Source: http://www.cisgac.com/cisgac-opinion-no10/
Timestamp: 2020-07-06 23:31:14
Document Index: 44965008

Matched Legal Cases: ['sui generis', 'Art 4', 'Art 4', 'Art 4', '§ 343', 'Art 21', 'Art 652', 'Art 369', '§ 1336', 'Art 311', 'Art 1226', 'Art 532', 'Art 408', 'art 403', 'Art 1535', 'Art 114', 'Art 1592', 'Art 708', 'Art 350', '§ 544', 'Art 1578', 'Art 223', 'Art 1406', 'Art 417', 'Art 1226', '§ 339', 'Art 405', '§ 158', 'Art 1226', 'Art 1382', 'Art 170', 'Art 230', 'Art 420', 'Art 364', 'Art 398', 'Art 1716', 'Art 266', 'Art 6', 'Art 1226', 'Art 799', 'Art 1841', 'Art 624', 'Art 232', 'Art 6', 'Art 1985', 'Art 1039', 'Art 454', 'Art 1341', 'Art 481', 'Art 812', 'Art 1066', 'Art 330', '§ 544', 'Art 398', 'Art 1152', 'Art 160', 'Art 224', 'Art 250', 'Art 1363', 'Art 325', 'Art 1257', 'Art 422', 'Art 348', 'Art 420', 'Art 420', 'Art 230', 'Art 656', 'Art 372', '§ 1336', 'Art 314', 'Art 413', 'Art 1539', 'Art 114', 'Art 1601', 'Art 354', 'Art 1587', 'Art 224', 'Art 1415', 'Arts 1231', 'Art 420', '§ 343', 'Art 409', '§ 162', 'Art 1152', 'Art 1384', 'Art 171', 'Art 230', 'Art 364', 'Art 398', 'Art 266', 'Art 6', 'Arts 1231', 'Art 801', 'Arts 1844', 'Art 630', 'Art 232', 'Art 6', 'Art 1041', 'Art 459', 'Art 1346', 'Art 484', 'Art 812', 'Art 1070', 'Art 333', 'Art 398', 'Art 1154', 'Art 163', 'Art 225', 'Art 252', 'Art 326', 'Art 1260', 'Art 354', 'Art 36', 'Art 36', '§ 36', 'Art 36', 'Art 2012', 'Art 1229', 'Arts 1', 'Art 15', 'Art 8', 'Art 7', 'Art 9', 'Art 4', 'Art 170', 'Art 4', 'Art 74', '§ 433', 'Art 74', 'Art 534', 'Art 412', 'Art 1843', 'Art 232', 'Art 811', 'Art 378', 'Art 370', 'Art 312', 'Art 418', 'Art 294', 'Art 321', 'Art 6', 'Art 625', 'Art 232', 'Art 330', '§ 544', 'Art 356', 'Art 428', 'Art 261', '§ 355', '§ 355']

Opinion No10 Agreed Sums Payable upon Breach of an Obligation in CISG Contracts
CISG Advisory Council Opinion No. 10
Agreed Sums Payable upon Breach of an Obligation in CISG Contracts
CISG_AC_Opinion_No_10_English.pdf
To be cited as: CISG-AC Opinion No. 10, Agreed Sums Payable upon Breach of an Obligation in CISG Contracts, Rapporteur: Dr. Pascal Hachem, Bär & Karrer AG, Zurich, Switzerland. Adopted by the CISG-AC following its 16th meeting in Wellington, New Zealand on 3 August 2012.
This opinion is dedicated to the memory of Professor Albert J Kritzer, our dear friend, colleague and teacher, who passed away on 1 June 2010.
Reproduction of this opinion is authorized.
Ingeborg Schwenzer, Chair
Eric Bergsten, Joachim Bonell, Michael Bridge, Alejandro Garro, Roy Goode, John Gotanda, Han Shiyuan, Sergei Lebedev, Pilar Perales Viscasillas, Jan Ramberg, Hiroo Sono, Claude Witz -- Members
Sieg Eiselen, Secretary*I
Opinion (Black Letter Text) Comments
1. Comments on Rule 1
2. Comments on Rule 2
2.1 Comparative Overview
2.2 The Position of the CISG
3. Comments on Rule 3
4. Comments on Rule 4
4.2 Interpretation of Domestic Tests Under the CISG
4.3 The Standard of the CISG
5. Comments on Rule 5
6. Comments on Rule 6
7. Comments on Rule 7
8. Comments on Rule 8
8.3 Avoidance
8.4 Damages
1. The Convention governs the incorporation in the contract and interpretation of clauses providing for the payment of agreed sums for failure to perform the contract (“agreed sums”).
2. According to the principle of freedom of contract laid down in Article 6 CISG the parties may derogate from Articles 74 – 79 CISG by including such clauses.
3. The CISG does not exclude provisions on the protection of the obligor of the otherwise applicable law or rules of law, except for form requirements.
4. (a) Provisions on the protection of the obligor of the otherwise applicable law or rules of law relying on notions such as reasonableness, excessiveness or proportionality must be applied in accordance with an international standard. This standard must be developed from the underlying principles of the CISG.
(b) In an international context, agreed sums do not fail such provisions on the sole grounds that they compel the obligor to perform.
5. Whether an impediment exempts the obligor from payment of the agreed sum is primarily a matter of interpretation of the contract under Articles 8 and 9 CISG. Unless otherwise agreed, Article 79(1) CISG exempts the obligor from the obligation to pay an agreed sum.
6. Where the obligee has contributed to the failure of the obligor triggering the agreed sum, it is barred by Article 80 CISG from relying on agreed sums to the extent that it has caused the breach.
7. A failure to take reasonable measures to mitigate the loss (Article 77) does not affect the amount recoverable as an agreed sum.
8. The relationship of agreed sums to the default remedies of the CISG for breach of contract is primarily a matter of interpretation of the contract under Articles 8 and 9 CISG. Unless otherwise agreed the following rules apply:
(a) Specific performance may be claimed in addition to the agreed sum, only if the agreed sum is not meant to replace performance of the contract.
(b) Avoidance of the contract does not affect an agreed sum (Article 81(1) CISG).
(c) In addition to the agreed sum no further damages may be claimed.
Rule 1 repeats the undisputed view that Articles 14 – 24 CISG govern the incorporation of agreed sums.[1]
2.1.1 Agreed sums payable upon breach of an obligation are a frequent feature in sales contracts. Today, parties are free to include such clauses in Civil Law systems.[2] Excessive sums are typically[3] subject to reduction.[4] The Nordic systems likewise recognise the concept of agreed sums, although there are no specific rules in the respective Contracts Acts.[5] In terms of their validity, the Nordic systems treat them as every other clause in the contract. This means that a modification of excessive sums is possible under the provisions allowing for a modification of unconscionable terms in a contract.[6]
2.1.2 In Common Law jurisdictions the distinction of penalty and liquidated damages clauses is of far greater importance than in Civil Law jurisdictions. Originating in the development of equitable relief against penal bonds, traditional Common Law denies enforceability to clauses that are found to act in terrorem and are thus classified as penalties; liquidated damages on the other hand are enforceable under Common Law.[7] At its simplest, the courts require that the agreed sum be a genuine pre-estimate of the loss. This approach is today also followed in other legal systems of Common Law descent,[8] although there are notable exceptions,[9] even within Common Law systems.[10]
2.1.3 Mixed Jurisdictions are divided on the subject of agreed sums. The Philippines and South Africa have established rules corresponding to those of Civil Law legal systems.[11] Although somewhat ambiguous, the same approach can be inferred for Israel.[12] Scotland has traditionally followed the English approach.[13] However, under the anticipated Penalty Clauses (Scotland) Bill the court may modify sums that are manifestly excessive.[14]
2.1.4 At the international level the first steps were taken by the 1973 Convention Benelux Relative à la Clause Pénal. In the aftermath of the drafting of the CISG UNCITRAL in 1983 finalised the Uniform Rules on Contract Clauses for an Agreed Sum Due upon Failure of Performance. Subsequent followers to the UNCITRAL Rules are Article 7.4.13 UNIDROIT Principles of International Commercial Contracts in 1994, 2004 and 2010, Article 9:509 Principles of European Contract Law in 1999 and Article III.–3:712 of the Draft Common Frame of Reference in 2009. The approach taken by the UNCITRAL Rules and its followers dispenses with the distinction of penalty and liquidated damages clauses. Rather, all agreed sums are upheld, subject to reduction in case of excessiveness.[15] An essentially identical approach is also taken by Article 170 of the European Code of Contract published by the Gandolfi Initiative in 2001.[16]
Rule 2 of this opinion acknowledges the frequency of agreed sums in commerce and reemphasises the freedom of the parties to include such clauses into their contract. Courts and arbitral tribunals have based this principle either on Article 6[17] or on Article 45(2) .[18] Since penalty and liquidated damages clauses are inseparably intertwined with the law of damages, such clauses affect Articles 74 – 77, 79, 80 of the Convention.
3.1 Rule 3 addresses the interplay of the Convention and domestic rules protecting the obligor.
3.2 Legal systems have developed different mechanisms to offer protection for the obligor. These can be summarised as follows: Legal systems may establish specific formal requirements for agreed sums;[19] legal systems may fix the maximum amount of such sums; legal systems may deny enforceability to agreed sums classified as penalties;[20] legal systems may provide for the reduction of excessive sums. Furthermore, the obligor may be protected by general provisions exempting it from liability.
3.3 From the perspective of the CISG, all of these protection mechanisms concern the validity of agreed sums. Where domestic laws establish fixed amounts for agreed sums, these provisions determine to what extent an agreed sum is valid. Where a legal system denies enforceability to agreed sums classified as penalties, the function of the clause determines the validity of the entire clause. Where a legal system provides for the reduction of excessive sums, such provisions determine the extent to which an agreed sum is valid. As the CISG is not concerned with questions of validity – Article 4 sentence 2(a) CISG – domestic protection mechanisms generally remain applicable to agreed sums in CISG contracts.
3.4 Courts and arbitral tribunals have therefore rightly applied domestic protection mechanisms against agreed sums also where such clauses were incorporated in CISG contracts.[21] In particular, it has been denied that a reduction mechanism could be based on Articles 8 and 77.[22] In one case, it was, however, held, that the reduction mechanism established in Article 7.4.13(2) PICC 1994 satisfied the requirements of an international trade usage under Article 9(2) and on that account was held applicable.[23]
3.5 Rule 3 contains an exception to the general rule for domestic form requirements. These are not applicable on account of Article 11 CISG. Some domestic legal systems, especially in Eastern Europe and Central Asia, have established specific formal requirements to be met by agreed sums.[24] Article 4 sentence 2(a) CISG, however, defers questions of validity to domestic "except as otherwise expressly provided in this Convention". Article 11 CISG, which establishes the freedom of form, is unanimously perceived to be such an exception, that is, this provision governs a validity question.
3.6 One court decision has, however, held that despite Article 11 CISG domestic formal requirements specifically addressing agreed sums remain applicable as the Convention did not contain any provisions dealing with agreed sums.[25] The better view, which is adopted in Rule 3, is to give Article 11 CISG a broad meaning so as to eliminate all domestic form requirements for the sales contract or any of its clauses, unless Articles 90, 96 CISG lead to a different result.
4.1.1 Rule 4 addresses the application of domestic validity tests as envisaged by Rule 3 to agreed sums contained in CISG contracts. Independent of the individual approach taken by a legal system the subject matter is always whether and to what extent a clause is upheld in a contract. From a functional perspective, some legal systems completely invalidate clauses while others partially invalidate them by reduction of the sum agreed upon; then again, some legal systems uphold clauses in their entirety and only subject to unconscionability and immorality, which is again a question of validity.
4.1.2 The most prominent protection mechanisms against agreed sums are the unenforceability of clauses classified as penalties and the reduction of excessive sums. As noted earlier,[26] the first approach is primarily taken by Common Law legal systems, while the second is typical for Civil Law legal systems, Nordic systems, Mixed systems and also for international instruments.
4.1.3 As regards these mechanisms, independent of the individual approach taken by a legal system the subject matter is always whether and to what extent a clause is upheld in a contract. From a functional perspective, some legal systems completely invalidate clauses while others partially invalidate them by reduction of the sum agreed upon; then again, some legal systems uphold clauses in their entirety and only subject to unconscionability and immorality, which is again a question of validity.
4.2.1 The CISG is part of the law of every Contracting State. More specifically, it is that part of state law which governs international sales contracts. Thus, where purely domestic provisions are needed to supplement this part of the law it makes sense to interpret them in a way so as to reflect the international dimension of this area of the law. In other words, a clause that may be unreasonable in domestic sales is not necessarily unreasonable in an international setting.
4.2.2 From this finding it follows that when applying tests such reasonableness, proportionality or whether an agreed sum is a genuine pre-estimate of the loss, these must be assessed against an international standard to be derived from the CISG. To put it in traditional terms of legal systems prohibiting penalties: Whether a sum stipulated is a genuine pre-estimate of the loss – which in the end is always a test of reasonableness – must not be decided in accordance with domestic case law but in light of what is reasonable in international trade. To put it in traditional terms of legal systems employing a reduction mechanism: Whether a clause is excessive under the circumstances and thus to be reduced is not to be decided in light of what is held to be excessive in domestic contracts, but is to be determined by applying an international standard.
4.3.1 Determining the standard established by the CISG means interpreting the Convention under Article 7(1) CISG. It is necessary to determine, whether the possibility of inducing performance by making use of an agreed sum is also part of the international standard established by the CISG, ie whether party autonomy provides sufficient grounds in international trade to do so.
4.3.2 The possibility to induce performance by an agreed sum is recognised in most Civil Law legal systems, Mixed Jurisdictions, Nordic legal systems and in international instruments. The mandate of Article 7(1) CISG requires the standard also to be acceptable to those legal systems which take a different stance. This relates to those legal systems that protect the obligor by denying enforceability to clauses classified as penalties. Here, it is justifiable that the test of whether an agreed sum is a genuine pre-estimate of the loss in international sales contracts can also be passed by clauses inducing performance by the respective counter-party.
4.3.3 A closer analysis of the developments in Common Law jurisdictions reveals that the traditional rule has come to be seen as a rare departure from the general principle of freedom of contract and is perceived to be a relic from the age of English courts of equity protecting obligors in penal bonds.[27] The traditional Common Law approach has been labelled an anomaly,[28] with its underlying ratio being ‘mysterious’[29] and remaining ‘one of the abiding mysteries of the common law’[30] which in the end turns out to be an ‘anachronism, especially in cases in which commercial enterprises are on both sides of the contract’ .[31] In a similar vein Lord Diplock had stated in Robophone Facilities Ltd v Blank: ‘I will make no attempt, where so many others have failed, to rationalise this common law rule. It seems sui generis.’[32] Others speak of an ‘accident of legal history’.[33]
4.3.4 Furthermore, there is increasing acceptance of the notion that the law of damages protects the interest in the performance of the contractual obligations owed and not merely the economic balance sheet. In comparative law discussion this development is typically described as a paradigm shift from the ‘economic benefits principle’ to the ‘performance principle’.[34] Under this latter principle the law of damages is considered to function as an enforcement of contractual obligations.[35]
4.3.5 A vivid example is Attorney-General v Blake.[36] The majority of the Law Lords reasoned that ‘the law recognises that damages are not always a sufficient remedy for breach of contract. […] Even when awarding damages, the law does not adhere slavishly to the concept of compensation for financially measurable loss. When the circumstances require, damages are measured by reference to the benefit obtained by the wrongdoer.’[37] One commentator has noted that an agreed sum providing for the disgorgement of benefits derived from breach of contract under the traditional rule would clearly fail to be a liquidated damages clause but that ‘it would seem odd to knock out such a clause as a penalty at least in a situation where the courts would otherwise be willing to award an account of profits or restitutionary damages’.[38]
4.3.6 Further evidence for a changing perception of the law of damages – although not directly related to international sales contracts – can be derived from an increasing tendency to either grant or advocate punitive damages also in breach of contract actions.[39]
4.3.7 Putting together these developments, the exception made for agreed sums from the general principle that terms freely entered into have to be strictly enforced may see a change in the near future. It follows, that where the CISG provides the backdrop for the general test of reasonableness to be carried out under the genuine pre-estimate of loss test, agreed sums should not fail the genuine pre-estimate of the loss test simply because they seek to induce performance of the obligation owed. Rather, they should fail this test if they are excessive in relation to that goal, ie where they are disproportionate in the context of the individual contractual relationship.
4.3.8 Consequently, agreed sums in CISG contracts should generally be upheld independent of the function they assume. Domestic tests of validity employing a standard of reasonableness have to be applied against the background provided by the CISG. This background provides that the mere fact that a clause secures performance as owed under the contract is not sufficient for the agreed sum to fail the test of unreasonableness. However, the CISG does not provide any guidelines as to the legal consequences should the clause in question be held to be unreasonable, ie to not be a genuine pre-estimate of loss or an excessive sum. This issue is exclusively for the applicable domestic law to decide.
* The CISG-AC is a private initiative supported by the Institute of International Commercial Law at Pace University School of Law and the Centre for Commercial Law Studies, Queen Mary, University of London. The International Sales Convention Advisory Council (CISG-AC) is in place to support understanding of the United Nations Convention on Contracts for the International Sale of Goods (CISG) and the promotion and assistance in the uniform interpretation of the CISG.
At its formative meeting in Paris in June 2001, Prof. Peter Schlechtriem of Freiburg University, Germany, was elected Chair of the CISG-AC for a three-year term. Dr. Loukas A. Mistelis of the Centre for Commercial Law Studies, Queen Mary, University of London, was elected Secretary. The founding members of the CISG-AC were Prof. Emeritus Eric E. Bergsten, Pace University School of Law; Prof. Michael Joachim Bonell, University of Rome La Sapienza; Prof. E. Allan Farnsworth, Columbia University School of Law; Prof. Alejandro M. Garro, Columbia University School of Law; Prof. Sir Roy M. Goode, Oxford, Prof. Sergei N. Lebedev, Maritime Arbitration Commission of the Chamber of Commerce and Industry of the Russian Federation; Prof. Jan Ramberg, University of Stockholm, Faculty of Law; Prof. Peter Schlechtriem, Freiburg University; Prof. Hiroo Sono, Faculty of Law, Hokkaido University; Prof. Claude Witz, Universität des Saarlandes and Strasbourg University. Members of the Council are elected by the Council. At subsequent meetings, the CISG-AC elected as additional members Prof. Pilar Perales Viscasillas, Universidad Carlos III de Madrid; Professor Ingeborg Schwenzer, University of Basel; Prof. John Y. Gotanda, Villanova University; and Prof. Michael G. Bridge, London School of Economics, Prof HAN Shiyuan, Tsinghua University, Beijing; Prof. Jan Ramberg served for a three-year term as the second Chair of the CISG-AC. At its 11th meeting in Wuhan, People’s Republic of China, Prof. Eric E. Bergsten of Pace University School of Law was elected Chair of the CISG-AC and Prof. Sieg Eiselen of the Department of Private Law of the University of South Africa was elected Secretary. At its 14th meeting in Belgrade, Serbia Prof. Ingeborg Schwenzer, University of Basel was elected Chair of the CIG-AC.
1. See Schwenzer/Hachem, in: Schwenzer (ed), Schlechtriem & Schwenzer – Commentary on the UN-Convention on the International Sale of Goods, 3rd edn, Oxford: Oxford University Press (2010), Art 4 CISG, para 17 [hereinafter referred to as “Commentary”]; Ferrari, in Schwenzer (ed), Schlechtriem/Schwenzer – Kommentar zum Einheitlichen UN-Kaufrecht, 5th edn, Munich: C. H. Beck (2008), Art 4 CISG, para 40 [hereinafter referred to as “Kommentar”]; Magnus, in: Staudingers Kommentar zum Bürgerlichen Gesetzbuch, CISG, 13th edn, Berlin: de Gruyter/Sellier (2005), Art 4 CISG, para 61 [hereinafter referred to as “Staudinger”]; Benicke, in Münchener Kommentar zum Handelsgesetzbuch, Vol 5 – Viertes Buch. Handelsgeschäfte. Erster Abschnitt. Allgemeine Vorschriften §§ 343–372, Recht des Zahlungsverkehrs, Effektengeschäft, Depotgeschäft, Ottawa Übereinkommen über Internationales Factoring, 2nd edn, Munich: C. H. Beck (2009), Art 21 CISG, para 57 [hereinafter referred to as “MünchKommHGB”].
2. See for Argentina Art 652 CC; Armenia Art 369 CC; Austria § 1336(1) CC; Belarus Art 311 CC; Belgium Art 1226 CC; Bolivia Art 532 CC; Brazil Art 408 CC; Bulgaria Section 92 OCA; Cambodia art 403 CC; Chile Art 1535 CC; China Art 114 Contract Law; Colombia Art 1592 CC; Costa Rica Art 708 CC; Croatia Art 350 Civil Obligations Act; Czech Republic § 544 CC; Ecuador Art 1578 CC; Egypt Art 223 CC; El Salvador Art 1406 CC; Georgia Art 417 CC; France Art 1226 CC; Germany § 339 CC; Greece Art 405 CC; Estonia § 158 Law of Obligations Act; France Art 1226 CC; Italy Art 1382 CC; Iraq Art 170 CC; Iran Art 230 CC; Japan Art 420 CC; Jordan Art 364 CC; Republic of Korea Art 398 CC; Latvia Art 1716 CC; Lebanon Art 266 Code of Obligations and Contracts; Lithuania Art 6.71 CC; Luxembourg Art 1226 CC; Macau Art 799 CC; Mexico Art 1841 CC; Moldova Art 624 CC; Mongolia Art 232 CC; the Netherlands Art 6.91 CC; Nicaragua Art 1985 CC; Panama Art 1039 CC; Paraguay Art 454 CC; Peru Art 1341 CC; Poland Art 481(1) CC; Portugal Art 812 CC; Romania Art 1066 CC; Russia Art 330 CC; Slovakia § 544 CC; South Korea Art 398 CC; Spain Art 1152 CC; Switzerland Art 160 CO; Syria Art 224 CC; Taiwan Art 250 CC; Uruguay Art 1363 CC; Uzbekistan Art 325 CC; Venezuela Art 1257 CC; Vietnam Art 422 CC; Yemen Art 348 CC.
3. Some Civil Law legal systems do not establish express reduction mechanisms. This is eg the case in the Czech Republic, Costa Rica, Latvia and Slovakia. In Japan Art 420(1), sentence 2 CC expressly states that the court may not increase or decrease the amount of liquidated damages. Art 420(3) CC equates penalties and liquidated damages. The same applies under Iran Art 230 CC.
4. See for Argentina Art 656 CC; Armenia Art 372 CC; Austria § 1336(2) CC; Belarus Art 314 CC; Brazil Art 413 CC; Bulgaria Section 92 OCA; Chile Art 1539 CC; China Art 114 Contract Law; Colombia Art 1601 CC; Croatia Art 354 Civil Obligations Act; Ecuador Art 1587 CC; Egypt Art 224(2) CC; El Salvador Art 1415 CC; France Arts 1231, 1152 CC; Georgia Art 420 CC; Germany § 343 CC; Greece Art 409 CC; Estonia § 162 Law of Obligations Act; France Art 1152 CC; Italy Art 1384 CC; Iraq Art 171(2) CC; Iran Art 230 CC; Jordan Art 364(2) CC; Republic of Korea Art 398(2) CC; Lebanon Art 266(2) Code of Obligations and Contracts; Lithuania Art 6.73(2) CC; Luxembourg Arts 1231, 1152 CC; Macau Art 801 CC; Mexico Arts 1844, 1845 CC; Moldova Art 630(1) CC; Mongolia Art 232(8) CC; the Netherlands Art 6.94 CC; Panama Art 1041 CC; Paraguay Art 459 CC; Peru Art 1346 CC; Poland Art 484(2) CC; Portugal Art 812 CC; Romania Art 1070 CC; Russia Art 333 CC; South Korea Art 398(2) CC; Spain Art 1154 CC; Switzerland Art 163 CO; Syria Art 225(2) CC; Taiwan Art 252 CC; Uzbekistan Art 326 CC; Venezuela Art 1260 CC; Yemen Art 354 CC.
5. See for Denmark Lookofsky, The Limits of Commercial Contract Freedom: Under the UNIDROIT ‘Restatement’ and Danish Law, (1998) 46 Am J Comp L 498; for Denmark, Finland, Norway and Sweden Dimatteo, A Theory of Efficient Penalty: Eliminating the Law of Liquidated Damages, (2001) 38 Am Bus L J 655. The rules of the Icelandic Contracts Act correspond almost word for word to those of the Danish Contracts Act.
6. See for Denmark Art 36 Contracts Act; Finland Section 36 Contracts Act; Norway Art 36 Contracts Act; Sweden § 36 Contracts Act; Iceland Art 36 Contracts Act. Cf also Dimatteo, op cit (n. 5), at p 655.
7. See for the development in Common Law legal systems Hachem, Agreed Sums Payable upon Breach of an Obligation, The Hague: eleven publishing (2011), p 34 et seq.
8. See for Australia Ringrow Pty Ltd v BP Australia Pty [2005] HCA 71; Buthan Sec 67(1) Commercial Sale of Goods Act; Ireland DOOLAN, Principles of Irish Law, 6th edn, Dublin: Gill & MacMillan (2003), p 128; New Zealand BURROWS/FINN/TODD, Law of Contract in New Zealand, 3rd edn, Wellington: LexisNexis NZ (2007), para 21.2.6(a). A more guarded approach is taken by Canadian courts, see Ontario Ltd v Torrey Springs II Associates Ltd Partnership, Ont Ct App, 4 July 2005, 256 DLR (4th) 490 requiring an element of oppression.
9. See for India Section 74 Contracts Act (1872); Pakistan Section 74 Contracts Act (1872). In Malaysia Section 75 Contracts Act (1950) explicitly provides for the enforceability of agreed sums, even if classified as penalties. However, the Malayan Supreme Court has interpreted this provision to the contrary, see Selva Kumar A/L Murugiah v Thiagarajah A/L Retnasamy [1995] 1 MLJ 817; criticism from Mohd Danuri/Che Munaaim/Yen, Liquidated Damages in the Malaysian Standard Forms of Construction Contract: The Law and the Practice, (2009) 25 Constr L J 103 et sqq.
10. See Art 2012 Louisiana Civil Code providing for the reduction of excessive sums. Courts in Louisiana, however, follow the general Common Law approach of invalidating penalties, see Dye, Attorney Fees Provisions and Promissory Notes, (1984) 44 La L Rev 836.
11. See for the Philippines Art 1229 CC; South Africa Arts 1, 3 Conventional Penalties Act (1962).
12. See for Israel Art 15 Contracts (Remedies for Breach of Contract) Law which speaks of ‘agreed compensation’ under the heading of ‘liquidated damages’.
13. See for a summary of the most important cases and development of the law of liquidated damages in Scotland Scottish Law Commission, Report on Penalty Clauses (1999), p 5 et sqq; see also for the current state of the law Gloag/Candlish Henderson, The Law of Scotland, 12th edn, Edinburgh: Thomson/W Green (2008), paras 10.30-33.
14. At the time of writing the consultation process had finished but the bill has not been passed yet.
15. See Art 8 UNCITRAL Rules; Art 7.4.13(2) PICC; Art 9:509(2) PECL; Art III.-3:712(2) DCFR. See also Art 4(1) Convention Benelux.
16. Art 170(4) ECC.
17. See Foreign Trade Court of Arbitration attached to the Serbian Chamber of Commerce in Belgrade, 15 July 2008, CISG-online 1795; Schwenzer/Hachem, Commentary (n 1), Art 4 CISG, para 17; Schwenzer, Commentary, Art 74 CISG, para 58; Honnold/Flechtner, Uniform Law for International Sales under the 1980 United Nations Convention, 4th ed., Alphen an Rijn: Kluwer Law International (1999) para 403; P Huber, in: Münchener Kommentar zum Bürgerlichen Gesetzbuch, vol 3 – Schuldrecht – Besonderer Teil I §§ 433–610, 5th edn, Munich: C. H. Beck (2008), Art 74 CISG, para 57 [hereinafter referred to as “MünchKommBGB”]; Hachem, Fixed Sums in CISG Contracts, (2009) 13 VJ 219.
18. Russian Federation Arbitration Proceeding 99/2002, 16 April 2002, CISG-online 1683; Foreign Trade Court of Arbitration Attached to the Yugoslav Chamber of Commerce in Belgrade, 9 December 2002, CISG-online 2123.
19. See for Bolivia Art 534 CC; Brazil Art 412 CC; Mexico Art 1843 CC; Mongolia Art 232(4) CC; Portugal Art 811(3) CC; Vietnam Art 378 Contract Law.
20. See for this mechanism in traditional Common Law supra para 2.1.2.
21. With regard to the invalidity of an agreed sum RB Hasselt, 21 January 1997, CISG-online 360 (domestic Belgian law applied, clause invalid). With regard to the reduction of excessive sums see Hof van Beroep Antwerp, 18 June 1996, CISG-online 758 (domestic French law applied); Gerechtshof Arnhem, 22 August 1995, CISG-online 317 (domestic German law applied under which a reduction was denied); CIETAC, 7 December 2005, CISG Pace (domestic Chinese law applied); CIETAC, 9 November 2005, CISG-online 1444 (domestic Chinese law applied); CIETAC, 6 February 1997, CISG Pace (domestic Chinese law applied); Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, 27 April 2005, CISG-online 1500 (domestic Russian law applied); Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, 19 March 2004, CISG-online 1186 (domestic Russian law applied); Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, 19 February 2004, CISG-online 1182 (domestic Russian law applied); Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, 4 April 2003, CISG-online 1547 (domestic Russian law applied); Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, 10 January 1998 CISG-online 2122 (domestic Russian law applied).
22. See Gerechtshof Arnhem, 22 August 1995, CISG-online 317.
23. Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, 5 June 1997, CISG-online 1247.
24. See for Armenia Art 370 CC; Belarus Art 312(1) CC; Georgia Art 418(2); Kazakhstan Art 294 CC; Kirgizstan Art 321 CC; Lithuania Art 6.72 CC; Moldova Art 625(1) CC; Mongolia Art 232.3 CC; Russia Art 330 CC; Slovakia § 544(2) CC; Tajikistan Art 356 CC; Turkmenistan Art 428 CC; Uzbekistan Art 261 CC.
25. District Court Nitra, 29 June 2006, CISG-online 1957.
26. See supra para 2.1.1 et seq.
27. For details see Hachem, op cit (n. 7), p 34 et seq.
28. See XCO International, Inc v Pacific Scientific Company, US Ct App (7th Cir), 24 May 2004, 369 F3d 998 at 1001: ‘Courts don’t review the other provisions of contracts for reasonableness; why this one?’
29. See XCO International, Inc v Pacific Scientific Company, US Ct App (7th Cir), 24 May 2004, 369 F3d 998 at 1001.
30. See XCO International, Inc v Pacific Scientific Company, US Ct App (7th Cir), 24 May 2004, 369 F3d 998 at 1001.
31. See XCO International, Inc v Pacific Scientific Company, US Ct App (7th Cir), 24 May 2004, 369 F3d 998 at 1002. Already at p 1001 Judge Posner had pointed out that ‘ironically, it is the larger firm, PacSci, that is crying ‘penalty clause’’.
32. [1966] 1 WLR 1428 at 1446.
33. Quote from Mattei, The Comparative Law and Economics of Penalty Clauses in Contracts, (1995) 43 Am J Comp L 433 with further references.
34. See Pearce/Halson, Damages for Breach of Contract: Compensation, Restitution and Vindication, (2008) 28 Oxford J Leg Stud 82 et seq, who speak of the vindicatory function of contract damages.
35. See Coote, Contract Damages, Ruxley and the Performance Interest, (1997) 56 Cambridge L J 541 et seq; Pearce/Halson, op cit (n. 33), (2008) 28 Oxford J Leg Stud 75; Webb, Performance and Compensation: An Analysis of Contract Damages and Contractual Obligation, (2006) 26 Oxford J Leg Stud 43; McKendrick, The Common Law at Work: the Saga of ‘Alfred McAlpine Construction Ltd v Panatown Ltd’, (2003) 3 Oxford U Commonwealth L J 168.
36. [2001] 1 AC 268 (HL). The spy Blake - In the words of Lord Nicholls of Birkenhead a ‘notorious, self-confessed traitor’, Attorney-General v Blake [2001] 1 AC 268 (HL) at 275 – had been a member of the Secret Intelligence Service (SIS) between 1944 and 1961. In 1951 he switched sides to the Soviet Union. In 1989 he wrote his autobiography which was published in 1990. In so doing, Blake violated the clause in his contract with SIS obliging him not to divulge any official information gained as a result of his employment. The information revealed by Blake, however, had been no longer confidential and their publishing did not damage public interest. The Crown sued for the 90’000 £ which Blake so far had not been paid under his publishing contract and which had by injunction been frozen. With a majority of four to one the Law Lords awarded the claimed sum to the Crown.
37. See Attorney-General v Blake [2001] 1 AC 268 (HL) at 285 per Lord Nicholls of Birkenhead.
38. Quote from Burrows, Remedies for Torts and Breach of Contract, 3rd edn, Oxford: Oxford University Press (2003), p 444 et seq.
39. See for the USA § 355 Restatement (2nd) of Contracts. In Canada the landmark decision is Whiten v Pilot Insurance Co, Can Sup Ct 22 February 2002, [2002] 1 SCR 595, majority vote delivered by Binnie J. The dissenting vote by LeBel J related only to the amount awarded. There were several decisions leading up to this decision, see already Ribeiro v Canadian Imperial Bank of Commerce, Ont Sup Ct, 9 February 1989, 67 OR 2d 385 where punitive damages were awarded for wrongful dismissal by a bank. In Vorvis v Insurance Corporation of British Columbia, Can Sup Ct, 4 May 1989, [1989] 1 SCR 1085 the court explicitly departed from the formula of the US § 355 Restatement (2nd) of Contracts which expressly speaks of ‘also a tort’. In her dissenting vote Wilson J even rejected this requirement and stated that it was the nature of the defendant’s conduct which was decisive. It was again pointed out in Royal Bank v W Got & Associates Electric Ltd, Can Sup Ct, 15 October 1999, [1999] 3 SCR 408 that – although rare – there are cases in which the circumstances justified punitive damages also in the absence of a tort. In England such statements can be found in Burrows, op cit (n. 40), p 409: ‘recent developments suggest that the rule in Addis […] may require reconsideration in the near future.’ Edelman, Exemplary Damages for Breach of Contract, (2001) 117 L Q R 539 also relying on Royal Bank v W Got & Associates Electric Ltd, Can Sup Ct, 15 October 1999, [1999] 3 SCR 408. For New Zealand Tak & Co Inc v AEL Corp Ltd (1995) 5 NZBLC 103: rule of Addis is not absolute.
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