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NATIONAL LAW INSTITUTE

UNIVERSITY

Project Report On:-

Law Relating To Damages Under The InternationalSales: A Comparative Overview Between The CISG

And Indian Contract Act.

VII Trimester

International Trade Law

SUBMITTED TO:

Dr Kondaiah Jonnalagadda

SUBMITTED BY:

Baibhaw Gahlaut

2009 B.A. LL.B-06


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Table of Contents

Introduction ................................................................................................. 3

General Principles Governing Measure of Damages .................................... 3

Application of the CISG .............................................................................. 8

Mitigation of Damages ...............................................................................13

Sellers Right to Claim Damages .................................................................14

Buyers Right to claim Damages.................................................................15

Interest ........................................................................................................19

Conclusion ..................................................................................................21

Bibliography..24


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Introduction

This project seeks to provide a comprehensive critique of the similarity and differences of

the treatment of damages between Indian law governing contracts for sale of goods and

the United Nations Convention on Contracts for the International Sale of Goods (the

"CISG"). This endeavor gains significance in view of the following observation: 'No

aspect of a system of contract law is more revealing of its underlying assumptions than is

the law that prescribes the relief available for breach.'1

India is one of the countries that, despite having participated in the 1980 Vienna

Diplomatic Conference, which debated the various Articles of the CISG, chose not to

ratify this Convention. Nevertheless, the CISG may still apply to an Indian contracting

party even though India itself is not a party to the Convention. First, it is possible that one

of the parties entering into a contract with the Indian party will be from a Contracting

State whose laws will apply by virtue of laws of private international law.2

These laws

may well be the CISG. Secondly, an Indian party may well have his place of business in a

Contracting State and he may have entered into an agreement with a party whose

business is also in a Contracting State. In such a case, too, the CISG will apply.3

Thirdly,

the CISG may also apply in cases where none of the parties have their place of business

in Contracting States because the parties chose CISG as the applicable law. This is inconsonance with the principles of private international law.

4

General Principles Governing Measure of DamagesIndianLaw

Indian law relating to sale of goods is codified in two legislations: The Sale of Goods

Act, 1930 (SGA) and The Indian Contract Act, 1872 (ICA). Sections 73 & 74 ICA

contains the principles governing damages. The law relating to sale of goods (including

provisions for damages) is also contained in the SGA. The general law governing

contracts is however contained in the ICA. The question that naturally arises is how the

1 E. A. Farnsworth, "Damages and Specific Relief" (1979) 27 Am. J. Comp. L. 247.2 Art. 1 (1)(b), CISG.3 Art. 1 (1)(a), CISG.4 Art. 1 (1)(b), CISG.


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law relating to damages specified in the two enactments is to be reconciled? The answer

is provided in s. 3 SGA. This section provides that the provisions of the ICA shall

continue to apply to the contracts for the sale of goods if they are not in conflict with the

express provisions of the SGA.5

Therefore an analysis of the damage provisions for the

sale of goods under Indian law will encompass a detailed study of these two enactments

and the relevant case laws.

As a general rule, the circumstances in which damages may be awarded are stated in the

SGA but the measure of damages is to be determined with reference to sections. 73 and

74 ICA.

(a) Section 73 Indian Contract Act

Section 73 ICA reads:

"Where a contract has been broken, the party who suffers by such breach is entitled to

receive, from the party who has broken the contract, compensation for any loss or

damage caused to him thereby, which naturally arose in the usual course of things from

such breach, or which the parties knew, when they made the contract, to be likely to

result from the breach of it.

Such compensation is not to be given for any remote and indirect loss of damage

sustained by reason of breach.

Compensation for failure to discharge obligation resembling those created by contract:

When an obligation resembling those created by contract has been incurred and has not

been discharged, any person injured by the failure to discharge it is entitled to receive the

same compensation from the party in default, as if such person had contracted to

discharge it and had broken his contract.

Explanation: In estimating the loss or damage arising from a breach of contract, the

means which existed of remedying the inconvenience caused by non-performance of the

contract must be taken into account."

5 See s. 3 SGA. See also Munniswami Chetty & Co., AIR 1944 Mad. 418, which confirmed the view that

provisions of the ICA apply to the sale of goods.


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The fundamental principle underlying damages is that a party who has sustained loss with

regard to breach of contracts is with respect to damages to be placed in the same position

that he would have been in had the contract been performed.6

(b) The Rules in Hadley v. Baxendale7

Section 73 ICA affirms the rule of the Common Law of England as laid down in Hadley

v. Baxendale.8

The law laid down by Hadley forms the cornerstone of any analysis of the

damage provisions in India.9

They may be stated in the form of three rules:

Damages naturally arising from a breach of contract according to the usual courseof things are always recoverable (general damages).

Damages which do not arise in the usual course of things from a breach ofcontract, but which arise in special circumstances are not recoverable except when

the special circumstances are known to the person who has broken the contract

(special damages).

Where the special circumstances are known (or have been communicated to theperson who breaks the contract) and where the damage flows naturally from the

breach of contract, in those special circumstances, such special damage must be

supposed to have been contemplated by the parties to the contract and isrecoverable (special damages).

Damages that naturally arise from the breach are those that directly flow from it. It is the

product of normal circumstances without the aid of "adventitious, accidental

circumstances".10

Further, merely because a particular damage was unexpected and the

parties could not reasonably foresee it does not cease to be a damage which arose

naturally in the usual course of things.11

The measure of general damages is the pecuniary

6 Union of India v. Baij Nath Mandal, AIR 1951 Pat. 219 at 221.7 156 Eng. Rep. 145 (Ex. 1854)8 C. K. Rao, Law of Damages and Compensation, 1959, Law Book Company, India, p. 132.9 Indian law of damages closely follows the common law tradition10 Weld-Blundell v. Stephens (1920) A.C. 956 at 983.11 C. K. Rao, Law of Damages, p. 127.
https://web2.westlaw.com/find/default.wl?vc=0&rp=%2ffind%2fdefault.wl&DB=4651&SerialNum=1920020294&FindType=Y&AP=&fn=_top&utid=%7b7ECC26C9-4646-4479-8C29-F40B2E81EFBC%7d&rs=WLW7.07&mt=WorldJournals&vr=2.0&sv=Splithttps://web2.westlaw.com/find/default.wl?vc=0&rp=%2ffind%2fdefault.wl&DB=4651&SerialNum=1920020294&FindType=Y&AP=&fn=_top&utid=%7b7ECC26C9-4646-4479-8C29-F40B2E81EFBC%7d&rs=WLW7.07&mt=WorldJournals&vr=2.0&sv=Split


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difference between the existing state of the plaintiff and that which it would have been

had the contract been performed.12

The amount of compensation recoverable under this section may be expressed in the form

of the following four rules:

Damages recoverable must be such as naturally arise in the usual course of thingsfrom the breach of contract; or

It must be damage which the parties knew when they made the contract, to belikely to result from the breach;

Such damage must in neither case be remote or indirect; and In both cases the means which existed of remedying the inconvenience caused by

non-performance of the contract, that is to say from the breach is to be taken into

account.

The market price of goods is taken to be the benchmark on the basis of which damages

are assessed.13

Where the time for the performance of contract is fixed this is the date of

breach and the damages will be calculated on the difference between the market price and

the contract price on that day. However where the time for performing the contract has

been postponed at the request of either the seller or the buyer and the contract is

ultimately broken damages have to be calculated with reference to the last date to which

the contract was extended.14

However here it must be stated that market price of goods isonly a presumptive test. There is an important exception: if in fact the purchaser, when he

obtains possession of the goods, sells them at a price much greater than the market value.

In such a case he can allow for the profit he actually makes and he can recover only his

actual loss; otherwise he would be placed in a better position than if the contract had been

performed.15

However, the Hadley test fails when there is no market. In such a case the measure of

damages must be the worth of the article at the time it ought to have been delivered. It

cannot, however, be argued that in such cases only nominal damages can be awarded

because the market price is difficult to determine. The general rule is that where there is

12 Michael v. Hart & Co. (1902) 1 KB 482.13 Werheim v. Chitcoutimi Pulp Co. (1911) A. C. 301 at 308, followed in Union of India v. Baijnath (1951)

Pat. 219.14 Kedar Nath Behari Lal v. Shumbhunath Nandu Mull AIR (1927) Lah. 176.15 Wertheim v. Chicoutimi Pulp Co. (1911) A.C. 301


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no available market one has to go to the place, which is nearest to the place where the

breach occurred. The most reasonable view seems to be that that taken by the Madras

High Court16

which held that Illustration (a) to s. 73 ICA did envisage damages in cases

where there was no available market as well. The court quantified the damage as the sum

by which the contract price falls short of the price for which the purchaser might have

obtained goods of a like quality at the time when they ought to have been delivered.

In the case of non-acceptance of goods that are specially made to order and which are not

marketable the rule for measuring of damages is the value of the goods.17

It is unclear

how the CISG would provide for such circumstances. It is probable that the words

"foreseeable" and "possible" will have to be taken recourse to for this purpose and the

result may well be similar to the analysis of the Madras High Court.

Damages for Injured FellingsIn some cases damages have been awarded for injured feelings.

18Damages have also

been awarded for mental anguish.19

However it must be noted that these are not

applicable in contracts of sale generally.20

There is no such provision in the CISG.

Mitigation of DamagesIn India the duty to mitigate the damages has been recognised and laid down in the

explanation attached to s. 73 ICA which reads:

"In estimating the loss or damage arising from a breach of contract, the means whichexisted of remedying the inconvenience caused by non-performance of the contract must

be taken into account.

The expression 'the means which existed of remedying the inconvenience' has been

interpreted to mean that it lays a duty upon a person complaining of a breach of contract,

to use common intelligence and guidance, and take all natural and obvious steps available

to diminish the loss arising from the breach.21

However the rule in the explanation to s.

73 must be applied with caution: a party, who has already put himself in the wrong by

breaking his contract, has no right to impose new and extraordinary duties on the

16 Haji Ismail Sait & Sons v. Wilson & Co, ILR 41 Mad. 709.17 G. D. Gear & Co. v. French Cigarettes C., AIR 1921 Lah. 742.18 Jarvis v. Swan Tours Ltd. (1973) 1 QB 223.19 R. K. Abichandani, Pollock and Mulla on The Indian Contract and Specific Relief Act, 1994 N. M.

Tripathi, India, p. 841.20 Ibid.21 C. K. Rao, Law of Damages, p. 298.


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aggrieved party. The latter can be only expected to use ordinary and reasonable

diligence.22 It must be noted that a person is under no obligation to take any steps to

minimise the damages until a breach of the contract has actually accrued. The amount of

damages should not, therefore, be reduced on the ground that he did not try to minimise

the same before the date on which the defendant actually committed the

breach."23

Expenses arising from a contract are a loss or damage arising naturally from the

contract. The test of reasonableness under the circumstances is whether a prudent man

would have acted in the same way, as he did if the original wrongful act had been the

result of his own default.24

Extent of Knowledge of Special Cir cumstancesSection 73 ICA provides that an aggrieved party is entitled to receive compensation

for loss or damage which the parties knew, at the time of entering into the contract, to

likely to result from the breach of it. However it must be noted that s. 73 does not refer to

knowledge of special circumstances. It speaks only of knowledge in respect of loss or

damage that is likely to result from the breach. It also does not refer to any undertaking,

express or implied, to bear special or exceptional loss.25

It follows that is both parties

knew that a particular kind of loss would be likely to result from the breach, the

defaulting party will have to make good that particular loss, and it is not necessary to

show that he has undertaken to make it good to the party suffering.

26

Therefore merenotice or knowledge is sufficient to fix responsibility though no undertaking to bear the

loss is given.

Application of the CISGAr ticle 74

Art. 74 CISG reads as follows:

"Damages for breach of contract by one party consist of a sum equal to the loss, including

loss of profit, suffered by the other party as a consequence of the breach. Such damages

22 C. K. Rao, Law of Damages, p. 299.23 Burn & Co. v. H. H. Thakur Saheb & Co. AIR 1924 Cal. 427.24 La Blanche v. London & North Western Ry. Co. (1876) ICPD 286.25 C. K. Rao, Law of Damages, p. 161.26A. H. P. Mohammad v. Sakavat Hussain AIR 1923 Mad. 103 at 107. Illustrations (i) and (j) to s. 73 ICAconfirm this view since they impute liability based on knowledge but do not refer to any undertaking to

bear exceptional loss


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may not exceed the loss which the party in breach foresaw or ought to have foreseen at

the time of the conclusion of the contract, in the light of the facts and matters of which he

then knew or ought to have known, as a possible consequence of the breach of contract."

The Secretariat Commentary on the 1978 Draft27

states that Art. 74 applies whenever the

contract has not been declared avoided by the party claiming damages, whether or not it

could have been. It also applies where the contract has been avoided but there are

damages in addition to those that can be calculated under Arts. 75 or 76 CISG.

The basic philosophy of the action for damages under Art. 74 CISG is to place the injured

party in the same economic position he would have been in if the contract had been

performed.28

The specific reference to loss of profit is necessary because in some legal

systems the concept of 'loss' standing alone does not include loss of profit. This is in

accordance with the philosophy under the ICA's damage provisions.

The terms which appear in Art. 74 CISG will now be examined in detail.

(a) F oresaw or ought to have foreseen

The principle of recovery of the full amount of damages suffered by the party not in

breach is subject to the qualification that the amount of damages that can be recovered by

the party not in breach "may not exceed the loss which the party in breach foresaw or

ought to have foreseen at the time of the conclusion of the contract, in the light of the

facts and matters which he then knew or ought to have known, as a possible consequence

of the breach of contract".29

However, if a party at the time of the conclusion of a contract

consider that breach of the contract by the other party would cause him exceptionally

heavy losses or losses of an unusual nature, he may make this known to the other party

with the result that if such damages are actually suffered they may be recovered.30

The

provision is exactly the same under Indian law.

27 Since Art. 70 of the 1978 Draft CSIG is substantially similar to Art. 74 of the Official Text (with the

exception of the inclusion of the word "of" before "which" in the second sentence, which appears to bemerely a grammatical alteration, the two Articles are identical) the Commentary is a useful guide for the

interpretation of Art. 74 CISG.28 Secretariat Commentary on Art. 70 of the 1978 Draft, paragraph 3.29 Art. 74 CISG.30 Secretariat Commentary on Art. 70 of the 1978 Draft, paragraph 8.


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Under Hadley, the damages must actually be 'contemplated' and not merely 'foreseeable'.

The question is whether the choice of the word 'foreseeable' (in CISG) instead of

'contemplated' should make a difference in the scope of liability. A plain reading of the

words would suggest that a difference in the scope of liability is intended.

Most authorities in the United States and some in England equated 'foreseeable' with 'in

the contemplation of the parties' and concluded that Hadley established a rule of

foreseeability.31

The British case, The Heron II, preferred the 'contemplation' test and

rejected the use of 'foreseeable' as a standard for measuring damages.32

In applying the Convention relating to a Uniform Law on the International Sale of Goods

(ULIS) the German Supreme Court held that the seller is liable for damages that a "...

reasonable, ideally typical obligor would know to be a serious consequence of a breach in

light of the circumstances."33 This test is similar to the Hadley rule and approximates the

'natural cause' test under the ICA.

(b) As a possibl e consequence of the Breach of Contr act.

The United States District Court (Northern District of New York) in Delchi Carr ier SpA

v. Rotorex Corporation34held that the CISG requires that damages be limited by the

familiar the principle of foreseeability established in Hadley v. Baxendale35

. It has been

suggested that this is an incorrect interpretation of Art. 74 CISG.36

Article 74 limits

recovery for consequential damages to those matters that "the party in breach foresaw or

ought to have foreseen at the time of the conclusion of the contract, in the light of the

facts and matters of which he then knew or ought to have known, as a possible

consequence of the breach of contract." On the other hand in Hadley the rule of

foreseeability tends to restrict recovery to a greater degree in that it requires the loss to

have been "such as may reasonably be supposed to have been in the contemplation of

31 Arthur G. Murphey, "Consequential Damages in Contracts for the International Sale of Goods and the

Legacy of Hadley" (1989) 23 Wash. J. Int'l L. & Econ 415.32 The Heron II, [1969] 1 App. Cas. 350.33 Judgment of Oct. 24, 1980, 1981 IPRAX at 97.34 71 F.3d 1024 (2d Cir. 1995)35 (1854) 156 ER 14536 See V. S. Cook, "The UN Convention on Contracts for the International Sale of Goods: A Mandate to

Abandon Legal Ethnocentricity" (1997) 16 Journal of Law and Commerce 257 at 259


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both parties, at the time they made the contract, as the probable result of the breach of

it."37 It is evident that Hadley's "probable result" limitation is much more restrictive than

the "possible consequence" limitation of Art. 74.38

It follows that since Hadley states the

rule in s. 73 ICA, the rule in Art. 74 is wider than the rule in s. 73.39

In determining the

standard of foreseeability under Art. 74 the usual or intended use by the buyer should be

decisive.40

Subsequent cases obfuscated the issue. In Victoria Laundry (Windsor) Ltd. v.

Newman Industries,41

an attempt was made by Lord Asquith to describe the required

degree of probability that the loss would occur. He described it as "liable to result"42

and

such that "a reasonable man"43

"could foresee that the loss was "likely so to result" or

a "serious possibility" or "a real danger" and the probability was "on the cards". Twenty

years later, however, the House of Lords in The Heron II rejected the use of the term

"foreseeable" and gave individual views of "probable" being the test.

c. Facts and Matter of which he then knew or ought to have known.

The requirement of knowledge which the parties should have foreseen as a consequence

of the breach of contract under the CISG resembles the Indian position which is clearly

that the natural consequences of breach of contract are in the contemplation of reasonable

men.

(d) Measure of Damages

The first sentence of Art. 74 CISG does not specify the time or place for measuring the

loss suffered by the injured party. This issue is likely to arise in international transactions,

particularly transactions involving goods that fluctuate significantly in price. A footnote

to the 1978 Secretariat Commentary of Art. 70 offers one plausible answer to this

37

V. S. Cook, "The UN Convention", p. 260.38 Ibid.39 J. E. Murray, "The Neglect of CISG: A Workable Solution" (1998) 17 Journal of Law and Commerce

365 at 370 (arguing that the Hadley test is broader than Art. 74).40 P. Schlechtriem, Uniform Sales Law-The UN Convention on Contracts for The International Sale ofGoods, 1986 Manz, Vienna, p. 297.41 [1949] 2 K.B. 528 (C.A.).42 [1949] 1 All. E.R. 997 at 1003 (relying on the observation of Lord Du Pard in Monarch Steamship Co. v.

A/B Karlshamns Oljefrabriker [1949] 1 All. E.R. 19.43 [1949] 1 All. E.R. 997 at 1003


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problem. The footnote states that the place for measurement should be where the seller

delivered the goods, and adds that the point in time should be an "appropriate [one] ...

such as the moment the goods were delivered, or the moment the buyer learned the non-

conformity would not be remedied by the seller" under other Articles of the Convention.

Breach of warranty claims would probably be covered under the exclusion in Art. 5 and

therefore the correct position of law is that personal injury is excluded from the scope of

the convention. In addition, the language of Art. 74 CISG appears to authorise only

commercial measures of damages. Under Indian law, however the position is different

and damages for personal injury can be claimed if they "are the natural consequence of

the breach of contract" and therefore "reasonably in the contemplation of the parties".

It should also be borne in mind that the Convention does not have a rule concerning

punitive damages. The position is the same in India unless there is a clause in the contract

providing for such damages in which case such damages will be available.

Where the goods have a market price, the injured party can also measure his damages

independent of any cover transaction. This method of measuring damages presupposes

that a cover transaction has not been undertaken with regard to the contract breached. To

meet the requirement, it is enough that the injured party is constantly dealing in "market

transactions" and that it is therefore difficult or impossible to determine which particular

transaction should be considered the cover for the breached contract. However, the

requirement of constant dealing in market transactions stated by Schlechtriem is not

stated in the CISG and, if correct, differs from Indian law which does not impose any

such restriction.


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Mitigation of Damages

The duty to mitigate damages is present in Art. 77 CISG, which reads: "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. Ifhe 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."

When the contract is avoided, damages generally amount to the difference between the

contract price and the costs of a cover transaction, together with any further damages.

The cover transaction must be undertaken within a reasonable time after avoidance. This

is in keeping with the duty to mitigate damages in Ar t. 77 CISG. The requirement of

mitigation is present under Indian law as well. Article 75 of the Convention, however,

does not specify the adjustment for expenses saved by the party claiming damages as a

result of the breach such as transportation expenses saved by the aggrieved party in a

substitute transaction A similar result can be reached underAr t. 75CISG by construing

the phrase 'price in the substitute transaction' to permit such adjustment. Equitable

considerations demand this construction, given that increased transportation costs and

similar items of extra expense associated with a substitute transaction would constitute

losses suffered 'as a consequence of breach' and thus would be recoverable under Ar t. 74

CISG. The position, if Art. 75 is so construed would be the same as Indian law.

The thrust of Art. 77 is to deny recovery of damages that could have been reasonably

avoided. The judge in Delchi turned a shield into a sword and interpreted Art. 77 CISG

as requiring mitigation and allowing consequential damages for costs incurred in the

mitigation process. This interpretation is in accordance with Indian law but it is doubtful

if this is the correct interpretation of the provision.

Further Art. 77 CISG provides that, if it is clear that one party will commit a fundamental

breach of the contract, the other party cannot await the contract date of performancebefore he declares the contract avoided and takes measures to reduce the loss arising out

of the breach by making a cover purchase, reselling the goods or otherwise. This position

is very different from Indian law where the duty does not arise till the breach of contract.


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Article 74 CISG provides for damages for loss suffered 'as a consequence of the breach'

for both the buyer and the seller. This should cover the losses caused by expenses and

other inconvenience which the parties could be reasonably expected to foresee.

Thus if the seller fails to deliver, a buyer who elects not to avoid the contract and who

seeks specif ic performanceunderAr t. 46(1) CISGcan also claim damages under Art. 74

of the Convention for losses caused by the delay in receiving the goods provided the

losses were foreseeable when the contract was formed and could not have been avoided

by reasonable attempts to mitigate. Art. 74 damages can also be recovered by the buyer

"if it reduces the price under Art. 50, seeks substitute goods under Art. 46(2), or demands

repair of defective goods underAr t. 46(3) CISG." The position is the same under Indian

law.

Sellers Right to Claim Damages

Indian Law

Section 56 SGA provides that where the buyer wrongfully neglects or refuses to accept

and pay for the goods the seller may sue him for damages for non-acceptance.44

The precondition for the seller to get any damages is that the buyer had to have acted'wrongfully' in refusing to accept delivery.

45The determination of whether the act of

neglect or refusal was 'wrongful' is a question of fact and has to be determined in the facts

and circumstances of each particular case.46

Under Indian law the seller has various remedies against the goods and the buyer

personally and even when those remedies exist, it still has the right to sue for damages

under this section. However, where the property in the goods has not passed to the buyer

and the contract does not entitle him to make a re-sale and charge the buyer with the

difference between the contract price and the price realized on re-sale, or to sue the buyer

44 Section 56 of the SGA45 K. Shanmuskari, A. Ramaiyas, The Sale of Goods Act, 1995 The Law Book Company Pvt. Ltd., India, p.

84146 K. Shanmuskari, The Sale of Goods Act, p. 841.


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for the price irrespective of delivery, the remedy provided by this section is the only one

by which he may recover damages for the breach of contract.

The expression 'property in the goods' refers to ownership. When the Indian law of sale

of goods refers to property in the goods it means that that person is the owner of the

goods. The rules governing damages are determined with reference to s. 73 ICA.

CISG

Acceptance of the goods and payment of the price in accordance with the contract and

the convention is an obligation of the buyer under the Ar t. 53 CISG. There is a general

rule underAr t. 61 (1) (b) CISGwhich states that where the buyer fails to perform any of

his obligations under the contract or the Convention, the seller may claim damages in

accordance with Arts. 74-77 CISG. This would include a case of non-acceptance of the

goods and non-payment of the price. The principles of damages have already been dealt

with earlier under Art. 74 CISG.

Buyers Right to claim Damages

Indian Law

Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the

buyer may sue the seller for damages for non-delivery. The general principles governing

damages under this section is dealt with underss. 73-74 of the ICA .

CISG

Article 30 CISG sets out the seller's obligation to deliver the goods, hand over any

documents relating to them and transfer the property in the goods as required by the

contract and the convention.

Article 45 CISG states that where the seller fails to perform any of his obligations the

buyer has the right to claim for damages underAr ts. 74-77of the Convention. This would

clearly include a breach of the obligations underAr t. 30of the Convention.


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Damages for the Breach of Warranty

Indian Law

The SGA makes a distinction between a condition and a warranty. A stipulation in a

contract of sale may be a condition or a warranty. A condition is a stipulation essential to

the main purpose of the contract, the breach of which gives a right to treat the contract as

repudiated whereas a warranty is a stipulation collateral to the main purpose of the

contract, the breach of which gives rise to a claim of damages but not to a right to reject

the goods and treat the contract as repudiated. Whether a stipulation in a contract is a

condition or warranty or neither depends on the construction of the contract in each case.

It must be noted that the buyer has the right to treat the condition as a warranty if he so

wishes. There are circumstances where the buyer may be compelled to treat a breach of

condition as a breach of warranty, for example, where a contract of sale is not severable

and the buyer has accepted the goods or a part of them then the breach of any condition to

be fulfilled by the seller can only be treated as a breach of warranty.

Section 59is a codification of the common law of the United Kingdom. It states that

cases where the seller breaches a warranty or where the buyer elects or is compelled to

treat any breach of a condition by the seller as a breach of warranty the buyer is not

entitled to reject such goods by reason only of such breach. However the buyer has two

other remedies, being to:

1) rely on the breach as against the seller suing for the price and set off damages,

as far as possible, against the price; or

2) sue the seller for damages for breach of warranty.

It may be noted here that the buyer may, in all cases, pay the price for the goods and

bring a distinct action for damages.

Measure of Damages by Applying S. 73 ICA.The measure of damages in the case of breach of warranty is the estimated loss directly

and naturally arising in the ordinary course of events from the breach, and this loss, in the

case of breach of warranty of quality, is the difference between the value of goods at the

time of delivery to the buyer and the value they would have had if they answered to the

warranty. Where there is a market value, the actual contract price or the price at which


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the goods have been resold is irrelevant for fixing these values. However there is rarely

any market price for damaged or defective goods, and thus the price at which the buyer

resold the goods may be evidence of their value.

Under the second rule in s. 73 ICA special damages for the breach of warranty were held

recoverable on the principle that such damages were known to the parties at the time of

entering into the contract.

However where the particular purpose for which the goods were required was not

communicated to the seller, special damages resulting from breach of warranty cannot be

granted.

Thus the measure of damages for breach of warranty cases is to be determined on the

basis of the principles laid down in s. 74 ICA.

CISG

The Indian law with regard to breach of warranty focuses greatly on the conceptual

difference between "condition" and "warranty". Therefore for any meaningful

comparison between CISG and Indian law it is necessary to examine whether any similar

concepts exist in the CISG.

An examination of the terms used in the CISG would lead to the conclusion that thoughthe distinction is not made in terms of "condition" and "warranty". However the concepts

find a place in the CISG. Case law dealing with breach of warranty under the Convention

also brings an important fact to light: breach of warranty under the CISG generally refers

to a breach of an assurance of facts regarding the goods and such breach may be

"fundamental". In contrast the definition of "warranty" under Indian law excludes such a

possibility. The Circuit Court case Delchi Carri er SpA v. Rotorex Corporationarose as a

warranty dispute between a U.S. seller of compressors ("Rotorex") and its Italian

customer ("Delchi"), a manufacturer of air conditioner units. Interpreting Art. 25 of the

Convention, the court held that Rotorex's failure to deliver conforming goods constituted

a "fundamental" breach, which is a breach that substantially deprived Delchi of "... [what]

it was entitled to expect under the contract."


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However it is clear that the distinction exists is so far as the CISG provides for

"fundamental breach" of the contract. Ar ticle 25 CISGdefines fundamental breach as one

which results in "such detriment to the other party as substantially to deprive him of what

he is entitled to expect under the contract". Therefore it is obvious that such a stipulation

is "essential to the main purpose of the contract" in terms of the Indian law on the point.

Further, Ar t. 72 CISGgives the right of avoidance of the contract the moment it is clear

that the other party will commit a fundamental breach of the contract. Therefore the result

of a "fundamental breach" under the CISG is the same as that of a "breach of a condition"

under Indian law. Hence it may be said that the concept of "fundamental breach" in the

CISG approaches that of "condition" under Indian law.

The question of whether breach of warranty cases are covered under the CISG must

also be answered in the affirmative. Ar ticle 74 CISGauthorises a buyer who has accepted

the goods to recover damages for breach of warranty.

Measure of Damages by Applying Article 74 of the CISG

Damages under the CISG are measured by the difference between the value of the goods

delivered and "the value they would have had if they had been as warranted." In a

German case the Supreme Court had stated that under Art. 82 ULIS, a seller is liable fordamages for a delivery of defective goods, including lost profits, but only to the extent

that losses and lost profits should have been foreseen by the seller at the time of

formation of the contract. Art. 82 ULIS is substantially similar to Art. 74 CISG and

therefore the analysis is material. The subjective and objective test (as in Art. 74 CISG)

was used to measure damages.

In Delchi, having determined a breach of warranty, the court examined Art. 74 of the

Convention to determine the recovery amount that would "equal ... the loss" suffered by

Delchi, including consequential and incidental damages "suffered by [Delchi] as a

consequence of the breach" and it applied the "foreseeabiliy" test for this purpose. Thus

the case is a clear authority on the point that the principles laid down in Art. 74 CISG for

calculating damages have to be used for calculating damages in breach of warranty cases

as well.


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Take, for example, where a seller delivers non-conforming goods and the buyer can

neither avoid the contract nor demand substitute goods because the defects do not satisfy

the fundamental breach standard.47

Further, say that the buyer cannot require the seller to

repair because that would be "unreasonable having regard to all the circumstances."48

In

such cases under Art. 74 of the Convention, the buyer can claim damages measured by its

losses from the defects.49

In these circumstances, Art. 74 authorises a buyer who has

accepted the goods to recover damages for breach of warranty. The measure of damages

under Art. 74 CISG is the difference between the value of the goods delivered and 'the

value they would have had if they had been as warranted.'50

The conclusion which, the

authors' opinion, follows is that the principles of damages as laid down under Art. 74

CISG (foreseeability, subjective and objective test etc.) will have to be used to determine

the measure of damages for breach of warranty. The position is the same under Indian

law.

INTEREST

Indian Law

Both the seller and the buyer have been given the right to recover interest where under

law they can be recovered.

If there is no contract to the contrary, the court may award interest at such rate as it thinks

fit on the amount of the price to:

1) the seller in a suit by him for the amount of the price. The interest will be from the

date of the tender of the goods or from the date on which the price was payable; or

2) the buyer in a suit by him for the refund of the price in a case of a breach of the

contract on the part of the seller-from the date on which the payment was made.

Pre Judgement InterestThe common law of the United Kingdom does not permit the award of interest by way of

general damages for delay in payment of a debt. However the court can enforce a

stipulation between the parties in their contract regarding payment of interest within the

47 Articles 46(2), 49(1) CISG.48 Article 46 (3) CISG.49 The buyer could also use the reduction in price remedy in this setting, although resort to this remedy is

optional: see Art. 50 CISG.50 H. M. Flechtner, "Remedies", p. 107.


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bound of statutory provisions. Special damages could be awarded where the plaintiff had

actually incurred interest charges in raising finance from another source as a result of the

defendant's failure to pay money when due.

Under the Indian Interest Act 1978 the Court may, if it thinks fit, allow interest to the

person entitled to damages at a rate not exceeding the 'current rate of interest' for the

period from the date mentioned in this regard in a written notice given by the person

claiming it to the person liable for the interest claimed, to the date of institution of the

proceedings. However pre-judgment interest (as explained above) will only be given on a

'sum certain' and is therefore not available for unliquidated damages.

However, it must be noted that interest by way of damages may be awarded if there is

an express stipulation to that effect.

CISG

Pre-Judgement InterestArticle 78 CISG deals with the issue of interest on damages. The provision does not

apply to interest payments on the refund of the purchase price if the purchase contract is

avoided because this case is covered by the specific provisions of Art. 84 CISG. It also

does not apply to interest payments on interest and, thus, gives no right to compoundinterest.

Here it must be noted that the interest provision under Art. 84 gives the buyer the right to

interest from the seller from the date on which the price was paid. This requirement is the

same as under Indian law.

Article 78 CISG authorises recovery of interest on the payment price or 'any other sum

that is in arrears'. It is clear that, like in Indian law, the seller in a suit for refund of the

price can get interest on it. However it is doubtful whether a party is entitled to recover

interest on an unliquidated amount, which was the position upheld in Delchi. Given the

internationally controversial nature of interest, the final language of Art. 78 entitling a

party to interest on "any ... sum ... in arrears" was a compromise among the States which

should not be interpreted to encompass unliquidated damages. The history of the Article

supports this view. The other problem is the interest rate applicable. In Delchi the court


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"in its discretion" awarded interest at the rate established by United States federal law for

the award of post-judgment interest. However it made no reference to Art. 7 CISG which

lays down rules for interpreting the Convention. It did not examine the legislative history

of the Convention or refer to scholarly opinion. Therefore the case cannot be said to serve

as a good authority to determine the interest rate applicable.

As stated above, there was much debate over the drafting of Art. 78 CISG, resulting in a

rule on interest being omitted in earlier drafts of the Convention. There is therefore no

commentary to allow insight on its development as is provided for in other Articles.

However, a 1976 draft included a provision for interest awards to the seller. Article 58 of

this draft provided for interest at the rate of the country of the seller's principal place of

business and this has been opined to be the correct rule. The International Court of

Arbitration has applied the law of the place of payment to determine the interest rate

owed on an unpaid balance to the seller. There is a view that in conformity with the

general principles of the Convention, specifically those from Art. 74 CISG (which strives

to award recovery of suffered losses), and Art. 75 CISG (which calculates compensation

by the cost of the substitute transaction), interest should be calculated by the cost of credit

faced by the injured party. Thus the interest rate applicable remains shrouded in mystery

and appears to be at the discretion of the governing Court or Tribunal.


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Conclusion

The most important issues, which arise from a comparative analysis of the law relating to

damages in international sale of goods, may be summarised as follows:

Section 73 ICA lays down the principles governing the measure of damages underIndian law. Its counterpart in international trade law is Art. 74 CISG. Both provisions

are identical in many respects and both provisions lay down a subjective and an

objective test for the determination of damages. However the rule in Art. 74 CISG is

wider than the rule in Indian law: the rule under Art. 74 requires damages to be

foreseen as a "possible" consequence whereas the Hadley rule refers to damages

being a "probable result" of the breach. This would arguably lead to a situation where

the aggrieved party would have a better chance of recovering damages under Indian

law than under the CISG.

The analysis has also shown that both Art. 74 CISG and s. 73 ICA encompassdamages for inconvenience and expense caused because of non-conforming goods

within their ambit. However the major difference here is that, unlike s. 73 ICA, Art.

74 CISG does not include damages for personal injury since by virtue of Art. 5 CISG,

the CISG does not apply to the liability of the seller for death or personal injury

caused by the goods to any person. Therefore it is probable that additional costs of aseparate action for recovering the damages caused by defective goods causing

personal injury may be considered while determining the transaction costs.

Though damages for injured feelings have been held to be within the scope of s. 73whereas no such provision exists in the CISG. Nor does the CISG specify the time or

the place for measuring damages. This is bound to lead to some confusion since the

time for measuring damages under Indian law is well settled. This assumes

significance in international transactions if the price of goods fluctuates wildly and

the time for measuring damages may have a significant impact on the quantification

of damages. The uncertainties may lead to substantial problems in case of any dispute

and it may increase litigation costs that have to be factored into the transaction costs.

In mitigation of damages, the major difference arises in the case of anticipatorybreach of contract. The time when the duty to mitigate damages under the CISG


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arises as soon as the aggrieved party comes to know of the intent to breach. The

position is different in India where the duty to mitigate arises only upon breach of the

contract or when the aggrieved party has rescinded the contract. Therefore the

position under Indian law is more favorable to the aggrieved party rather than to the

breaching party. It may also be stated that both parties a more certain test for

determining the time for determining when the duty to mitigate arises than is

provided under the CISG and may choose to introduce contractual terms to this effect.

The seller's right to claim damages if the buyer refuses to accept the goods and paythe price both under Arts. 53 and 61 (b) CISG and under s. 56 SGA is the same.

The law in India also provides a right to the buyer to get damages if there is non-delivery of the goods as is clearly stated in s. 57 SGA. The law is the same under the

CISG as an analysis of Arts. 30 and 45 demonstrates.

Damages for breach of warranty are available both under Indian law (S. 73 ICA andS. 59 SGA) and under the Article 74 CISG. The term 'warranty' has different

connotations under Indian law and under CISG but the analysis showed that the

essential concepts are the same.

In general one can conclude that the similarities relating to the law of damages between

the CSIG and Indian law outweigh the differences, and that the CISG may be a viable

alternative when we are dealing with the international sale of goods transactions.


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Bibliography

K. Shanmuskari, A. Ramaiyas, The Sale of Goods Act, 1995 The Law BookCompany Pvt. Ltd., India

The UN Convention on Contracts for The International Sale of Goods, 1986 Journal of Law and Commerce R. K. Abichandani, Pollock and Mulla on The Indian Contract and Specific Relief

Act, 1994 N. M. Tripathi, India

C. K. Rao, Law of Damages and Compensation, 1959, Law Book Company, India

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