1. General Comments
2. Question of Reasonableness
3. Conclusion

I. General Comments

Mitigation is a principle which is an obligation in the common law but not clearly defined in civil law. In arbitration practices mitigation has become a general principle of international trade and Mustill refers to the principle as "[to] constitute the lex mercatoria in its present form."[1] He went further by noting that mitigation is merely treated as obvious.[2]

The CISG has incorporated the doctrine of mitigation specifically into article 77 but the rule is also reflected in articles 85 and 86 which are concerned with the preservation of the goods after a breach. The idea behind article 77 is that the plaintiff cannot recover damages or losses which he should have avoided. This principle is also accepted in the Principles of European Contract Law (PECL) in article 9:505.[3]

The first obvious difference between PECL and the CISG is that article 77 clearly states that losses include loss of profit whereas PECL is silent on this aspect. Whether loss of profit is included in the PECL can be assumed, as the official commentary to article 9:501, specifically illustration 4, explains that loss of profit is included.[4] Furthermore, article 9:502 PECL stipulates that a party has the right to recover losses and "the gain of which it has been deprived."[5] In addition, the CISG can be used as an analogical tool which would confirm that losses as explained in PECL includes loss of profits and therefore are identical to the CISG and, hence, mitigation follows the same pattern of losses in the counterpart provisions.

Another point worth noting is that PECL in its language only refers to losses whereas the CISG introduces the word "damages" in addition to losses. The question is, whether the term "damages" is to be understood to expand on losses? Stoll is correct to argue that this includes the conclusion of cover transactions - or even avoidance must be contemplated - if it will reduce damages.[6] PECL arguably covers the same ground by reference to a reduction of losses "by taking reasonable steps". Such language is broader than the one in article 77 as it will allow a court or tribunal wider discretion as to what is included in "reasonable steps". Whether avoidance or cover transactions are included in "reasonable steps" is not certain; however, it is not specifically excluded either

A real problem seems to be the choice of the words. The CISG text provides that a party who relies on a breach of contract "must" take measures to mitigate the loss. Arguably in its language this article imposes a duty on the plaintiff to mitigate the "loss." Whereas PECL only suggests that the non-performing party is not liable for damages which the aggrieved party "could" have reduced. The wording is not as strong as the one in the CISG as it appears to rely on a subjective appraisal of the situation by the non-breaching party and to that effect by the court or tribunal.

The question, which has been posed, is whether, due to the choice of wording, article 77 imposes a legal obligation[7] and hence allows the original breaching party to claim a set-off. The Secretariat Commentary to article 73 of the 1978 Draft (draft counterpart of CISG article 77)suggests that it is "a duty owed by the injured party to the party in breach"[8] whereas another view is that the injured party "is under an obligation to herself to mitigate the loss."[9] This view can be supported because the second sentence of article 77 makes it clear that should the aggrieved party not follow the advice given in the first sentence he will bear some of the costs associated with the breach. It could not have been clearer that "must" is linked to the second sentence which means that inactivity, or the failure to take reasonable steps to mitigate, are no excuse.[10]

This could be contrasted with the English view which can be formulated as follows:

"A plaintiff is under no duty to mitigate his loss, despite the habitual use by the lawyers of the phrase 'duty to mitigate'. He is completely free to act as he judges to be in his best interests."[11]

Arguably the English view is mirrored by PECL but not the CISG where the reading suggests that the non-breaching party has a legal duty to mitigate the loss.

PECL simplified the whole process by starting with the premise that the non-performing party simply is not liable for any losses which the aggrieved party could have avoided. It does require a positive step by the aggrieved party to mitigate any possible losses.

II. Question of Reasonableness

Both the CISG and PECL suggest that reasonable steps must be taken in order to mitigate the loss. In both instruments this is not a question of law but rather a question of fact. Every case will have different circumstances; hence, if a person takes steps which are in good faith - which is a principle found in both instruments - he has acted reasonably specifically if the measures adequately prevent losses. However it will be within the court's discretion to evaluate measures of mitigation. Obviously, if no measures have been taken then a party will be in breach of CISG article 77 or PECL article 9:505. It is never suggested that the efforts to mitigate must be exceptional.

The argument is, however, how far, or how much action is required to satisfy the reasonable standard test. The Supreme Court of Austria considered that:

"a possible measure to reduce damages is reasonable, if it could have been expected as bona fide conduct from a reasonable person in the position of the claimant under the same circumstances."[12]

It appears that, given the facts of the case, the court chose to look at the objective measure of a situation. As such, excessive measures, or those which entail unreasonable high expenses and risks, are not necessary.[13] This has been confirmed by the Austrian Supreme Court which noted that:

"the buyer may not undertake any unreasonable expenditures (Art. 77 CISG): if the costs to effect a cure stand in no reasonable proportion to the benefit of the cure for the buyer, then they are not recoverable."[14]

This conclusion was confirmed by a Swiss court pointing also to the to the fact that mitigation not only obliges the aggrieved party to take positive steps but these positive steps cannot be undertaken when they result in unnecessary costs. In essence the court stated:

"Seller's counterclaim may be reduced to the extent he took measures to mitigate the losses or ought to have taken such measures. Such measures entail namely the re-sale or respectively the re-utilization of the sold machine, if there was not any market place for such a kind of production machine, because it was unique. Furthermore, these measures also entail the avoidance of any unnecessary expenditures and costs."[15]

A reading of PECL counterpart provisions leads to the same result. However, article 9:505(2) turned the obligation around by allowing the aggrieved party only to recover costs which are "reasonably incurred." The interpretation of the CISG as pointed out above suggests that the non-breaching party can incur expenses until the costs to mitigate become unreasonable. In sum, though, the practical effect is the same.

Not surprisingly, courts have been relatively strict in their interpretation of CISG article 77. A Swiss Court dismissed the claim of the plaintiff that it had to pay damages to a third party as it neglected to involve the defendant in the negotiations with the third party. In such a case, the defendant could have contributed to the costs or even indemnified the plaintiff.[16]

Not all cases are controversial or difficult, as seen in a Russian arbitration proceeding. The tribunal paid attention to the fact that the buyer did not take any measures whatsoever to mitigate the loss:

"He did not cancel the contract with a third party, nor conclude substitute transactions and did not resort to article 76 when calculating the damages."[17]

The same approach was taken by the Intermediate People's Court of Shandong Province. The court apportioned the main responsibility to the buyer who "did not take reasonable measures and just let the losses grow until the value of the PTO shrimp was nearly extinguished."[18] Arguably, though, the courts would have come to the same conclusion if they had applied the PECL to the case.

Mitigation is not necessarily restricted to minimizing actual costs. Courts have viewed the circumstances of the contract in very broad terms and merely ask the question "could the situation have been changed but for the buyer's behaviour". An interesting case is where the buyer did not produce evidence asked for by the arbitral panel to determine whether he took measures to eliminate a negative impression in relation to the seller's products. The arbitral panel found it inexcusable that the buyer in effect agreed with the unsubstantiated allegations of his consumers.[19] Whether the same result would have been achieved under PECL is debatable. It would depend on the definition of "loss." Under the CISG this debate is avoided as "damages" are also included in article 77 and a negative impression will cause damages but not necessarily a loss.

III. Conclusion

In summary, the above cases illustrate that courts and tribunals simply ask whether the prudent business person has taken all reasonable steps, and has done all he can to keep costs to the breaching party to a minimum. Merely ignoring the situation is in breach of CISG article 77, so is willful adherence to contractual terms. In effect, it is of little value to try to give a definition of what is "reasonable", as each court has demonstrated that in a practical sense the word "reasonable" is well understood. One point noted by Saidov is that mitigation can bring about certain forms of costs as well. Arguably, article 77 is broad enough here to cover the situation where the mitigating party incurred costs, which could be off-set.[20] However, costs to mitigate will be subject to the same rules as the mitigation process itself. If costs are not necessary, the mitigating party cannot claim any recompense. It is argued that PECL in most circumstances would deliver the same results as those achieved by the CISG. The only question which possibly is unanswered is whether PECL article 9:505 could be as broadly interpreted as the CISG, i.e., as set-off and mitigation of abstract damages such as negative impressions or loss of reputation.

FOOTNOTES

* Senior Lecturer in Law, Victoria University Law School, Melbourne Australia.

1. Mustill M., "The New Lex Mercatoria: The First Twenty-Five Years" 4 Arb. Int'l (1988) 86 - 119, at 113 [available on the Internet courtesy of CENTRAL Transnational Law Database (TLDB)].

2. Ibid at 100.

3. Lando, O., and Beale, H., Principles of European Contract Law, Kluwer Law (2000), 445.

4. Ibid at 435.

5. Ibid at 438.

6. Stoll H. in Schlechtriem P., Kommentar zum Einheitlichen UN-Kaufrecht, (2000), 587.

7. Saidov D., "Methods of limiting Damages under the Vienna Convention on Contracts for the International Sale of Goods", available online at <http://cisgw3.law.pace.edu/cisg/biblio/saidov.html>

8. Secretariat Commentary to Article 73 of the 1978 Draft, para 3, available online at <http://cisgw3.law.pace.edu/cisg/text/secomm/secomm-77.html>

9. Bernstein H. and Lookofsky J., Understanding the CISG in Europe, Kluwer, 2nd ed. (2003), 103.

10. Zeller B., Damages under the Convention on Contracts for the International Sale of Goods, Oceana Press (2005), 112.

11. Sir John Donaldson, in The Solholt [1983] 1 Lloyd's Rep. 605.

12. Austria 6 February 1996 Oberster Gerichtshof [Supreme Court], case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/960206a3.html>

The plaintiff, a German buyer, and the defendant, an Austrian seller, entered into an agreement for the FOB delivery of a certain quantity of propane gas. See analysis of Austrian case law by Willibald Posch & Thomas Petz, "Austrian Cases on the UN Convention on Contracts for the International Sale of Goods", 6 Vindobona Journal of International Commercial Law and Arbitration (2002) 1-24, at 23:

"When dealing with the Convention's provision on mitigation of damages (Article 77 CISG), the Court held that the loss, including lost profits, suffered from a breach of contract may only be claimed to the extent to which the loss should not have been mitigated by measures that would have been reasonable in the circumstances. Examples of such reasonable measures to mitigate the loss would be those which under the circumstances of the individual case could have been expected in good faith. In the Court's view, the answer to the question of which measures would be reasonable and ought to be taken depends on how a reasonable creditor would have acted in the same situation. [Because of the absence of any substantial argument on this point during the proceedings, this question was not answered by the Austrian Supreme Court in greater detail.]"

13. Saidov, supra note 7.

14. Austria 14 January 2002 Oberster Gerichtshof [Supreme Court], case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/020114a3.html> [a German seller and an Austrian buyer concluded a contract for the sale of a cooling system to be specifically manufactured by the seller].

15. Switzerland 3 December 2002 Handelsgericht [Commercial Court] St. Gallen, case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/021203s1.html> [the plaintiff, a buyer incorporated in Tel Aviv, Israel, ordered from the defendant, a seller, of Switzerland, a sizing machine for the production of textiles].

16. Switzerland 1 March 2002 Zivielgesetz [Civil Court] Basel, P 1997/482, para 3.7; case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/020301s1.html> [a Belgian seller and a Swiss buyer concluded a contract for the sale of soy protein products].

17. Russia 6 June 2000, Arbitration proceeding 406/1998; case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/000606r1.html> [an English buyer and a Russian seller concluded a contract for the sale of goods to be shipped to a certain port on c.i.f. terms. When the seller notified the buyer that it would not perform the contract due to an increase in tax rates which, in its view, amounted to force majeure, the buyer filed a motion for arbitral proceeding claiming damages].

18. China 17 December 1999 Rizho Intermediate People's Court, Shandong Province (Hang Tat v. Rizhao), case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/991217c1.html> [buyer, of the U.S.A., concluded a contract with sellers, of China, for the sale of a quantity of frozen shrimp].

19. Russia 24 January 2000 Arbitration proceeding 54/1999, case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/000124r1.html> [a U.S. firm, the buyer, commenced proceedings against a Russian company, the seller, in connection with a contract concluded between the parties, which involved the delivery of two consignments on an FCA (free carrier) basis, in accordance with Incoterms under the contract].

20. Saidov, supra note 7.