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 II-C

E. ALLAN FARNSWORTH

Damages and Specific Relief

No aspect of a system of contract law is more revealing of its un-

derlying assumptions than is the law that prescribes the relief avail-
able for breach. In the following pages an attempt will be made to
identify some of the underlying assumptions of the 1978 Draft Con-
vention on Contracts for the International Sale of Goods through an
examination of its provisions on damages and specific relief.' The
perspective is admittedly that of one familar with the legal system
of the United States.
The assumptions of that legal system in this respect are rela-
tively simply stated and differ relatively little from those held in
most Common law countries. Of concern here are five basic tenets.
First, the law of remedies for breach of contract is directed at relief
to the promisee to redress breach rather than compulsion of the
promisor to prevent breach. Second, relief to the promisee is to be
measured by his expectation, sometimes called "the benefit of the
bargain," and the attempt is therefore to put him in the position in
which he would have been had the contract been performed. Third,
this attempt should take the form of substitutionalrelief, an award
of money, rather than specific relief, whenever substitutional relief
is adequate. Fourth, the award of substitutional relief should not in-
clude compensation for loss that might reasonably have been
avoided by the claimant. Fifth, the award of substitutional relief
should not include compensation for loss that could not reasonably
have been foreseen by the party in breach at the time he made the
2
contract.
Taken as a whole, these tenets are designed to accord with the
goal of economic efficiency in a free enterprise economy. For the
good of society, its resources should be efficiently allocated at every
point in time. It is therefore in society's interest that each economic
unit reallocate its resources whenever this would lead to greater effi-
ciency. Even if a party is bound by a contract to allocate his re-

1. No attempt is made here to plumb the depths of art. 46 on reduction of price,

which is separately treated by Bergsten and Miller, "The Remedy of Reduction of
Price," infra at II-D.
2. See Farnsworth, "Legal Remedies for Breach of Contract," 70 Colum. L. Rev.
1145 (1970).
 THE AMERICAN JOURNAL OF COMPARATIVE LAW [Vol. 27

sources in a particular way, the good of society requires that he

break the contract and reallocate his resources whenever this makes
him better off without making someone else worse off. Since reallo-
cation through breach will not make the injured party worse off as
long as his expectations are protected (the second tenet), and will,
by hypothesis, make the party in breach better off, it is in society's
interest that the contract be broken and the resources reallocated.
This reasoning supports, for example, substitutional rather than
specific relief (the third tenet), because such compulsion would dis-
courage reallocation.

FIRST TENET: RELIEF

The tenet that the law of remedies for breach of contract is

aimed at relief of the promisee rather than at compulsion of the
promisor is admirably expressed by the Draft Convention in the
first sentence of art. 71:
• . . if, in a reasonable manner and within a reasonable time
after avoidance, the buyer has bought goods in replacement
or the seller has resold the goods, the party claiming dam-
ages may recover the difference between the contract price
and the price in the substitute transaction and any further
damages recoverable....
The following article, which lays down the market price formula,
makes it clear that no more than the aggrieved party's actual loss is
recoverable. He cannot inflate his damages by using that formula if
he has actually covered or resold.
Although the Draft Convention makes no provision for punitive
damages, it is always open to the parties themselves to include an
express provision for a penalty in the event of breach. There are po-
lar views on the validity of such penalty clauses. Many legal sys-
tems find nothing inherently objectionable in them. Others, notably
those based on the Common law, draw a distinction between a pro-
vision for a "penalty," which is not valid, and a provision for "liqui-
dated damages," which is valid. Since this condemnation of penalty
clauses is rooted in public policy, it is untouched by the Draft Con-
vention which is not, according to art. 4(a), concerned with "the va-
lidity of the contract or of any of its provisions." An inquiry into the
validity of a penalty clause will continue to involve an exercise in
choice of law to ascertain the governing law whenever jurisdictions
3
with these polar views are involved.

3. The same appears to be true of the question whether a down payment made
by a buyer is forfeit in the event of his default.
1979] FARNSWORTH: DAMAGES & SPECIFIC RELIEF

SECOND TENET: EXPECTATION

The second tenet is that relief to the promisee is to be measured

by his expectation, that is, by "the benefit of the bargain," and is not
limited to the extent of his reliance losses. Although this is nowhere
stated in so many words, it seems implicit in a reference to the
promisee's "loss, including loss of profit" in the first sentence of art.
70. The word "loss" alone might be read narrowly to refer to out-of-
pocket reliance expenditures, but the mention of "loss of profit"
4
makes it clear that this is not what is intended.

THIRD TENET: SUBSTITUTIONAL RELIEF

The third tenet, that relief should be substitutional rather than

specific, runs into heavy weather in the Draft Convention. This is
scarcely surprising in view of the proposed preference of Civil law
systems for specific relief on doctrinal grounds, buttressed, in the
case of countries with planned economies that lack markets for sub-
stitute transactions, by a preference on economic grounds. What is
more surprising is that it has not been possible to work out a com-
promise that would be satisfactory to countries with other legal tra-
ditions and different economies.
The rights of both buyer and seller are stated in absolute terms.
Under art. 42, the buyer may not only "require performance by the
seller of his obligations," but he may, in some instances where the
goods do not conform, "require delivery of substitute goods." Under
art. 58, the seller "may require the buyer to pay the price, take deliv-
ery or perform his other obligations." Articles 41(a) and 57(a) give
the respective parties the power to "exercise the rights" so con-
ferred.
Such "compromise" as there is appears in art. 26, which pro-
vides:
If, in accordance with the provisions of this Convention,
one party is entitled to require performance of any obliga-
tion by the other party, a court is not bound to enter a judg-
ment for specific performance unless the court could do so
under its own law in respect of similar contracts of sale not
governed by this Convention.
To begin with, the words "judgment for specific performance" sug-
gest that the provision does not apply to a suit in which the seller
tenders the goods to the recalcitrant buyer and claims the price.
Such a suit, traditionally one at law rather than in equity, is not

4. The commentary to an earlier version of the text confirmed this by stating,

'This makes it clear that the basic philosophy of the action for damages is to place
the injured party in the same economic position he would have been in if the contract
had been performed." A/CN.9/116, Annex II [hereafter "Comments"] at 93.
 THE AMERICAN JOURNAL OF COMPARATIVE LAW [Vol. 27

commonly thought of as one for "specific performance," even though

it gives the seller relief that might accurately be described as "spe-
cific." Furthermore, even as to a buyer's suit against the seller for
what is unmistakably "specific performance," a Common law court
is not relieved of the obligation to render such a judgment if it
"could do so under its own law in respect to similar contracts of
sale." This is a very different test from that permitted under a reser-
vation of ULIS (art. VII) which relieves a court from the obligation
to render such a judgment "except in cases in which it would do so
under its own law in respect of similar contracts of sale." The law
relating to equitable relief in any Common law system is sufficiently
discretionary that, given appropriate facts, a court could render a
judgment of specific performance in respect of many types of con-
tracts although it would render such a judgment in respect of very
few. The rewording of the language has produced at best a sham
5
compromise.
In addition, two significant omissions in the Draft Convention
destroy a delicate compromise worked out in ULIS. Art. 25 of ULIS
provides:
The buyer shall not be entitled to require performance
of the contract by the seller, if it is in conformity with usage
and reasonably possible for the buyer to purchase goods to
replace those to which the contract relates....
Art. 61(2) contains a similar qualification on the seller's action for
the price:
The seller shall not be entitled to require payment of
the price by the buyer if it is in conformity with usage and
reasonably possible for the seller to resell the goods....
Both these provisions have been dropped. Were it not for this back-
ground, one might venture to argue that art. 73, which requires a
party to "take such measures as are reasonable in the circum-
stances to mitigate the loss," requires an effort at cover or resale as
a condition of specific relief. But that is scarcely a tenable position
in the light of history.
The conclusion is inescapable that, under the current version,
neither seller nor buyer is free to reallocate its resources even if the
other party has a ready market on which it can cover or resell as the

5. Although the Comments (at 17) say that "States could not be expected to al-
ter fundamental principles of their procedure in order to bring this convention into
force," they explain that this article limits the application of the provision of specific
relief "only if a court could not under any circumstances order such a form of specific
performance." Thus the Draft Convention has "the effect of changing the remedy of
obtaining an order by a court that a party perform a contract from a limited remedy,
which in many circumstances is available only at the discretion of the court, to a rem-
edy available at the discretion of the other party."
1979] FARNSWORTH: DAMAGES & SPECIFIC RELIEF

case may be and even if that party is fully compensated for any re-
sulting loss. This would not, perhaps, be a significant matter if it of-
fended only the sense of pride of those Common law countries
whose history dictates a contrary rule. Its importance lies in its dis-
regard of fundamental notions of economics. It may be that both
buyers and sellers will choose to ignore their rights to specific relief
and seek damages based on cover or resale. Should that be so how-
ever, it will be in spite of the Draft Convention and not because of it.

FOURTH TENET: AVoIDABILITY

The requirement of avoidability is stated in art. 73:

The party who relies on a breach of contract must take
such measures as are reasonable in the circumstances to
mitigate the loss, including loss of profit, resulting from the
breach. If he fails to take such measures, the party in
breach may claim a reduction in the damages in the amount
which should have been mitigated.
Its purpose is the same as that of Restatement of Contracts § 336,
which denies recovery for "harm that the plaintiff should have for-
seen and could have avoided by reasonable effort without undue
risk, expense or humiliation" and of UCC 2-715(2) (a), which denies
recovery to the buyer for loss that "could reasonably be prevented
by cover or otherwise."
The most common step to be taken in avoidance of loss under a
contract for the sale of goods is a substitute sale or "resale" to an-
other buyer in the case of breach by the buyer and a substitute
purchase or "cover" from another seller in the case of breach by the
seller. The rule that results from applying the general rule on avoid-
ance to these situations is the market price formula stated in art.
72(1):
If the contract is avoided and there is a current price for
the goods, the party claiming damages may, if he has not
made a purchase or resale under article 71, recover the dif-
ference between the price fixed by the contract and the cur-
rent price at the time he first had the right to declare the
contract avoided and any further damages recoverable
under the provisions of article 70.
This provision parallels UCC 2-713(1), which ties buyer's damages to
"the market place at the time when the buyer learned of the
breach." It departs from UCC 2-708, which ties seller's damages to
"the market price at the time . . . for tender." The Draft Convention
proceeds on the assumption that the aggrieved party, whether buyer
or seller, can be expected to protect himself by a substitute transac-
tion as soon as he has the right to free himself of the original con-
 THE AMERICAN JOURNAL OF COMPARATIVE LAW [Vol. 27

tract. This seems unexceptionable and, as to anticipatory

repudiation, accords with UCC 2-723(1), which ties both buyer's and
seller's damages to "the time when the aggrieved party learned of
the repudiation." Under art. 72(2), "the current price is that prevail-
ing at the place where delivery of the goods should have been
made." There is no counterpart of UCC 2-713(2), which allows the
buyer to base damages on the market at the place of arrival where
the goods have already reached their destination before the buyer's
failure to take or keep them.
The Draft Convention contains no direct counterpart of UCC 2-
708(2), which allows a seller damages based on "the profit (includ-
ing reasonable overhead) which the seller would have made from
full performance by the buyer" in cases where the market price
formula is "inadequate to put the seller in as good a position as per-
formance would have done." This provision is available to the "lost
volume" seller, who claims that his supply of goods exceeds his de-
mand and that the breach by the buyer "cost" him a sale and its re-
sultant net profit. It has produced as much controversy over its
application as any of the Code's remedy sections. Despite the lack
of a specific provision designed for the "lost volume" seller, art. 72 of
the Draft Convention says only that the aggrieved party "may" use
the market price formula, and the general rule of the first sentence
of art. 70 seems broad enough in its reference to "loss or profit" to
afford compensation to the seller who can make out a case of "lost
volume." 6
Nor does the Draft Convention contain specific language corre-
sponding to that of UCC 2-704(2), which applies when seller "in the
exercise of reasonable commercial judgment" finishes goods in proc-
ess of manufacture after repudiation by the buyer. The UCC allows
the seller to base his damages on the cost of completing manufac-
ture, even though hindsight might show that he would have avoided
loss if he had stopped manufacture and disposed of the unfinished
goods as scrap. The general language of art. 73, however, may bear a
reading under which stopping manufacture would not be "reason-
able in the circumstances" if the seller reasonably believed that
finishing manufacture would cut the loss but hindsight proved him
wrong. This is an instance where the more laconic style of the cur-
rent UNCITRAL Text leaves uncertainty that is allayed by the
Code's greater detail.

FIFiH TENET: FORESEEABILITY

The requirement of foreseeability, known throughout the Com-

6. The notion of "lost volume" is suggested in the Comments at 94.

19791 FARNSWORTH: DAMAGES & SPECIFIC RELIEF

mon law world as "the rule of Hadley v. Baxendale, '7 appears as

the second sentence of art. 70:
Such damages 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.
Any such formula is inevitably imprecise. It comes close to blend-
ing Restatement of Contracts § 330, which allows recovery for "inju-
ries that the defendant had reason to foresee as a probable result of
his breach when the contract was made, and UCC 2-715(2) (a), which
allows the buyer recovery for "any loss resulting from general or
particular requirements and needs of which the seller at the time of
contracting had reason to know." Although the use in art. 70 of
"possible consequence" may seem at first to cast a wider net than
the Restatement's "probable result," the preceding clause ("in the
light of the facts . . .") cuts this back at least to the scope of the
Code language.
A more significant difference goes to damages for breach of war-
ranty. In the case of injury to person or property, UCC 2-715(2) (a)
has a separate formula for damages allowing recovery for injury
"proximately resulting from any breach of warranty." It thus ap-
plies to such claims the more generous measure of damages for tort
rather than the less generous one of damages for breach of contract.
The Draft Convention has no such separate formula to claims for
breach of warranty, which are governed by the less generous con-
tract formula of art. 70. If the difference reflects the relatively fa-
vored status of the personal injury claimant in the United States, it
is impractical to hope that the result of the world could be brought
to accept the broader separate formula of the Code.

CONCLUSION

Of the five tenets listed at the outset of this article that are the
basis for the law of relief for breach of contract in the United States,
four are adequately reflected in the Draft Convention. Only the
tenet that relief should be generally substitutional rather than spe-
cific is disregarded. That deficiency can be remedied by relatively
simple drafting changes. It is to be hoped that this will be done at
the forthcoming diplomatic conference.

7. 9 Ex. 341, 156 Eng. Rep. 145 (1854).