Overview of the Subject Matter and Approach

Disgorgement and the CISG – Comparative and Future Perspectives

1. Introduction

1.1 Overview of the Subject Matter and Approach

This thesis intends to lay out a thorough description of the remedial instrument known as disgorgement and the practical and principled needs it is designed to attend to, as well as to examine whether there might be a prospect of its acceptance under the United Nations Convention on Contracts for the International Sale of Goods¹ (CISG).

The policy perspectives said to underlie the stripping of profits gained from a breach of contract i.e. disgorgement, include fairness and good faith. This thesis focuses particu-larly on this remedy in the context of contract law and sales of goods. A closely related question arises from the traditional approach to contractual damages, going all the way to Oliver Wendell Holmes and his views regarding contract damages presented in “The Path of the Law.²

In contract law, the duty of a party breaching a contract has traditionally been constructed as a duty to pay damages and nothing more. A possible problem emerges when the breach is motivated by an intention to reach more profits than would have been obtained by hon-oring the original contract. The question is whether or not a court or a tribunal can order the breaching party to hand over the profits it acquired through its breach under any cir-cumstances. The question is fairly simple but the necessary considerations and subsequent answers are considerably more complex.

At the time of the drafting of the CISG, there existed a largely unanimous agreement about the function and nature of contract damages among the drafting parties. Thus, the issue of disgorgement was not deliberated in detail or otherwise. The eventual conclusion was that the guiding principle regarding damages under the Convention should be full compensation, meaning that the injured party should be put in a position it would have

1 United Nations Convention on Contracts for the International Sale of Goods 1498 UNTS 3 (adopted 11 April 1980, entered into force 1 January 1988). Also referred to as “the Convention”.

2 Oliver Wendell Holmes Jr., The Path of the Law, 10 Harvard Law Review 457 (1897).

2 been in without the breach. This rule is widely accepted within the member states com-prising of different legal traditions.

However, although the full compensation principle and the restriction of damages to the extent of the actual economic loss is a relatively straightforward rule of thumb, what is worth recognizing is that possible exceptions to this rule were not discussed in detail as a separate issue at the time of drafting the CISG. There is no denying the status of full compensation as a well-reasoned principle governing the general application of the dam-ages provisions of the CISG. But since the drafting of the CISG, questions have emerged concerning claiming the connection between verifiable loss and damages as an absolute.

A particular emphasis among the issues involved in the application of the CISG will be placed on the principle of good faith and its interpretation as well as the differently per-ceived viewpoints regarding this issue in common- and civil law legal systems. Indeed, the role and interpretation of good faith as a legal principle, both domestically and in international trade, has been the subject of noticeable discussion and re-evaluation.

Another issue that is touched upon is the doctrine of restitution and unjust enrichment, since certain domestic solutions concerning disgorgement in contract law have evolved partially from concepts traditionally regarded as stemming from the law of restitution. At first glance, this might seem a biased bending of existing doctrines out of place, but when reflected against the CISG’s interpretational dynamics that is largely based on the infer-ence and application of general principles, these considerations should be deemed highly relevant.

The principle of unjust enrichment undoubtedly shares elements with the arguments of-fered in justifying disgorgement, but the analysis will be limited on this front as disgorge-ment is more often than not addressed within the doctrine of damages because scholars who have contemplated this issue usually and understandably examine disgorgement through the lens of damages provisions rather than the restitution provisions. In this the-sis, mostly due to the relevant comparative considerations that will be made, I will exam-ine components from both doctrexam-ines.

3 Referring to the comparative considerations, in the U.S. – one of the most prominent member states as regards to economic influence³ – the tide has been turning away from the ‘Holmesian’ paradigm of contract damages. The Restatement (Third) of Restitution and Unjust Enrichment issued by the American Law Institute was published in 2011 and it laid down rules which not only enable the targeting of breaching party’s profits in spe-cific circumstances but also sets out the general conditions under which this would be justified.

This development becomes even more interesting when we recognize the fact that as is the case with the CISG, likewise in American contract law, damages for breach of con-tract are based on the expectation interest rule. Thus, the view that expectation interest as the general rule of damages can coexist with the more recently recognized ‘disgorgement interest’, or rather, with more concrete manifestations of the ‘performance interest’ in specific circumstances has arguably made itself into the mainstream of contract law.

This thesis adheres to a growing and established, but sometimes overlooked, dialogue between different legal systems and, therefore, there should be no confusion of its partly comparative nature. While a substantial emphasis is placed on contract damages in com-mon law, particularly American contract law, the primary purpose of this thesis is to ex-amine the interpretation dynamics and future perspectives of the CISG.

Through an issue-specific and comparative approach, this paper intends to highlight and introduce viewpoints that flow either from certain universal legal theories or comparative analysis to the degree to which they might have relevance and prove useful in examining contract damages under the CISG. The intention is to supplement the analysis of the CISG in this regard by also examining viewpoints that have been developing or put forth in other contexts. I argue that such a method has the potential to broaden perspectives for academics and practitioners equally in the field of international commercial law.

As Schwenzer and Hachem have stated: “If [the CISG] does not respond to current de-mands and continues to focus on the state of discussion prevalent in the 1970s (or more accurately the nineteenth century), it risks falling back into obscurity. The necessary

3 A fact that undeniably affects the U.S. legal system’s traction and influence globally and in international trade.

4 justments will then be made by the concurrent application of domestic remedies to pre-cisely those cases for which the CISG was originally designed. The battle for uniformity fought by the CISG would be lost.”⁴