Corresponding author. E-mail: jorgeoa@unisabana.edu.co
This article addresses the duty to mitigate damages in activities relating to the international sale of goods that are govern by the 1980 United Nations Convention on Contracts for the International Sale of Goods (CISG), which is performed by the creditor in the event that the debtor breaches the contract. It is based on a dogmatic understanding of Article 77 of the CISG. The paper examines legal theory in order to establish the concept and legal character of mitigation of damages, and, through this, the scope. Court decisions and arbitration awards have also been studied, which, when implemented, have established what type of mitigating behavior should be undertaken by the creditor if the debtor breaches the contract.
Este artículo se refiere al deber de mitigar los daños en operaciones de compraventa internacional de mercaderías regidas por la Convención de las Naciones Unidas sobre los Contratos de Compraventa Internacional de Mercaderías, asumido por el acreedor ante el incumplimiento del contrato por el deudor. Para su elaboración se han tenido en cuenta la interpretación dogmática del artículo 77 de la Convención, apoyada en una indagación de tipo doctrinal con el fin de establecer el concepto y la naturaleza jurídica y a partir de ello su alcance, para lo cual igualmente se han estudiado fallos y laudos arbitrales que en su aplicación han establecido qué tipo de conductas mitigadoras deben ser asumidas por el acreedor frente el incumplimiento del deudor.
This article addresses the duty to mitigate damages in activities relating to the international sale of goods that are governed by the 1980 United Nations Convention, hereinafter the Convention on the International Sale or CISG (United Nations Convention on Contracts for the International Sale of Goods), which is performed by the creditor in the event that the debtor breaches the contract. It is based on a dogmatic understanding of Article 77 of the United Nations Convention on Contracts for the International Sale of Goods, which, to date, has been implemented by 89 countries, including several in Latin America. The paper examines legal theory in order to establish the concept and legal character of mitigation of damages, and, through this, the scope. Court decisions and arbitration awards have also been studied, which, when implemented, have established what type of mitigating behavior should be undertaken by the creditor if the debtor breaches the contract.
The aim of the article is to demonstrate that there is a duty to mitigate damage, and also to avoid it. This is included in some of the Convention's rules, especially in Article 72, which allows the creditor to terminate the contract in the event of a future fundamental breach. If such action is not undertaken, Article 77 will apply, and, as such, the other party can request that compensation is reduced. This article, thus, suggests that for activities relating to the international sale of goods there is a duty not only to mitigate but also to avoid damage.
This article is organized into the following sections: First, the concept and legal recognition of the mitigation of damages in legal traditions are addressed. Subsequently, reference is made to the regulation of mitigation of damages in international contract instruments that have seemingly drawn on the rule contained in Article 77 of the Convention on the International Sale. Thirdly, the legal nature and scope of the mitigation of damages are discussed, then several representative mitigating behaviors are identified, including termination for fundamental foreseeable breach of contract in accordance with the regulations stated in the CISG. The final section contains the conclusions and bibliography.
The following section explains the concept of mitigation of damages that is included in the Convention on the International Sale, and reference is also given to how it is recognized in other international contract instruments and in several harmonization proposals. Additionally, the way in which it has been adopted by countries that follow the Anglo-Saxon tradition as well as some that use continental European law will be referred to in order to provide an insight into the context on its inclusion into foreign laws.
The duty to mitigate damages can be considered to be a set of reasonable measures that the party who suffers the breach of contract should adopt in order to avoid being damaged to any further extent. As such, it cannot be claimed that the other party compensates them for those damages that are not a consequence of the breach, but instead for their own lack of adopting such measures.
The duty to mitigate damages, at least with respect to contemporary law, has Anglo-Saxon origins.
In the United States, the duty to mitigate damages can be found in §350 of the
In some codes that are based on the continental European tradition, mitigation of damages has been expressly included, for example in Articles 1227-1 of the Italian Civil Code, 1479 of the Civil Code of Québec, 6:101 of the Dutch Civil Code, 44 of the Swiss Code of Obligations, and §254-2 of the German Civil Code.
In Latin American law, there have been no further developments other than the inclusion of mitigation of damages in Article 1327 in the Peruvian Civil Code of 1984; in Article 348 in the Bolivian Civil Code; and also in Article 1074 of the Colombian Code of Commerce, despite being written into insurance contracts when establishing that the insured party is obliged to avoid any increase in loss and to recover what is insured.
Despite the dearth of normative regulation, some authors have posed the possibility of deriving the duty to mitigate damages from the obligation to behave in good faith when implementing contracts that are explicitly legally regulated. As such, JORGE CUBIDES-CAMACHO has commented in the Colombian legal theory that the mitigation of damages should be seen as a demonstration of the “responsibility of indemnity”, which is, in turn, derived from the duty to act in good faith when implementing a contract that is established in Article 1603 of the Colombian Civil Code.
Similarly, ÁLVARO VIDAL-OLIVARES bases his comments in Article 1546 of the Chilean Civil Code when he affirms that good faith serves to limit the powers and rights of the contractors and as a source of duties of conduct, for example, in this case, for the creditor affected by the breach of contract.
It is worthwhile mentioning that in the modernization proposal of the Spanish Civil Code, in terms of obligations and contracts, the duty to mitigate damages was included in Article 1211. The suggested rule sets out that the debtor will not respond for damages that the creditor could have avoided or reduced by adopting the measures required by good faith but will compensate for the expenses reasonably incurred by the creditor, even if the measures have been unsuccessful.
Despite there being no rule that defines it expressly, the Convention on the International Sale includes a broad concept of breach of contract in an objective manner, which, apart from subjective elements such as guilt, includes the non-implementation of services as well as late and defective performance. It establishes a system of remedies that work for the creditor, who is able to choose freely from remedies such as enforced implementation, price reduction, repair; resolution or substitution is reserved for fundamental breaches —in events of breach of contract— according to what is specified in Articles 25 and 46.2 of the Convention.
Compensation from damages can be found (Chapter V, Section II, Articles 74-77) among the remedies for breach of contract that are written in the CISG. It includes the value of the loss suffered and the gain that was not obtained by the creditor as a result of the breach, but is limited to the loss that the debtor would or should have had foreseen in the moment that the contract was signed. Facts are considered that he had or should have had a knowledge of at this moment of time as a possible consequence of the breach in terms of what is written in Article 74. It is worthwhile remembering that damages in the Convention on the International Sale can be filed for either independently or in addition to other remedies that are available to the creditor.
However, compensation is limited by the duty to mitigate damages, which is regulated in Article 77 of the Convention for the International Sale in the following terms:
“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. If he fails to take such measures, the party in breach may claim a reduction in the damages in the amount by which the loss should have been mitigated.”
The mitigation of damages is understood in both the legal theory and in case law as one of the principles upon which the CISG is based.
In addition, as VIDAL-OLIVARES explains, the Convention on the International Sale makes sure that the creditor reasonably manages the effects that result from the debtor's breach. There are a series of duties that must be carried out in order to exercise the rights that are set out in each situation, in such a way that a balance is achieved when protecting the interests of the creditor and the debtor by assuring that he will behave in a reasonable way according to his particular circumstances.
This rule has been incorporated into the modern instruments of contract law, which, through the Convention on the International Sale, seek global or regional harmonization or unification, and they are also widely approved in international arbitration; it is even recognized as one of the principles of lex mercatoria.
“Mitigation of harm
The non-performing party is not liable for harm suffered by the
aggrieved party to the extent that the harm could have been reduced by the
latter party's taking reasonable steps. The aggrieved party is entitled to recover any expenses reasonably
incurred in attempting to reduce the harm.
Similarly, Article 9.505 of the Principles of European Contract Law states that:
The non-performing
party is not liable for loss suffered by the aggrieved party to the extent that
the aggrieved party could have reduced the loss by taking reasonable steps. The aggrieved party is
entitled to recover any expenses reasonably incurred in attempting to reduce
the loss.
Also, in the Draft of the Common Frame of Reference (DCFR), Article III, 3.705:
III.-3:705: Reduction of loss
The debtor is not liable for loss suffered by the creditor to the
extent that the creditor could have reduced the loss by taking reasonable
steps. The creditor is entitled to recover any expenses reasonably incurred
in attempting to reduce the loss.
Similarly to the above-mentioned instruments, it is worthwhile
mentioning that the Proposal for the Principles of Latin American Contract Law,
which included this duty in terms of compensation being reduced if the creditor
omitted adopting measures that, in accordance with good faith, were reasonable
to mitigate losses. The reduction corresponds to the amount by which it would
have been possible to mitigate damages.
There are two theories regarding the legal character of the mitigation of damages: the first conceives it as an obligation and the second as a duty.
The mitigation of damages in the international sale of goods is not a contractual obligation as the debtor cannot turn to the remedies that the Convention has established for the situations in which there has been non-execution of the parties’ obligations. It is, instead, a duty. Non performance with this duty will bring about consequences for the creditor in terms of his inability to claim complete damages for the debtor's breach.
The mitigation of damages involves both a positive and negative aspect, the first is that the creditor should adopt the measures necessary to reduce or avoid the losses that the breach has generated or may generate, and second, to refrain from behaviors that could increase the debtor's losses.
It has also been argued that, as a consequence of the duty to mitigate damages, the creditor should be compensated for the cost of the measures adopted; compensation for losses that could have effectively been avoided are excluded.
It is worthwhile mentioning that the duty to mitigate damages is limited by reasonableness as in no case can the creditor be required to mitigate losses that arise from a breach. It can also not be assumed that by reducing losses the creditor should undertake expensive operations according to the particular circumstances.
Determining reasonable measures to mitigate damage is a factual matter
that depends as much on the uses as it does the practices established between
the parties and the behavior of what a similar person in the same position and
same circumstances to whoever must take such measures would have done in a
similar situation. This is all in accordance with what is established in
Articles 9 and 8.2 of the Convention, respectively, without obviously involving
disproportionate efforts or expenses, as has already been mentioned.
ANA SOLER-PRESAS highlights that in the international sale of goods the initiation of a replacement transaction or “business of market coverage” is quintessential mitigating behavior.
This type of replacement transaction can be undertaken by either the seller (reselling the goods) or by the buyer (buying replacement goods), as is established in Article 75 of the Convention. According to this rule, if the contract is terminated but one of the two parties implements it within a reasonable timeframe after termination, the party claiming the compensation may obtain the difference between the price of the contract and the price stipulated in the replacement transaction, as well as any other damages that are can be requested according to Article 74.
In several cases, it has been accepted that the replacement sale or purchase is mitigating behavior; for example, in a decision regarding a shoe sales contract in which the seller terminated the contract and sold the shoes to retailers due to the buyers' breach of contract in terms of payment and the concession of requested guarantees.
Contracting the delivery of goods that were not delivered on time by the buyer with a third party is also considered to be mitigating behavior. An example of this is a contract entered into between a Canadian company (seller) and a U.S. company (buyer) for the production and delivery of templates to manufacture car parts. The seller was delayed in production, which led the buyer having to request another producer to manufacture the templates in order to be able to deliver the end-buyers their parts in a timely manner. The buyer filed a claim and was awarded the extra costs that he incurred resulting from changing producer as well as the damages for breach of contract due to the fact that some of the templates were not in line with the contractual specifications.
The buyer purchasing parts to replace the damaged pieces or parts is a
demonstration of the duty to mitigate damages. Indeed, in a case in which the
buyer made allegations regarding a lack of conformity for some air compressors,
the seller, who was the manufacturer, was ordered to pay compensation that
covered the expenses incurred by the buyer when he attempted to rectify the
defects. These included the payment made by the defendant when he bought
compressors from a third party in order to mitigate the original losses as the
claimant could not secure orders due to the defendant's breach of contract,
there were handling and storage costs of the non-conforming goods, and there
was also the buyer´s loss of profit that resulted from the decrease in sales of
the said goods to third parties.
If the buyer does not receive the
object of the contract, a mitigating measure on the part of the seller would be
to pay the transport and storage costs. This decision was arrived at in a case
involving a lawsuit that was filed by the seller in which compensation was
claimed for the buyer's breach of contract as well as interest for failure to
pay the purchase price. The court accepted the seller's termination of contract
for the payment not having been made in the additional time-frame established
in accordance with Articles 63.1 and 64.1b of the Convention. It also ruled
that the seller had the right to claim interest according to Article 78 and
compensation for the maintenance of undelivered machinery, according to Article
74. It also accepted that the seller had mitigated the damage according to
Article 77 when he transported and stored the goods that were not received by
the buyer.
It is worthwhile mentioning that the principle of mitigation of damages is also seen in other rules in the Convention, such as Articles 85-88, which relate to the preservation of goods for both the seller and the buyer.
Similarly, when the buyer who has received the goods intends to reject them due to a breach of contract by the seller, such as when the goods are defective in terms of quality or quantity or when they are delivered to a place or at a time that is different to what was agreed upon either in the contract or the Convention, in accordance with Articles 45-52, reasonable measures should be adopted for their preservation, according to the circumstances. This includes depositing them in third party warehouses at the expense of the other party insofar as the costs are not excessive, which is contemplated in Article 87 of the Convention. Moreover, they could be sold by what is contemplated in Article 88 of the Convention when the other party has taken a very long time to claim the goods, accept their return, or pay the price of the cost of preserving them, or any other reasonable costs.
As VICENTE MONTES points out, the stated Articles are applications of the principle of mitigation of damages, which is established in Article 77, since the creditor who claims that the debtor has breached contract should adopt reasonable measures, according to the circumstances, to reduce the loss. This includes the loss of earnings that are a result of the breach.
As was indicated in the introduction of this article, it might arguably be the case that in the context of the CISG, the duty to mitigate damages is not only limited to the moment at which the fundamental breach of the obligations stipulated in the contract happens; it also includes the duty to avoid damage. As such, SOLER-PRESAS has stated that by including lost profits in the object of the mitigation the Convention has made it clear that the measures to be adopted are not only mitigating in the strict sense. They should also include those measures that help to avoid the imminent detrimental consequences that could arise from breach of contract.
This possibility can be found in Article 72 of the Convention, according to which, if before the date of performance of the contract it was clear that one of the parties will commit a fundamental breach of contract, the other party may declare the contract avoid. As far as is possible, this entails the duty to communicate what is written in point 2 of the Article with reasonable notice to the debtor. This remedy is not only useful for the seller who will not be obliged to manufacture or deliver a product for which they will not be paid, but it is also useful for the buyer who will not have to wait for the delivery that will not be made. Adopting this possibility will contribute to minimizing the damage that the parties will be forced to repair as a result of the breach.
The following are the main conclusions from the previous sections:
The duty to mitigate damages, which are contained in Article 77 of the United Nations Convention Contracts for the International Sale of Goods, is not understood as an obligation but as a duty that is assumed by the creditor who seeks compensation for damages resulting from breach of contract. It consists of adopting reasonable measures to reduce the loss that comes from the other party´s breach. These can either be in the preparatory stage of the contracting process or avoiding that the loss ever occurs.
The creditor should undertake this duty while seeking to protect his/ her own interests that entail the right to obtain compensation for the debtor's breach of contract. The consequences of breach of contract are that his/her behavior will be taken into consideration when deciding on the amount of compensation for breach of contract and the loss that disadvantaged party could have avoided.
Determining reasonable measures to mitigate damage is a factual matter that depends on both the uses and the practices established between the parties and the behavior that will be or would have been carried out in a similar situation by a similar person in the same position or in similar circumstances to the person who needs to take the measures. This is in accordance with what is established in Articles 9 and 8.2 in the Convention, respectively, and, obviously, there should be no unreasonable costs.
Based on some decisions and considerations from the legal theory, the following could be examples of mitigating behavior: A replacement transaction, which seeks to obtain a replacement of what was originally agreed upon and which can be effected by both the seller and the buyer. The second could be obtaining parts from another provider that replace those damaged. The costs of transporting and storing the good that was not received by the buyer may also be assumed by the seller, and the contract can be terminated for a fundamental foreseeable breach.
This paper is a product of the research
project
LUIS
DÍEZ-PICAZO,
However, without doubt,
as LILIAN C. SAN MARTÍN-NEIRA indicates, the duty to avoid damages was
recognized by Roman law. The author has suggested appealing to Roman law as a
method of establishing the rules that govern the damage avoidable in the Latin
American legal subsystem. LILIAN C. SAN MARTÍN-NEIRA,
PATRICK S. ATIYAH,
PATRICK S. ATIYAH, JOHN N. ADAMS & HECTOR MACQUEEN,
American Law Institute, ALI,
JOHN D. CALAMARI & JOSEPH M. PERILLO,
The concept is not
greatly recognized in the codes that are based on continental European
tradition. However, despite not explicitly referring to it, ROBERT JOSEPH POTHIER
also mentions it when explaining a case based on the sale of livestock that
suffered a contagious disease that caused the buyer a heavy economic loss due
to other cattle he owned being affected. He was then left with land that was
not possible to cultivate, and the author questioned if the debtor's
responsibility extended to all damages caused despite knowing about the
existence of the disease affecting the livestock. That is to say, should the
seller be treated as malicious. Faced with this
situation, POTHIER affirms that the seller should not respond for all the
damages as these were not so inevitable that the buyer could not have overcome
them by looking for other animals to plow the land, or by giving them to a
settler. As such, this conduct must be estimated when calculating damages. ROBERT JOSEPH POTHIER,
EDGARDO MUÑOZ,
As provided in the rule (article 1710 of the Civil and Commercial Code), every person has the duty, insofar as it depends on them, to: a) avoid causing unjustified harm; (b) take, in good faith and in accordance with the circumstances, reasonable measures to prevent damage, or to reduce its extent. If such measures prevent or reduce the extent of damages for which a third party would be liable, the person has the right to be reimbursed for the value of the expenses incurred in accordance with the rules of unjust enrichment; c) not worsen the damage, if it has already occurred.
According to this article,
contracts must be implemented in good faith, and, therefore, enforce not only
what is expressed in them, but everything that clearly arises from the nature
of the obligation, or from the law that it falls under. JORGE CUBIDES-CAMACHO,
ÁLVARO VIDAL-OLIVARES,
LUIS
DÍEZ-PICAZO,
ÁLVARO
VIDAL-OLIVARES,
On this point,
see, among others: ÁLVARO VIDAL-OLIVARES,
Cfr.
BERNARD AUDIT,
INGEBORG SCHWENZER,
ANA
SOLER-PRESAS,
In fact, and as the author
explains, the Convention sets forth a series of duties in terms of communication
and material conduct for the creditor affected by the breach, which are
demonstrated in the duty to report the lack of conformity of the goods within a
reasonable timeframe, starting from when it was discovered. According to what
is established in Articles 35 and 30 of the Convention, there is a limit of two
years that commence when the goods are delivered after which the possibility of
invoking the lack of conformity will be lost. Similarly, the duty to
communicate the decision to terminate the contract (Article 26) as a material
conduct duty, is precisely to mitigate the losses that derive from the breach,
and is established in Article 77. Cfr. ÁLVARO VIDAL-OLIVARES,
FILALI OSMAN,
EWAN MCKENDRICK,
Regarding this subject, LUIS DÍEZ-PICAZO,
ENCARNACIÓN ROCA-TRÍAS & ANTONIO MANUEL MORALES-MORENO,
CHRISTIAN VON BAR, ERIC CLIVE & HANS
SCHULTE-NÖLKE, eds.,
The Principles of Latin
American Contract Law Proposal relates to a project that was prepared by a
group of teachers from several Latin American countries and sponsored by the Foundation
for Continental Law. The article on the suggested mitigation of damages was
taken from a draft version written in 2013, which can be found in ANTONIO
MANUEL MORALES-MORENO,
On the difference between obligation and duty as elements of the imperative relationship, see: ANTONIO CABANILLAS-SÁNCHEZ,
This thesis is upheld by TOMÁS VÁZQUEZ-LÉPINETTE,
ÁLVARO VIDAL-OLIVARES,
In
this regard, MARÍA LUISA
PALAZÓN-GARRIDO,
VICTOR KNAPP,
FRITZ ENDERLEIN & DIETRICH
MASKOW,
ÁLVARO VIDAL-OLIVARES,
Cfr.
VICTOR KNAPP,
INGEBORG SCHWENZER, op. cit., 1104-1110, 1110 (2016). ANA
SOLER-PRESAS,
FRITZ ENDERLEIN & DIETRICH
MASKOW,
ANA SOLER-PRESAS, Artículo 77, 621-628, 625 (1998). Also see: BERNARD AUDIT,
ANA
SOLER-PRESAS,
According to AUDIT, if the
buyer obtains replacement goods or the seller finds another buyer in a
sufficiently short period of time, an objective mechanism can be used to
evaluate the prospective damages suffered. Article 75 sets the amount of
damages as the price difference between the contract and the replacement;
therefore, there will only be damages and losses on the part of the debtor in
relation to the value of the goods if there is an unfavorable difference. BERNARD
AUDIT,
INGEBORG SCHWENZER,
Germany, Oberlandesgericht OLG
[Provincial Court of Appeal] Düsseldorf, 17 U 146/93, 14th January,
1994, Clout Case 130.
Canada, Ontario Court, General Division,
United States, Federal District Court,
Northern District of New York,
International Chamber of Commerce, ICC,
BRUNO ZELLER,
JOHN HONNOLD,
VICENTE MONTES,
ANA SOLER-PRESAS,
ÁLVARO VIDAL-OLIVARES,
Accordingly: ALFONSO LUIS CALVO-CARAVACA,
Research paper