Damages and Interest
© Springer International Publishing Switzerland 2015Javier Plaza Penadés and Luz M. Martínez Velencoso (eds.)European Perspectives on the Common European Sales LawStudies in European Economic Law and Regulation410.1007/978-3-319-10497-3_13
13. Damages and Interest
Martin-Luther University Halle-Wittenberg, Halle, Germany
The right to rescind the contract and to withhold or reduce the price does not fully compensate the creditor for his loss in every case. Therefore, each system of contract law must provide for an additional level of remedy as a backup. In most cases, this additional level of remedies consists in claims for damages and interests. Damages are the general remedy available for all kinds of breaches of contract. If monetary obligations are not performed, interest may be added as an additional remedy that does not exclude the simultaneous awarding of damages.
Damages and interest is regulated in Chapter 16 of the CESL. One could consider Chapter 16 as a sort of distilled experience of national and international law. Nevertheless, this does not prevent its articles from occasionally deviating from them. This chapter will first focus on general aspects of Chapter 16 (II) and then turn to the provisions on damages (III) and interest (IV).
KeywordsDamagesStrict liabilityFault-based liabilityPrinciple of full compensationMandatory natureMonetary damageTort lawInterestClaim for interestPeriod of interestInterest rate
13.1.1 Theoretical and Economic Background
It is hard, if not impossible, to enforce contractual obligations literally against an unwilling or incapable debtor. The right to rescind the contract and to withhold or reduce the price does not fully compensate the creditor for his loss in every case. Therefore, each system of contract law must provide for an additional level of remedy as a backup. In most cases, this additional level of remedies consists in claims for damages and interests. Damages are the general remedy available for all kinds of breaches of contract. If monetary obligations are not performed, interest may be added as an additional remedy that does not exclude the simultaneous awarding of damages.
There are deontological and teleological reasons for allowing these types of claims (Unberath 2007, pp. 285–310). Damages and interest serve the immediate goal of dispensing justice by making the creditor whole. In the words of Hegel, they re-establish the law’s authority by “negating its negation” that has come about through the non-performance of the debtor’s contractual obligations (Hegel 2001, § 82, No. 172). They thus compensate for the wrong that is caused by the non-performance of contractual obligations. In the Aristotelian system, they are part of the corrective justice that complements commutative and distributive justice (Aristotle 2013, No. 4).
Damages and interest are also required from an economical perspective (Baird 1994; Unberath 2007, pp. 310–321). If the debtor did not have to pay them, he may be incentivised to break the contract where it is convenient for him to do so. A rescission of the contract or the withholding or reduction of price may not adequately reflect the loss suffered by the creditor. The breach, therefore, is not an “efficient breach” in the sense that the creditor would be fully compensated and the debtor may still gain (cf. Posner 2007, p. 120). Rather, the breach only unilaterally improves the creditor’s position.
From the vantage point of law and economics, it also becomes clear that damages and interest redistribute the risk of non-performance (Shavell 2004, p. 311; see also Posner 2007, p. 120). A contract is not always breached because one of the parties is at fault . It can also come about by random events that none of them has caused intentionally or negligently. One can think, for example, of a case in which contractual duties are not performed because of a breakdown of production in the seller’s plant. In this case, the awarding of damages does not serve as an incentive mechanism, but rather as a mechanism to redistribute the risk of such a breakdown to the seller.
Against this theoretical and economic background that strongly favours damages and interest, it is hardly surprising that the CESL includes rules on these remedies. Indeed, any sales law would be incomplete if it did not contain provisions in this regard. The EU legislator, however, had to venture into territory that was relatively new to him. The Directive on Consumer Sales1 skipped over the topic and left it to the Member States to provide for damages. It is true that the Late Payment Directive deals with the apportionment of interest, but only in the context of B2B contracts.2 There is, thus, no pre-existing EU law on damages in general and on interest in B2C relationships.
13.1.2 Historical Antecedents in Uniform Law
Fortunately for the EU legislator, he could build upon many rules of uniform law that provide for damages and interest as remedies. Such rules have a long tradition. They exist both on the international and the European level.
The first among these rules was laid down in the Convention relating to a Uniform Law on the International Sale of Goods (ULIS) adopted as early as 1964. Articles 74, 82–83 ULIS deal with damages and interest . Upon these provisions, the Vienna Convention on the International Sale of Goods (CISG) of 1980 bases its damages and interest regime, which is contained in its arts. 45(1)(b), 61(1)(b), 74 and 78. It is remarkable that both the ULIS and the CISG rules are contained in conventions binding under Public International Law.
A new stage was achieved, in some sense, with the adoption of the Principles of European Contract Law (PECL) , arts. 9:501–9:508. Although these provisions incorporate insights from the ULIS and the CISG, they also contain the first comprehensive and detailed uniform regime for damages and interest. The ensuing UNIDROIT Principles of International Commercial Contracts (UPICC), arts. 7.4.1–7.4.12, are not fundamentally different, though more explicit on some points. Both texts are not binding conventions, but rather are soft law projects. Nevertheless, they exert considerable influence on legal practice and on law reform projects in the Member States.
From the PECL runs a direct line to the Draft Common Frame of Reference (DCFR) , which deals with damages and interest in its arts. III.-3:701 to III.-3:708. These provisions, in turn, have served as a model for Chapter 16 of the CESL. If the rules of the proposal were to be formally adopted, soft law would thus be turned into “hard” EU law. One must not forget, however, that the rules of the PECL, the UPICC, and the DCFR are themselves not without antecedents. They are the result of a careful analysis of the pre-existing conventional law, namely that of the CISG, and of in-depth comparative research into the national legal systems of different states.
It is thus accurate to consider Chapter 16 as a sort of distilled experience of national and international law. Its content is hardly new, but instead rests on solid foundations. Given the origins of the proposal, it is not surprising that the provisions on damages follow lines that are similar to national legal systems and international uniform texts. Nevertheless, this does not prevent them from occasionally deviating from them. This discussion will first focus on general aspects of Chapter 16 (II) and then turn to the provisions on damages (III) and interest (IV).
13.2 Chapter 16 CESL Within the Context of European National Legal Systems
13.2.1 Special Treatment of Damages and Interest
If one compares the CESL to national legal systems for possible doctrinal insights, the first thing that one remarks is that the former dedicates a separate chapter to the topic of damages and interest. This is, of course, inherited from international conventions (ULIS and CISG) that adopt the same approach. It stands, however, in marked contrast to the soft law texts (PECL, UPICC and DCFR) that all rank damages and interest as one of several remedies and do not treat them independently.
One may speculate as to why the drafters of the CESL decided to follow the conventions and to deviate from the more recent soft law. To a certain extent, this decision was already predetermined by the structure that the drafters had chosen. By following a division of the seller’s obligations and remedies on the one hand and the buyer’s obligations and remedies on the other, it was inevitable that the outline would be more similar to that of the conventions, and contrary to the soft law, CESL. Specifically, such a structure makes a separate chapter on damages and interest almost inevitable if one does not want to repeat the rules on them in the context of each party’s remedies.
However, the drafters may also have had more in mind than to simply follow the tables of content of the international conventions. One of the shortcomings of the proposal for the CESL is that it is very specific to sales contracts when seen from the point of view of European private law, in general. In contrast to the soft law texts and national legal system such as the Common law or German law, the CESL does not contain general provisions of contract law. It is drafted in a very specific way tailored to sales and related service contracts. For instance, the CESL carefully avoids the terms “debtor” and “creditor”. Instead, it uses the terms “seller”, “buyer”, “service provider”, and “customer”. Because of this specificity, it will be very hard to build new instruments upon it that may concern other types of contracts, for instance general service contracts, loan contracts or franchise contracts. Chapter 16 remedies this shortcoming to a certain extent since its content is not specific to sales contracts. Because of their general character, its rules can be easily incorporated by reference to other instruments. Together with other provisions, such as those in Chap. 4 on the conclusion of the contract or those in Chap. 6 on defects in consent, it may, thus, serve as a nucleus for a European private law, and also as a source for a Common Frame of Reference, as originally envisaged by the Commission.
It is of course merely speculative whether the drafters indeed aimed at creating some sort of general rules of European private law. Should this have been their goal, they could have achieved it much more easily and to a much higher degree by eliminating the distinctions between buyers, sellers, service providers and customers. This simple step would have allowed them to enact a truly “general part” of remedies, and to also avoid a lot of repetition. For this reason, the proposal of the ELI which adopts this alternative approach should be applauded (see ELI 2011, p. 105 et seq., Chapter 15). If one were to follow this proposal, there would no longer be any need to treat damages and interest separately. Their respective rules could be incorporated into the same chapter as those on other remedies, such as termination or price reduction .
13.2.2 Unitary Concept of Damages
The next point that is remarkable is that Chapter 16 contains a single set of rules for all types of non-performance. Its provisions cover all cases of total absence of performance, late performance, and defective performance. The CESL, thus, contains a unitary regime for all cases in which a claim for damages or interest may arise .
In this respect, it deviates e.g. from German law, which even after its modernisation in 2002 continues to distinguish between different types of damages (see § 280 German Civil Code—BGB). The unitary regime is much more in line with the Romanic approach. From French law stems the concept of inexécution du contrat (see art. 1147 French Code Civil), which covers different kinds of non-performance, even though different remedies are provided in cases of missing title (garantie d’eviction—art. 1690 Code Civil) or defective performance (garantie des vices cachés—art. 1645 Code Civil). In its purest form, the unitary regime can be found in the Common law, which knows only one comprehensive category for all kinds of “breach of contract” (Beale, in Beale 2013, p. 1758, No. 26-001).
From a view of legislative methods, the approach chosen by the drafters for the CESL deserves reward because it makes intricate distinctions unnecessary. For instance, in Germany, the delimitation between late or defective performance has occupied the literature and the courts for some time (see e.g. Stadler in Jauernig 2011, § 280 No. 4). The CESL effectively avoids these problems by accepting only one type of damage .
That does not mean that all distinctions are unnecessary because every type of damage claim would fall under the same provision. It will be shown that Chapter 16 does not cover all types of damages that may arise under the CESL (see infra III 1). It is, therefore, necessary to distinguish the cases covered by Chapter 16 from those that are regulated in other provisions. This distinction, however, does not pose a major problem. For instance, the type of damage dealt with in art. 55 CESL only arises in the particular situation where one party has relied on the validity of the contract when in fact the agreement was null and void. In other words, the provision deals with the reliance interest (cf. Treitel 1976, p. 28, No. 50). In contrast, Chapter 16 deals with damage that occurs because one party has not properly fulfilled its (valid) contractual obligations .
13.2.3 Strict Liability vs. Fault-based Liability
The damages and interest claims provided for under Chapter 16 arise as soon as a contractual obligation is not performed. The expert group and the European Commission, which have proposed the CESL, have thus opted for a system of strict liability . This system is based on the idea that the debtor owes the creditor a guarantee for performance of his duties and will, therefore, be liable each time that he does not perform, except if his non-performance is excused. In this, the CESL follows the model set by international conventions (see arts. 82 and 83 ULIS, arts. 74 CISG) and by soft law texts on uniform law (art. 9:501 PECL, art. 7.4.1. UPICC).
Many other national legal systems decide otherwise. They opt instead for a system where liability is based on fault . For instance, under Austrian and German law, the debtor does not have to pay damages for a breach of his contractual obligations if he is not responsible for the violation of his duties (§ 1295(1) Austrian Civil Code—ABGB; § 280(1) 2 BGB). French law, in principle, also follows the model of fault-based liability (see art. 1137 Code Civil), even though in the case of sales contracts this is largely superseded by important guarantees (see supra 2).
In order to see which system is more appropriate, it is necessary to consider a “hard case”, i.e. one where the debtor is not at fault but where nevertheless there is no excusing supervening event. A case in point is a defective product delivered by a supplier of the seller where the seller had no possibility of recognising the defect before delivery to the buyer. In a fault-based system, the seller will not be liable for any loss that the buyer suffers because he has not acted intentionally or negligently. In a system of strict liability , by contrast, he will owe damages because the impediment was not “beyond his control” (see art. 79(2) CISG; the same applies under art. 7.1.7 UPICC, see Kleinheisterkamp, in Vogenauer and Kleinheisterkamp 2009, art. 7.1.7 No. 16 footnote 212). The same also seems to be true for art. 88(1) CESL (cf. Zoll, in Schulze 2013, Article 88 No. 9). From an economic perspective, this result is to be preferred because the problem arose in the sphere of the seller, and it was, thus, easier for him to avoid (cheapest cost avoider). In a way, the principle of strict liability forces him to choose his suppliers more carefully. The result reached can also be justified from a deontological perspective because reasonable parties would have provided that such an event must be attributed to the seller (Unberath 2007, p. 334).
The formulation of the excuse in the CESL also closely follows the models of uniform law. Indeed, art. 88 CESL, which speaks of an “impediment beyond the debtor’s control”, is copied almost word for word from the CISG (art. 79(1)). It can also be found in the PECL (art. 8:108(1)) and under the title “force majeure” in the UPICC (art. 7.1.7). One can, therefore, speak of an internationally excepted axiom that applies to strict liability . The only difference is that the excuse under the CESL also exempts the debtor from the creditor’s claim for interest (on this, see infra IV 2).
In principle, the CESL drafters’ preference for the strict liability model with the force majeure exception can be defended with good arguments. One must, however, be aware that the parties can deviate to a certain extent from Chapter 16.
13.2.4 Mandatory Nature
From the debtor’s perspective, the liability under Chapter 16 will often be too burdensome. One only needs to think of a seller from a Member State whose law follows the fault-based principle . If he bases his contracts on the CESL, he will also be liable for the mistakes of his suppliers, whereas under the national regime, he is not. Against this background, it would be very difficult to convince a seller of the advantages of opting into the new European instrument.
This raises the immediate question as to whether, and to what extent, the benefits of the CESL can be combined with a limitation of liability in the case of non-performance. In this regard, a distinction between the rules on damages and on interest becomes visible. In principle, the parties can change the damages regime as they wish. The parties are free to discard strict liability under Chapter 16 and to agree on a fault-based system. Article 108 CESL, which excludes any derogation from remedies to the detriment of the consumer, only applies to Chapter 11 and not to Chapter 16 (this is ignored by Možina, in Schulze 2013