER/Stoll/Gruber, op. cit., art. 74, 2.

60. See Gotanda, Lost Profits, op. cit., p. 99.

61. See, UNITED STATES, Southwest Battery Corp. v. Owen, Texas Supreme Court, 1928, 115 S.W.2d pp. 1097, 1099; UNITED STATES, Super Valu Stores, Inc. v. Peterson, Supreme Court of Alabama, 1987, 506 So. 2d pp. 317, 330.

62. See ¶¶ 2.1-2.13.

63. See DUNN, op. cit., § 6.1. The most common form of expenses saved are variable costs, which include all "charges composing an essential element in the cost of manufacture or ... service. Essential elements in such cost[s] ... are confined to expenditures that would necessarily have been made in the performance of the contract." Id., § 6.5 (quoting UNITED STATES, Oakland California Towel Co. v. Sivils, California Court of Appeals, 1942, 52 Cal. App. 2d pp. 517, 520).

64. UNIDROIT Principles art. 7.4.2; PECL art. 9:502.

65. PECL art. 9:502 cmt. C.

66. See SCHLECHTRIEM/SCHWENZER/Stoll/Gruber, op. cit., art. 74, ¶ 22; see also UNIDROIT Principles art. 7.4.2(1) cmt. 2.

67. The classic example involves breach of a contract denying a contestant the chance to win a beauty pageant. See UNITED KINGDOM, Chaplin v. Hicks, 1911, 2 K.B. p. 786.

68. One commentator asserts that loss of chance can be treated in two ways - as an issue of "recoverability of losses" or as a "standard of proving losses" issue. See Saidov, Damages: The Need for Uniformity, paper presented at 25 Years United Nations Convention of Contracts for the International Sale of Goods (CISG) § 3.4, p. 9 (Vienna Mar. 15-16, 2005). Cf. MURRAY, MURRAY ON CONTRACTS, LexisNexus, 4th ed., 2001, § 121[C].

69. See Saidov, Damages: The Need for Uniformity, op. cit., § 3.4, p. 10; SCHLECHTRIEM/SCHWENZER/Stoll/Gruber, op. cit., art. 74, ¶ 22.

70. SCHLECHTRIEM/SCHWENZER/Stoll/Gruber, op. cit., art. 74, 22, n.98.

71. See Saidov, Damages: The Need for Uniformity, op. cit., § 3.4, p. 9; Melvin Aron Eisenberg, Probability and Chance in Contract Law, 45 UCLA L. REV. pp. 1005, 1049 (1998).

72. In such a situation the breaching party could still be liable for other damages incurred by the aggrieved party as a result of the breach.

At least one court interpreting CISG Article 74 has denied the recoverability of the loss of chance. See SWITZERLAND, HG Zürich, 10 Feb., 1999, CISG-online.ch 488. In this case, the court addressed whether a buyer could set off the seller's claims of damages with, among other claims, a claim that the seller's failure to deliver art books to an exhibition on time prevented the buyer from receiving more offers. The buyer contended that, "as one of three European publishing houses specializing on the production of such catalogues, buyer would have received at least a third of the commissions." The court held that such a chance of profit was not recoverable, stating that "buyer's loss of profit must be considered normal for the buyer's kind of business and the seller at the time of conclusion of contract, must have been in the position to foresee such a consequence." Id. However, the court acknowledged that, had the seller been aware of this potential type of loss, such loss would have been recoverable.

73. MURRAY, op. cit., § 121 ("These depa rtures from the reasonable certainty requirement are explicable only on the basis that courts are simply unwilling to permit a breaching party to avoid liability solely on the basis of the plaintiff's difficulty of proving loss where it was clear at the time of formation that such loss would be impossible to prove with reasonable certainty.").

74. UNIDROIT Principles art. 7.4.3(2).

75. See UNITED KINGDOM, Chaplin v. Hicks, 1911, 2 K.B. p. 786; UNITED STATES, Kansas City, M & O. Ry. Co. v. Bell, Tx. Ct. of Civil Appeals, 1917, 197 S.W. p. 322; UNITED STATES, Wachtel v. National Alfalfa Journal Co., Iowa Supreme Court, 1920, 176 N.W. p. 801; see also RESTATEMENT (SECOND) ON CONTRACTS § 348(3) (U.S.); MURRAY, op. cit., § 121; Simont, op. cit., p. BEL-64 (Belgium); NICHOLAS, op. cit., p. 228.

76. See SCHLECHTRIEM/SCHWENZER/Stoll/Gruber, op. cit., art. 74, ¶ 22.

77. PECL art. 9:501(2)(b) cmt. F. The Comment provides the following illustration:

E is appointed sales manager of F's business under a three-year service contract. She is to be paid a salary and a commission on sales. After 12 months E is wrongfully dismissed, and despite reasonable efforts to find an alternative post she is still out of work when her action for wrongful dismissal is heard six months later. E is entitled to damages not only for her accrued loss of six months salary but also for the remaining 18 months of her contract, due allowance being made for her prospects of finding another job meanwhile. She is also entitled to damages for loss of the commission she probably would have earned.

Id., Illustration 8.

78. See U.C.C. § 2-708(2) (U.S.) (lost volume seller exception). For more information on how the lost volume seller exception operated under the U.C.C., see ANDERSON, DAMAGES UNDER THE UNIFORM COMMERCIAL CODE, West, 2nd ed., 2003, § 2-708:14.

79. UNITED STATES, Neri v. Retail Marine Corp., New York Court of Appeals, 1972, 285 N.E.2d p. 311 (quoting HAWKLAND, SALES AND BULK SALES, ALI, 1958 ed., pp. 153-54).

80. See SCHLECHTRIEM/SCHWENZER/Stoll/Gruber, op. cit., art. 75, ¶ 11. Allowing an aggrieved party to recover lost profits in addition to damages already including lost profits would place that party in a better economic position than if the contract had been performed. See GERMANY, LG München 6 Apr. 2000, CISG-online.ch 665.

81. See Korpela, Article 74 of the United Nations Convention on Contracts for the International Sale of Goods, § 3.3.2, PACE REV. OF THE CISG 2004-05 [Sellier, European Law Publishers (2006) 73-168]; cf. U.C.C. § 2-710 (U.S.).

Under Article 77, "[a] party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach." CISG art. 77. See generally HONNOLD, op. cit., pp. 456-64; see also Saidov, Methods of Limiting Damages Under the Vienna Convention for the International Sale of Goods, (Dec. 2001), available at <http://cisgw3.law.pace.edu/cisg/biblio/saidov.html>.

82. See e.g., ARBITRATION, ICC Arbitration Case No. 7585, 1 Jan., 1992 CISG-online.ch 105; see also SCHLECHTRIEM/SCHWENZER/Stoll/Gruber, op. cit., art. 74, ¶ 18.

83. See GERMANY, LG Landshut, 5 Apr., 1995, CISG-online.ch 193; AUSTRIA, Vienna Arbitral Tribunal, 15 Jun. 1994 CISG-online.ch 691; SWEDEN, Arbitration Institute of the Stockholm Chamber of Commerce Case No. 107/1997, available at <http://cisgw3.law.pace.edu/cases/980107s5.html>.

84. See e.g., UNITED STATES, Delchi Carrier S.p.A. v. Rotorex Corp., U.S.Court of Appeals (2nd Circuit), 6 Dec. 1995, CISG-online.ch 140.

85. See, e.g., SWEDEN, Arbitration Institute of the Stockholm Chamber of Commerce Case No. 107/1997, available at <http://cisgw3.law.pace.edu/cases/980107s5.html>; GERMANY, BGH, 25 Jun. 1997, CISG-online.ch 277; see also SCHLECHTRIEM/SCHWENZER/Stoll/Gruber, op. cit., art. 74, ¶ 19; Korpela, op. cit. § 3.3.2; cf. U.C.C. § 2-715(1) (U.S.).

86. See UNITED STATES, Zapata Hermanos Sucesores v. Hearthside Baking Co., U.S. Court of Appeals (7th Circuit), 2002, 13 F.3d pp. 385, 388; Flechtner/Lookofsky, Viva Zapata! American Procedure and CISG Substance in a U.S. Circuit Court of Appeal, VINDOBONA J. INT'L COM. L. & ARB. p. 93 (2003). Under this view, as a matter of procedural law, the recovery of litigation expenses is to be determined by reference to domestic law or applicable rules for resolving the dispute. See Zapata, op. cit., 313 F.3d p. 388; see also SCHLECHTRIEM/SCHWENZER/Stoll/Gruber, op. cit., art. 74, ¶ 20 ("The compensation of costs of litigation ... is governed exclusively by the relevant lex fori."); but cf. SCHLECHTRIEM/SCHWENZER/Schlechtriem, op. cit., Introduction, p. 7 ("If national courts simply qualify the recoverability of litigation costs and lawyers' fees as a procedural matter to be decided under their own lex fori, thereby circumventing Article 74 and the analysis of whether such costs are a risk to be borne by any party having to litigate in the U.S., there will soon be more enclaves of domestic law, which for the deciding judge may seem self-evident and which conform to his or her convictions, formed by historic rules and precedents, but which will not be followed in other jurisdictions and, thereby, will cause an erosion of the uniformity achieved.").

87. See generally Felemegas, The Award of Counsel's Fees under Article 74 CISG, in Zapata Hermanos Sucesores v. Hearthside Baking Co. (2001), available at <http://cisgw3.law.pace.edu/cisg/biblio/felemegas1.html>; Zeller, Interpretation of Article 74 - Zapata Hermanos v. Hearthside Baking - Where Next?, 2004 NORDIC J. COM. LAW 1, available at <http://www.njcl.utu.fi>.

88. See ¶ 2.5. One commentator has proposed an outcome determinative test to be applied by courts in judging whether an issue is substantive or procedural. See generally Orlandi, Procedural Law Issues and Law Conventions, 5 UNIFORM L. REV. p. (2000). Use of an outcome determinative test in the United States has generated much confusion, particularly with respect to the applicability of the Federal Rules of Civil Procedure in situations where it conflicts with state law. As a result, the United States Supreme Court eventually ruled that the outcome determinative test did not determine the validity of the Federal Rules of Civil Procedure in cases where the rules conflicted with state law. See UNITED STATES, Hanna v. Plumer, op. cit.; see also CHEMERINSKY, FEDERAL JURISDICTION, Aspen, 4th ed., 2003, p. 321 (noting that "problem with the outcome determinative test is that virtually any rule can determine the outcome of a case").

89. See Carruthers, The Substance and Procedure Distinction in Conflict of Laws: A Continuing Debate in Relation to Damages, 53 INT'L & COMP. L.Q. p. 691 (2004).

90. CISG art. 7(2). One commentator notes:

There is strong opinion in favor of the view that the label given by domestic law is not conclusive as to whether a particular matter ... falls within the Convention (HONNOLD, Uniform Law, 97). The substance rather than the label or characterization of competing rule of domestic law determines whether it is displaced by the Convention. In determining such questions, the tribunal, it is submitted, should be guided by the provisions of Article 7, and give to the Convention the widest possible application consistent with its aim as a unifier of legal rules governing the relationship between parties to an international sale.

BIANCA/BONELL/Khoo, op. cit., art. 4, ¶ 3.3.5.

91. HONNOLD, op. cit., p. 109; see also SCHLECHTRIEM/SCHWENZER/Schlechtriem, op. cit., art. 7, ¶¶ 27-29.

92. Articles 45 and 61 provide equivalent remedies to both buyer and seller, respectively, following a failure of the other party to perform its obligations. See CISG arts. 45, 61; see also Liu, Comparsion of CISG Article 45/61 remedial provisions and counterpart PECL articles 8:101 and 8:102, 2004 NORDIC J. COM. L. pp. 1, 2 available at <http://cisgw3.law.pace.edu/cisg/text/anno-art-61.html> (discussing parallel remedies available to buyer and sellers).

93. See Flechtner, Recovering Attorneys' Fees as Damages under the U.N. Sales Convention: A Case Study on the New International Commercial Practice and the Role of Case Law in CISG Jurisprudence, with Comments on Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Co., 22 NW. J. INT'L L. & BUS. pp. 121, 151 (2002); Keily, How Does the Cookie Crumble? Legal Costs Under a Uniform Interpretation of the United Nations Convention on Contracts for the International Sale of Goods, 2003 NORDIC J. COM. L. 1, § 5.6, available at <http://www.njcl.utu.fi>; Vanto, Attorneys' Fees as Damages in International Commercial Litigation, 15 PACE INT'L L. REV. pp. 203, 221 (2003).

94. See Vanto, op. cit., p. 221; see also Flechtner, op. cit., p. 151; Keily, op. cit., § 6.2(b). One commentator has argued that the gap identified by the anomaly would be filled by domestic law in accordance with Article 7(2). See Zeller, op. cit., p. 10. This, however, would not resolve the problem as successful respondent may still not be able to recovery their litigation costs. Another commentator argues that a claimant breaches a duty of loyalty when it files a breach of contract action, but the tribunal determines that the respondent was not in breach. He argues that, in such case, attorneys' fees and costs may be awarded under the Convention. See Felemegas, op. cit., p. 126. This proposal, however, stems from an overly strained interpretation of the Convention. Neither the language nor the structure of the Convention supports the imposition of liability for attorneys' fees and costs on the claimant in such circumstance. See Flechtner, op. cit., p. 152.

Interpreting Article 74 to provide for the recovery of litigation expenses incurred by a successful claimant also may conflict with otherwise applicable procedural laws and rules that regulate the amount of attorneys' fees that may be recovered. For example, in a number of countries, awards of attorneys' fees are calculated pursuant to a fixed fee schedule that may result in an award amounting to less than the actual fee incurred. If Article 74 were interpreted to allow for the recovery of litigation expenses, then these laws and rules presumably would be preempted by the Convention because they would be inconsistent with the principle of full compensation. Such preemption would, however, would result in disuniformity between the claimant and respondent. Due to the anomaly discussed above, a successful respondent would be forced to recover expenses associated with litigation under domestic laws, but because of preemption such laws would not apply to successful claimants. Such an unequal treatment is patently unfair and contrary to the Convention. Of course, one may argue that the ability to recover attorneys' fees and costs is a substantive matter that is governed by the Convention, but the determination of the amount is a procedural matter that is subject to applicable local law and rules. This distinction is highly artificial and would be contrary to the principle of full compensation and the need for uniformity, particularly because recovery of litigation expenses would vary depending on the applicable procedural law or rules.

95. Other policy reasons for awarding attorneys' fees and costs include deterrence and punishment. See Reinganum/Louis L. Wilde, Settlement, Litigation, and the Allocation of Litigation Costs, 17 RAND J. ECON. p. 557 (1986) (discussing the deterrence function awarding attorneys' fees serves); Wetter/Priem, Costs and Their Allocation in International Commercial Arbitrations, 2 AM. REV. INT'L ARB. p. 249, 329 (1991) (arguing that courts awarded costs and fees in order to punish an unsuccessful plaintiff for bringing a false claim or to fine a losing defendant for unjustly refusing the plaintiff's right). The later is clearly not a policy to be furthered by Article 74.

Moreover, interpreting the CISG to provide for one-way fee shifting would not serve the goals behind such a regime. One-way fee shifting statutes are typically enacted to encourage law suits in certain areas because it is in the public interest to do so or to equalize the litigation strength between the parties, particularly in suits between governments and private parties of modest means. See generally Krent, Explaining One-Way Fee Shifting, 79 VA. L. REV. p. 2039 (1993). Claimants in CISG suits do not need one-way fee shifting as incentive to bring suit. Nor do such suits as a routine matter involve claimants of modest means suing governments. Thus, the purposes for construing the CISG as providing for a one-way fee shifting scheme are not compelling.

96. See Keily, op. cit., § 6.2(b); see also BIANCA/BONELL/Bonell, op. cit., ¶ 2.2.1 (stating that, in interpreting the Convention, "courts are expected to take a much more liberal attitude and to look, wherever appropriate, to the underlying purposes and policies of individual provisions as well as the Convention as a whole").

97. See SCHLECHTRIEM/SCHWENZER/Stoll/Gruber, op. cit., art. 74, ¶ 21.

98. See SCHLECHTRIEM/SCHWENZER/Stoll/Gruber, op. cit., art. 74, ¶ 21 (citing cases).

99. See GERMANY, OLG München, 28 Jan. 1998, CISG-online.ch 339; GERMANY, LG Bielefeld, 2 Aug., 1996.

100. See GERMANY, BGH, 25 Nov. 1998, CISG-online.ch 353.

101. See ANDERSON, op. cit., § 11.3; SCHLECHTRIEM/SCHWENZER/Stoll/Gruber, op. cit., art. 74, ¶ 21.

102. See SCHLECHTRIEM/SCHWENZER/Stoll/Gruber, op. cit., art. 74, ¶ 12; Blase/Höttler, op. cit.; Djakhongir Saidov, Methods of Limiting Damages Under the Vienna Convention on Contracts for the International Sale of Goods, 14 PACE INT'L L. REV. pp. 307, 328 (2001). but see GERMANY, LG München, 30 Aug. 2001, CISG-online.ch 668 (holding that damages due to loss of goodwill are not available under Convention). Commentators argue, however, that the reasoning in that case was unsound. See SCHLECHTRIEM/SCHWENZER/Stoll/Gruber, op. cit., art. 74, ¶ 12, n.55; see also WADDAMS, op. cit., p. 535 (noting "no cogent reason why damages should not be given for loss of reputation in a contract case"); MCGREGOR, op. cit., § 38 (same).

103. See SCHLECHTRIEM/SCHWENZER/Stoll/Gruber, op. cit., art. 74, 12; but see Saidov, op. cit., pp. 329-32 (arguing for category of non-material damages for injury to business reputation).

104. See FRANCE, Sté Calzados Magnanni v. SARL Shoes General International, CA Grenoble, 21 Oct. 1999, CISG-online.ch 574; SWITZERLAND, HG Zürich, 10 Feb. 1999, CISG-online.ch 488; GERMANY, LG Darmstadt, 9 May 2000, CISG-online.ch 560.

105. Blase/Höttler, op. cit.

106. See UNIDROIT Principles art. 7.4.2 cmt. 5; PECL art. 9:501(2) and n.4; see also Blase/Höttler, op. cit.

Numerous jurisdictions applying the American Uniform Commercial Code also permit recovery of damages due to loss of goodwill. See ANDERSON, op. cit., § 11:31.

107. Commentators explain:

Many business people think of goodwill in terms of a company's relationship with its customers; that is, a company with good service generates goodwill among its customers. Although this is an accurate interpretation of goodwill, there are several others. For example, under the so-called excess earnings method for estimating business value, a company is worth the sum of the FMV [fair market value] of its tangible assets and its goodwill. In this scenario, goodwill is calculated as the capitalized value of the company's "above average" earnings or rate of return. In other words, the goodwill is a reflection of the fact that the subject company is earning a return greater than the norm for investments of a similar risk. Thus, goodwill in this instance is the company's ability to earn above-normal profits ... .

The final interpretation of goodwill relates to a company's balance sheet. GAAP [Generally Accepted Accounting Principles] does not allow a company to estimate the value of its goodwill and then place this figure on the balance sheet. The historical cost principle makes such an entry impossible under GAAP. However, in the case of a business acquisition, goodwill can be placed on the postacquisition balance sheet, reflecting the excess purchase price paid over the FMV of the identifiable tangible assets. In practice, this excess may be allocated to other intangible assets besides goodwill (e.g., customer base, trade name).

GABEHART/BRINKLEY, THE BUSINESS VALUATION BOOK, A.M.A., 2002, pp. 116-17.

108. See ANDERSON, op. cit., § 11:31; Saidov, op. cit., p. 330.

109. See HG Zürich 10 Feb. 1999, op. cit.

110. See GERMANY, LG Darmstadt, 9 May 2000, CISG-online.ch 560.

111. See ¶¶ 2.1-2.9 (discussing level of proof/certainty requirement); see also ANDERSON, op. cit., § 11.3 (rejecting any "stringent standard of certainty" for damages due to loss of goodwill) (quoting MCCORMICK, HANDBOOK ON THE LAW OF DAMAGES, West, 1935, p. 677; Saidov, op. cit., p. 330.

Of course, the aggrieved party will still have to prove, among other things, that such damages were foreseeable. In fact, some have asserted that there exists a stricter foreseeability test for loss of goodwill. See SCHLECHTRIEM/SCHWENZER/Stoll/Gruber, op. cit., art. 74, ¶ 46.

112. WADDAMS, op. cit., p. 628; LG Darmstadt, 9 May 2000, op. cit.; see also ANDERSON, op. cit., § 11.3 (stating that "lost future profits that are not attributable to an erosion of the customer base do not constitute a loss of goodwill").

113. See LG Darmstadt, 9 May 2000, op. cit. (citing danger of double recovery).

114. Id.

115. See id.

116. Cf. UNITED STATES, Lewis River Golf v. O.M. Scott & Sons, Wash. Supreme Court, 1993, 845 P.2d p. 987 (awarding U.S. $664,340 in damages for breach of contract and U.S. $1,026,800 in damages for loss on subsequent sale of business, which included loss resulting from damage to its reputation or goodwill).

117. See generally FARNSWORTH, op. cit., pp. 216, 225.

118. CISG art. 75.

119. Cf. GERMANY, OLG Hamburg, 28 Feb. 1997, CISG-online.ch 261.

120. See Schlechtriem, Damages Avoidance of the Contract and Performance Interest under the CISG, FESTSCHRIFT APOSTOLOUS GEORGIADES, ATHENS (forthcoming 2006); see also FARNSWORTH, op. cit., pp. 224-27. In this situation, the aggrieved party is also entitled to any incidental and consequential damages.

121. Schlechtriem, op. cit., p. 4. In calculating the amount of damages owed to the aggrieved party, the loss to the aggrieved party resulting from the breach must be offset by any gains to the aggrieved party

121. Schlechtriem, op. cit., p. 4. In calculating the amount of damages owed to the aggrieved party, the loss to the aggrieved party resulting from the breach must be offset by any gains to the aggrieved party resulting from the non-performance of the contract. Professor Schlechtriem notes:

If the buyer liquidates the contract by claiming performance interest without avoiding the contract, he has to keep the non-conforming goods, the value of which has to be taken into account in the computation of the buyer's total damages. If he resells the goods - even at a high discount because of their non-conformity - the proceeds have to be accounted for in the calculation of damages. Likewise, if he claims performance interest because the seller was in delay in delivering the goods, but then tenders, although late, and the buyer has to take delivery, because he cannot avoid (since the delay might not amount to a fundamental breach or an additional period of time was not set), the value of the goods bought as cover, if and insofar as they can be utilized, or the proceeds from reselling them, have to be taken into account.

Id., p. 6.

122. SCHLECHTRIEM/SCHWENZER/Stoll/Gruber, op. cit., art. 74, ¶ 32.

123. See FARNSWORTH, op. cit., § 12.9; TREITEL, op. cit., §§ 149-50; see also PECL art. 9:502 n.4 (citing numerous cases and authorities).

124. UNIDROIT Principles art. 7.4.2.

125. Id., cmt. 3.

126. PECL: art. 9:502 cmt c.

127. Secretariat Commentary, op. cit., art. 70 [draft counterpart to CISG art. 74], ¶ 5.

128. For a comparative study of punitive damages, see Gotanda, Punitive Damages: A Comparative Analysis, 42 COLUM. J. TRANSNAT'L L. p. 391 (2004). The prohibition on punitive damages does not, in principal, apply to claims for liquidated damages.

129. CISG art. 74.

130. Id.

131. See ENDERLEIN/MASKOW/Knapp, op. cit., p. 544. It should be noted that an award of punitive damages may violate an applicable mandatory rule of law. In such case, the award or the portion of the awarding punitive damages may be invalid or unenforceable. See generally Gotanda, Awarding Punitive Damages in International Commercial Arbitration in the Wake of Mastrobuono v. Shearson Lehman Hutton, Inc., 38 HARV. INT'L L.J. p. 59 (1997).