The Right to Damages of the Buyer and the Seller under the CISG

I. BREACH OF CONTRACT AND DAMAGES UNDER THE CISG AND TURKISH LAW

The CISG's understanding of breach of contract presents some significant differences compared to the understanding of breach of contract in Turkish law and the civil law system, to which Turkish law belongs. First of all, certain concepts and distinctions found in Turkish law do not exist in the Convention. The reason for this is that the CISG is an international convention and takes into consideration not only the civil law system but also the common law system. However, it is possible to say that the common law system has a profound influence on the basis of the Convention's understanding of breach of contract⁴.

Under Turkish law, breach of contract is not treated as a whole; instead, types of breach of contract are addressed separately. As the principal cases of breach of contract, impossibility, default, and improper performance are included in different parts of the code, and they are evaluated both generally and specifically for different contracts in the code. In terms of damages, a separate evaluation must be made for each of these situations. In this respect, it is possible to say that the Turkish Code of Obligations No. 6098 ("TCO")⁵ has a rather scattered systematic.

In the CISG's understanding of breach of contract, parallel to the common law system, breach of contract is evaluated as a whole, and the focus is generally firmly placed on whether the contract has been breached. In this system, the cause of the breach of contract is not important; if the contract has been breached, liability arises as a rule. This liability stems from the guarantee commitment undertaken by the contract. Distinctions such as default, defective performance, etc., which exist in Turkish law, are absent in the CISG. As a result of this, the primary sanction for breach of contract has developed as damages. The possibilities of specific performance or avoidance of the contract constitute exceptions in this system. In this respect, the buyer's and seller's right to damages is extremely important in the application of the Convention⁶.

A. Damages under the CISG in General

In the CISG system, the remedies available to the buyer in the event of a breach of contract by the seller are regulated in Article 45, according to which:

"(1) If the seller fails to perform any of his obligations under the contract or this Convention, the buyer may:

(a) exercise the rights provided in articles 46 to 52;

(b) claim damages as provided in articles 74 to 77.

(2) The buyer is not deprived of any right he may have to claim damages by exercising his right to other remedies.

(3) No period of grace may be granted to the seller by a court or arbitral tribunal when the buyer resorts to a remedy for breach of contract."

The remedies available to the seller in the event of a breach of contract by the buyer are explained in Article 61:

"(1) If the buyer fails to perform any of his obligations under the contract or this Convention, the seller may:

(a) exercise the rights provided in articles 62 to 65;

(b) claim damages as provided in articles 74 to 77.

(2) The seller is not deprived of any right he may have to claim damages by exercising his right to other remedies.

(3) No period of grace may be granted to the buyer by a court or arbitral tribunal when the seller resorts to a remedy for breach of contract."

These two articles are essentially reflections of each other⁷, and in paragraph 1(b) of both articles, the parties are granted the right to claim damages provided for between Articles 74 and 77. In paragraph 2 of the same articles, it is stated that the right to claim damages is not lost upon the exercise of other legal remedies.

In the CISG system, the right to claim damages, which is one of the legal remedies available to the other party in the event of a breach of contract by one of the parties, is regulated as a separate section between Articles 74 and 77, befitting the importance attributed to it in the CISG's understanding of breach of contract. In Article 74 of the CISG, the general provisions regarding the compensation of damages in the event of a breach of contract by one of the parties are determined. In the subsequent Articles 75 and 76, two special cases to be applied in the event of the avoidance of the contract are envisaged. The measures regarding the mitigation of the loss are regulated in Article 77. The specified articles will come to the fore when both the buyer's and the seller's claim for damages is in question.

B. Damages under the Turkish Code of Obligations in General

In the TCO system, due to the difference in perspective towards breach of contract, damages are not regulated in a single section as in the CISG. Instead, different claims for damages for different parties are provided under different causes of breach of contract. Primarily, the code has regulated the claim for damages arising from subsequent culpable impossibility under general provisions in Article 112, and the claim for damages arising from measures not taken in subsequent faultless impossibility in Article 136. Under the distinction of the debtor's default, different claims for damages are provided: damages for delay in Article 118, damages arising from unexpected events in Article 119, compensation for damages exceeding the default interest in Article 122, and the right to optionally demand the performance of the obligation along with delay damages, or the right to claim expectation interest by renouncing the performance of the obligation and delay damages, or reliance interest in case of avoidance of the contract, all regulated in Article 125.

The code also mentioned claims for damages specific to the contract under the heading of sales of movables. In Article 212, where the seller's default is regulated, it makes a reference to the debtor's default, and additionally, with Article 213, it regulates the concrete and abstract calculation of damages and compensation. For the claim for damages arising from seizure, Article 217 applies in case of total seizure, and Article 218 in case of partial seizure. In the claim for damages arising from defects, the claim for damages according to general provisions along with optional rights is regulated in Article 227, and the claim for damages arising from direct and consequential losses as a result of avoidance is regulated in Article 229. Finally, the seller's claim for damages in the event of the buyer's default is regulated in Article 236, similar to Article 213.

As can be seen, damages in the TCO system appear quite complex compared to the simplicity and integrity of the CISG system.

II. BASIC PRINCIPLES OF THE CISG DAMAGES SYSTEM

A. The Principle of Full Compensation

The purpose of the CISG damages system is to place the party who has suffered a loss due to a breach of contract in the economic position he would have been in if the breach had not occurred⁸. The first sentence of Article 74 states this point: "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." As can be understood from the wording of the article, the CISG has explicitly adopted the principle of full compensation⁹. Pursuant to the principle of full compensation, the party who has suffered a loss due to the breach of the contract will be able to compensate for all his losses, including actual loss (damnum emergens) and loss of profit (lucrum cessans)¹⁰.

In all legal systems, the purpose of damages is essentially to protect the value that the contract represents for the party suffering a loss from the breach of contract¹¹. The value the contract represents is expressed by the interests the parties expect from the contract, and these interests are termed differently in the common law and civil law systems. While the concepts of expectation interest and reliance interest exist in the common law system, this issue is met with the distinction of positive damage (expectation interest) and negative damage (reliance interest) in the civil law system, which includes Turkish law.

Since the principle of full compensation has been adopted in the CISG damages system, as in the TCO¹², not only the expectation interest (positive damage) that the suffering party expects from the contract but also the reliance interest on the performance of the contract (negative damage) is protected¹³. However, it should be importantly noted that the Convention does not directly and separately include the distinction between expectation/reliance interest in the common law system, nor does it include the distinction between positive/negative damage in Turkish law.

1. Expectation Interest ( Positive Damage in a Broad Sense )

The expectation interest can be defined as the benefit the parties intend to obtain from the contract¹⁴. If this benefit is not taken into consideration in compensating the loss of the party suffering from the breach of contract, it is obvious that full compensation cannot be achieved. In this respect, the protection of the expectation interest is of great importance for the principle of full compensation.

Positive damage, on the other hand, expresses the loss suffered by the creditor because of the non-realization of his interest in the performance of the obligation¹⁵. The concept of expectation interest in the common law system corresponds to positive damage in Turkish law in terms of its subject and scope¹⁶. In the TCO, the right to claim positive damage is regulated as an optional right of the creditor in the default of the debtor in Article 125/2 of the TCO: "The creditor may also immediately declare that he waives the right to claim the performance of the obligation and damages for delay, and may claim compensation for the loss arising from the non-performance of the obligation or may avoid the contract."

A simple example by which expectation interest and positive damage can be explained is as follows: A contract for the sale of a movable good worth 50,000,00-USD is concluded between (B) and (S). Because (S) does not perform his obligation, if (B) buys a good of the same quality from a different seller for 80,000,00-USD, the difference of 30,000,00-USD between the initial contract and the subsequent contract will be the positive damage of (B). Because if (S) had performed his obligation, (B) would have bought this good for 50,000,00-USD. In this case, the difference of 30,000,00-USD will be compensated from (S) for the protection of the benefit (B) expected from the contract.

2. Reliance Interest ( Negative Damage )

Negative damage, which is the reflection of the reliance interest in Turkish law, is the loss suffered due to the non-conclusion of a contract that was relied upon to have legal effect¹⁷. What is aimed with the protection of the reliance interest is to compensate for the difference between the state the patrimony has taken in the event that the contract does not take effect for a person who relied on the existence of the contract, and the state the patrimony would have been in if he had never entered into the contractual relationship¹⁸.

The scope of negative damage includes not only the expenses made relying on the validity of the contract but also the damages of being deprived of a more favorable opportunity missed because it was trusted that the contract would be concluded¹⁹. According to Article 125/3 of the TCO; "In the event of the avoidance of the contract, the parties are mutually released from the obligation to perform and may demand back the performances they have previously rendered. In this case, if the debtor cannot prove that he was not at fault in falling into default, the creditor may also demand compensation for the loss he suffered due to the contract becoming invalid."

To explain with another example; a contract for the sale of a movable good worth 50,000,00-USD is concluded between (B) and (S). (B) incurred 5,000,00-USD in notary and travel expenses for the conclusion of this contract. Before (S) performed its obligation, the same good was offered to (B) for 60,000,00-USD by another seller. However, (B) rejected this offer relying on its contract with (S). Later, because the contract between (B) and (S) became invalid, (B) had to buy the same good from a different seller for 80,000,00-USD. Here, because the (B) relied on its contract with (S) and rejected the 60,000,00-USD offer, its negative damage is 20,000,00-USD. In addition, the 5,000,00-USD expense it incurred relying on this contract is also an item of negative damage. (B) will be able to claim the 25,000,00-USD loss it suffered from (S).

B. The Principle of Not Awarding Damages Exceeding the Loss

As also stated in Article 74 of the CISG, the damages payable in the event of a breach of contract is the sum of the loss suffered by the other party due to the breach. The right to damages is envisaged not for the enrichment of the suffering party, but solely for the compensation of the loss suffered²⁰. In accordance with this principle, since the damages should not exceed the amount of the loss, the above-mentioned positive damage and negative damage cannot be claimed together. Because the one who claims compensation for positive damage would have had to endure the negative damages if the obligation had been duly performed. On the other hand, if negative damage is claimed, the obligation will be considered invalid, and the compensation of the interest relating to the performance of an invalid obligation will not be possible²¹. The CISG also does not cover punitive damages claims calculated according to the degree of bad faith of the party in breach²². However, within the framework of freedom of contract, the parties can stipulate a penalty clause to be applied in the event of a breach of contract²³. The same principles are valid in Turkish law, and in this respect, there is a similarity with the Convention.

C. The Principle of Strict Liability

Pursuant to Article 74 of the CISG, the fault or negligence of the party breaching the contract is not required for a claim for damages. In this matter, the CISG has adopted the principle of strict liability found in the common law system, unlike the civil law system²⁴. According to the principle of strict liability, the debtor is responsible for all damages arising from the breach of contract, regardless of whether he has fault or not²⁵. Although the rule is strict liability, damages can be limited by the principle of foreseeability and the provisions of Articles 79 and 80.

Turkish law, however, diverges from the CISG system with sharp lines in terms of fault. In Turkish law, as a general rule, the fault of the debtor is required in order to award damages in obligations arising from breach of contract²⁶. However, even if it is accepted as a presumption that the debtor is at fault, the debtor will be able to escape liability for damages by proving that he was not at fault in the breach²⁷. As an exception to this, in the compensation of direct damages along with avoidance of the contract in case of defective performance, regulated in Article 229 of the TCO²⁸, there is no fault liability²⁹. A guarantee commitment similar to that in the Convention is envisaged here. However, this issue is valid for direct damages, and there is again fault liability for consequential damages³⁰.

D. The Principle of Monetary Compensation

In the English version of Article 74, it is said "a sum equal to the loss", leaving no room for hesitation that the loss will be compensated solely in money. Although this point cannot be clearly understood from the translations of the Convention in other languages, including Turkish, it is accepted as a general principle that the loss will only be compensated with money³¹.

In Turkish law, on the other hand, pursuant to the reference made by Article 114/2 of the TCO to the provisions of tort law, the judge is granted discretion in determining the damages in Article 51 of the TCO. Accordingly, specific performance (in kind) and monetary compensation are seen as equivalent³². However, mostly in liability arising from contract, monetary compensation is in question. Especially in cases where the performance of the obligation becomes impossible due to the debtor's fault or the obligation is not fulfilled properly, the compensation to be requested is monetary compensation³³.

III. SCOPE OF THE CLAIM FOR DAMAGES UNDER THE CISG

A. Requirements for the Claim for Damages

In order to speak of the liability for damages of the buyer or the seller, certain requirements must have materialized. The most important of these are; the breach of a contractual obligation, the occurrence of a loss due to this breach, the existence of a causal link between the breach and the loss, and the foreseeability of the loss³⁴. In addition, the absence of grounds for exemption, which are exceptions to the principle of strict liability, is also of importance for the liability for damages.

1. Breach of a Contractual Obligation

Under the CISG, for the buyer or the seller to claim damages, the other party must breach one of its obligations arising from the contract or the Convention. This issue is explicitly stated separately for the buyer and the seller in Article 45³⁵ and Article 61³⁶. Although the breach of any obligation arising from the contract is sufficient for liability to arise, the breach does not have to be a "fundamental" breach as explained under Article 25³⁷. The non-performance or improper performance of an obligation that has become due is sufficient for liability to arise; moreover, the party committing the breach does not need to be put in default by any notification or by granting an additional period³⁸. A definitive declaration that an obligation, the performance of which is not yet due, will not be performed also means a breach of contract; in such a case, there is no need to wait for the obligation to become due for liability to arise³⁹. It should be noted that whether the breached obligation stems from the Convention or the contract will not make a difference in terms of liability⁴⁰.

Losses arising from the breach of obligations that must be fulfilled during pre-contractual negotiations (culpa in contrahendo liability) are excluded from the scope of the CISG⁴¹. In Turkish law, even though this liability is not explicitly regulated, taking its basis from the principle of good faith explained in Article 2⁴² of the Turkish Civil Code No. 4721⁴³ ("TCC")⁴⁴, it finds its reflection in various provisions of the TCO⁴⁵. Again, as can be understood from various decisions of the Court of Cassation⁴⁶, it can be said that, unlike the CISG, losses arising from pre-contractual obligations can also be compensated in Turkish law. However, concerning the obligation to compensate here, the compensation of positive damage is not in question; only negative damage can be claimed⁴⁷.

2. Occurrence of Loss Arising from the Breach of the Contractual Obligation

In order for the parties to claim damages pursuant to the provisions of Article 74 et seq., the mere breach of a contractual obligation is not sufficient; in addition, a loss must have occurred due to this breach. Although the losses that can be compensated under the CISG are not specified in detail, whether the loss can be compensated will be evaluated according to the characteristics of the concrete case within the scope of the general provisions specified in Article 74 and the principle of full compensation⁴⁸. It should be noted that losses affecting the integrity of the person due to the breach of a contractual obligation are excluded from the scope of the CISG, and liability arising from such losses will be evaluated within the scope of the applicable domestic law⁴⁹. This issue is explicitly stated in Article 5: "This Convention does not apply to the liability of the seller for death or personal injury caused by the goods to any person." In Turkish law, losses affecting the integrity of the person are evaluated within the scope of tort provisions determined by Article 49 et seq. of the TCO.

3. Existence of a Causal Link Between the Conduct Constituting the Breach and the Loss

Holding the parties liable for damages for a loss to whose occurrence they did not contribute is contrary to the basic principles of the Convention and the value system it protects. In the CISG damages system, the condition of the existence of factual causality between the loss and the breach is required. In determining the causal link to be established between the breach and the loss, the answer to the question "would the loss in question have occurred if there had been no breach?" carries great importance. In the event that the answer to this question is negative, that is, if the loss would not have occurred had there been no breach, the factual chain of causality will have been established, and the condition of the existence of causality will be met⁵⁰.

4. Foreseeability of the Loss

As a result of adopting the principle of full compensation and strict liability found in the common law system in the CISG, the principle of foreseeability has been accepted for the limitation of liability⁵¹. As stated in the second sentence of Article 74, "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 of which he then knew or ought to have known, as a possible consequence of the breach of contract." Accordingly, in order for the loss arising from the breach of contract to be compensated, the loss must be foreseeable by the debtor at the moment the contract is concluded. The reasoning underlying the foreseeability rule is to ensure that the parties can calculate the potential risk and their liabilities while concluding the contract⁵².

While Article 74 binds the foreseeability test to an objective criterion with the phrase "ought to have foreseen", it has also introduced a subjective criterion with the phrase "foresaw"⁵³. According to the objective criterion, what is determinative in the foreseeability test is what a reasonable merchant ought to have foreseen in the light of the facts existing at the time of the conclusion of the contract, rather than the person of the party breaching the contract himself⁵⁴. Under the objective criterion, it is not absolutely necessary to prove that the party breaching the contract foresaw the loss; proving that he was in a position to foresee it may be sufficient⁵⁵. Although the essential element in the foreseeability test is the objective criterion, the subjective foresight of the party breaching the contract will also be used as a supplementary criterion⁵⁶. If the party breaching the contract foresaw a loss that a reasonable merchant might not foresee, the party breaching the contract can no longer claim that foreseeability did not materialize by putting forward the objective criterion. Furthermore, what is meant by foreseeability is not the clear foresight of the loss with all its details; approximate foreseeability is sufficient.

In Turkish law, the principle of foreseeability has not been accepted for the limitation of liability⁵⁷. Instead, the theory of adequate causal link is applied. The adequate causal link refers to the conduct of the party breaching the contract increasing the probability regarding the occurrence of the loss according to general life experiences, and the conduct being apt in terms of the resulting outcome⁵⁸. Although a causal link between the loss and the breach is also sought in the foreseeability principle, after factual causality is established, an attempt is made to determine whether the loss is foreseeable. Whereas, in the theory of adequate causal link, even after the relationship of factual causality, it is investigated whether the breach is an adequate cause in terms of the type and scope of the loss. In this respect, while the limits of liability in the theory of adequate causal link are attempted to be determined by drawing the limits of causality, in the foreseeability principle, they are attempted to be determined within the scope of the risk foreseen by the parties while entering into the contractual relationship⁵⁹.

5. Absence of Any Grounds for Exemption

Although the principle of strict liability is envisaged in the CISG, the possibility of exemption from liability has been introduced for the parties with Articles 79 and 80. In the presence of one of the grounds for exemption, even if a loss has occurred due to the breach, the liability for damages of the party breaching the contract will not arise. According to Article 79:

"(1) A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.

(2) If a party's failure is due to the failure by a third person whom he has engaged to perform the whole or a part of the contract, that party is exempt from liability only if:

(a) he is exempt under the preceding paragraph; and

(b) the person whom he has so engaged would be so exempt if the provisions of that paragraph were applied to him.

(3) The exemption provided by this article has effect for the period during which the impediment exists.

(4) The party who fails to perform must give notice to the other party of the impediment and its effect on his ability to perform. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, he is liable for damages resulting from such non-receipt.

(5) Nothing in this article prevents either party from exercising any right other than to claim damages under this Convention."

If Article 79 is interpreted broadly, the strict liability system in the Convention will have no difference from the fault liability in the TCO. However, this article is interpreted narrowly in doctrine and practice, being limited to unexpected and unavoidable causes outside the person and personal sphere of the party breaching the contract. In this aspect, the principle of strict liability in the Convention continues to exist. For example, while it is accepted that the seller's illness or a theft occurring despite taking all precautions will not suffice for exemption from liability; the seller will be able to be exempt from liability due to unforeseen natural conditions, the impossibility of transportation due to external interventions, or the perishing of the sold goods⁶⁰.

With Article 80, it is envisaged that in the event the act causing the breach of the contract by one of the parties stems from the act or omission of the other party, the party suffering the loss from the breach of the contract cannot claim damages: "A party may not rely on a failure of the other party to perform, to the extent that such failure was caused by the first party's act or omission." In Turkish law, however, since fault liability is already envisaged, the debtor is under an obligation to pay damages to the extent of his fault.

6. The Necessity to Prove the Loss

In order for a loss formed due to the breach of contract to be compensated, the existence of this loss must be proven. Concerning the proof of the existence of the loss, the issue of upon which party the burden of proof will be placed carries great importance. Even though there is no explicit provision in the Convention regarding the allocation of the burden of proof, it is accepted that this issue will be evaluated within the scope of the Convention⁶¹. Pursuant to the prevailing view, the party suffering a loss due to the breach of contract bears the burden of proof to the extent of the scope of the loss he suffered and regarding the causal link between the loss and the breach of the contract⁶². How and in what manner the proof will be made, however, although not regulated in the Convention, will be subject to the lex fori as it is evaluated within the scope of procedural law⁶³.

In Turkish law as well, the obligation to prove the loss is generally upon the suffering party⁶⁴. However, this should not be confused with the proof of fault. In fault liability, although the party breaching the contract is accepted as being at fault as a presumption, if he proves that he is not at fault, he escapes liability.

7. The Buyer's Duty to Notify

If the breach of the contract has occurred due to the delivery of goods that are not in conformity with the contract, a special obligation is envisaged for the buyer to be entitled to damages. Accordingly, the buyer must fulfill the obligation to examine the goods and to notify the lack of conformity, which are regulated in Article 38⁶⁵ and Article 39⁶⁶. In the event of a failure to fulfill these obligations, the buyer will lose his right to damages⁶⁷. The limited exceptions to this rule, on the other hand, are regulated in Article 40⁶⁸ and Article 44⁶⁹.

In Turkish law as well, according to Article 223 of the TCO⁷⁰, there is a similar obligation to examine and notify the seller in order for the buyer to be able to request compensation for the loss arising from the defect.

B. Types of Losses

The losses that can be compensated within the scope of Article 74 can initially be subjected to the distinction of actual loss (damnum emergens) and loss of profit (lucrum cessans)⁷¹. While actual loss occurs in the form of a decrease in the assets or an increase in the liabilities of the patrimony, the loss in the form of loss of profit is the loss of the opportunity for an increase in the assets or a decrease in the liabilities of the patrimony of the party suffering from the breach⁷². Under the CISG, both losses can be claimed pursuant to the principle of full compensation. It should be noted that the distinction between actual loss and loss of profit must not be confused with the distinction between positive damage and negative damage that we have discussed within the scope of interests. Actual loss and loss of profit can emerge as both positive damage and negative damage.

Apart from the distinction between actual loss and loss of profit, types of losses have been subjected to a tripartite distinction in jurisprudence⁷³ and doctrine⁷⁴. Accordingly, compensable types of losses can be categorized as non-performance losses (direct loss), incidental losses (incidental damages), and consequential losses (consequential damages)⁷⁵.

1 . Non-Performance Losses (Direct Loss )

Non-performance losses, which can also be termed as direct losses, consist of the primary losses of the injured party⁷⁶. In cases where the debtor performs his obligation of performance improperly or not at all, the decrease in value occurring in the creditor's patrimony due to this impediment to performance constitutes the non-performance loss. Non-performance losses may arise in various ways in terms of the buyer and the seller. For example, the losses suffered by the seller due to the buyer's non-acceptance of the goods subject to the contract without relying on a justified reason, or the losses suffered by the buyer due to the goods subject to the contract being of lower quality than agreed upon in the contract are evaluated within this scope⁷⁷. The late delivery of the goods by the seller and the damages suffered by the buyer due to this late delivery can also be claimed within the scope of Article 74⁷⁸.

In damages arising from defective performance, the difference in value between the value the good would have had if it had been delivered in conformity with the contract and its defective state will constitute the loss⁷⁹. In this case, if the buyer has repaired the good, he will also be able to claim the repair expense as a non-performance loss⁸⁰. To explain with an example, a contract is signed for the sale of 100 tons of grain in exchange for 50,000,00-USD. The grains are delivered in a moist condition, and this moisture has reduced the quality of the grains. The buyer dried the grains by incurring an expense of 1,500,00-USD. However, while the grains would have been worth 55,000,00-USD if they had not been moist, their value became 51,000,00-USD despite the drying process. Here, the buyer will be able to request compensation for his 4,000,00-USD loss arising from defective performance and his 1,500,00-USD expense made for the drying process, and the liability for damages of the seller will be 5,500,00-USD in total⁸¹.

In cases of the buyer's underpayment, non-payment, or late payment of the price, for example, the seller will be able to claim compensation for the interest amounts it will have to pay due to a bank credit or for its losses arising from exchange rate differences⁸². To explain the seller's loss that may arise from non-performance with an example, suppose that the seller will sell 100 manufacturing machines it produces itself to the buyer for 50,000,00-USD, and the buyer avoids the contract without a justified reason before the seller commences production. If the contract had been properly performed, the seller would have had a production cost of 45,000,00-USD. Of this, 40,000,00-USD will arise solely from the existence of this contract with items such as production materials, labor, worker wages, etc.; 5,000,00-USD will stem from the seller's general expenses with items such as borrowed capital, administrative expenses, depreciation value of the workshop and equipment, etc. Because the buyer avoided the contract, even though the seller is saved from the 40,000,00-USD expenditure, it will not be saved from the 5,000,00-USD expenditure since general expenses are not tied to the contract. If the seller has not made different contracts with which it can cover his general expenses in the same way, it will be able to claim this 5,000,00-USD it spent as damages from the buyer who unjustifiably avoided the contract. At the same time, since there is also 5,000,00-USD it would obtain as profit from this contract, in this example, the buyer's liability will be 10,000,00-USD. If the buyer avoided the contract after the seller started production and the seller incurred a cost of 15,000,00-USD within this partial production, the buyer's liability will be 25,000,00-USD. If the seller recovered its 5,000,00-USD cost by selling a portion of the manufacturing machines arising from this partial production to a third party, the buyer is liable for only 20,000,00-USD⁸³.

2. Incidental Damages

Incidental damages, which can also be termed as accompanying damages, are expenses that are not dependent on the realization of the expected benefit by the parties but are made for the purpose of preventing additional losses⁸⁴. Although there is no explicit provision regarding incidental damages in Article 74, there is no doubt that these damages can also be collected within the scope of the principle of full compensation. As examples of incidental damages, additional losses suffered by the other party as a result of an unjustified refusal to perform by one of the parties⁸⁵, the expenses arising from the seller's ineffective offer regarding the goods, or the buyer's refusal to take delivery of the goods without asserting a justified ground, the failure to make payment despite delivery being made contrary to what was agreed in the contract⁸⁶, or the preservation and storage of the goods by the seller in the event that the shipment chamber located in the ship hold provided by the buyer is in an unloadable condition can be given as examples⁸⁷. The transportation expenses incurred by the buyer, who took delivery of defective goods, to send these goods back to the seller⁸⁸, the additional expenses incurred by the buyer to ascertain the defective goods⁸⁹, the commission agent expenses arising from the seller making a substitute sale due to the buyer's breach of contract, or the expenses for the modification made on the good according to the requests of a new buyer will also be evaluated within the scope of incidental damages⁹⁰.

3. Consequential Damages

Consequential damages encompass damages beyond the loss arising from the non-performance of the obligation⁹¹. The damages arising from the liability of the parties to third persons due to the breach of contract can be given as an example of consequential damage. For example, in the event of an unjustified breach of the contract by the buyer, situations where the seller cannot fulfill its liability towards its own suppliers⁹², or in the seller's breach of the contract, situations where the buyer cannot perform its obligation towards its own customers can be compensated within the scope of Article 74 as consequential damage⁹³. Again in such a case, the parties may suffer a loss of commercial reputation or a loss of customer portfolio because they could not fulfill their commitments towards third persons. For example, the seller delivered 3% of the Dutch cheese in a quality not conforming to the contract. Due to this defective performance, the buyer lost customers because of the high competition in the market and the customers' expectation of 100% quality. Even if it is difficult to prove, it is indisputable that the loss in the customer portfolio or the loss of reputation, as in this example, leads to material damage⁹⁴. Therefore, it has been widely accepted that these damages can also be compensated within the scope of Article 74⁹⁵.

The most typical and frequently encountered item of consequential damage arises as the loss of profit⁹⁶. In essence, the loss of profit is the only type of damage specifically stated to be compensated in Article 74⁹⁷. As stated in the Secretariat Commentary, since the loss of profit is not included within the scope of damages in some legal systems, a need arose to explicitly state this issue⁹⁸. Accordingly, because the Convention has adopted the principle of full compensation, there is no possibility of applying the provisions of domestic legal systems that restrict the compensation of the loss of profit within the Convention⁹⁹.

4. Moral Damages

The Convention has not introduced an explicit provision regarding liability arising from moral damages. Although there are opposing views in doctrine, damages of a purely moral nature can be collected in cases where the non-material purpose of the performance is a part of the contract, and the damage arising in this context becomes a typical consequence of the non-performance of the obligation¹⁰⁰. Again, although the loss of reputation we mentioned within the scope of consequential damages is essentially an interest of a moral nature, it can be compensated since it leads to material damage. However, especially damage items such as pain, suffering, and damages regarding mental health, and loss of senses and functions are evaluated outside the scope of Article 74¹⁰¹. This is because the Convention essentially addresses damages of a material nature as it serves the purposes of international trade. In Turkish law, on the other hand, although non-pecuniary damages arising from breach of contract are not specifically regulated, since a reference is made to tort provisions in Article 114/2 of the TCO, it is accepted that non-pecuniary damages can also be claimed in breach of contract based on Article 56¹⁰².

C. Statute of Limitations for Claims for Damages

Statute of limitations periods are not regulated in the CISG. Besides this, there is the Convention on the Limitation Period in the International Sale of Goods dated 14.06.1974¹⁰³. Pursuant to the application area of the Convention, the statute of limitations period for claims for damages to be asserted within the scope of the CISG is determined as 4 years in Article 8¹⁰⁴. However, since the number of states party to this convention is limited, in cases where the convention cannot be applied, as also stated in various court decisions¹⁰⁵, the statute of limitations period will be determined within the framework of the national rules of law applicable to the contract¹⁰⁶. It should be noted that while statute of limitations periods are accepted as a procedural issue in the common law system and therefore are subject to the lex fori, in the civil law system, the statute of limitations is dealt with as a matter relating to substantive law and is subjected to the lex contractus¹⁰⁷.

Turkey is not a party to the Convention on the Limitation Period in the International Sale of Goods and according to Article 146 of the TCO, "unless there is a provision to the contrary in the law, every claim is subject to a ten-year statute of limitations."¹⁰⁸ As an exception to this, for example, the statute of limitations in the seller's liability arising from the defect of the sold good is regulated as two years according to Article 231 of the TCO; "Unless the seller has undertaken it for a longer period, every lawsuit regarding the liability arising from the defect of the sold good is subjected to a statute of limitations of two years starting from the transfer of the sold good to the buyer, even if the defect in the sold good appears later. The buyer's right of plea arising from the defect notified within two years starting from the transfer of the sold good to it does not disappear with the passage of this period. If the seller is in gross fault in transferring the sold good defectively, it cannot benefit from the two-year statute of limitations period."

D. Place of Payment for Damages

Within the scope of the CISG, the place where damages are to be paid is not specifically stated. There are two views on this matter; while the first of these views says that damages should be paid at the place where the breached obligation is to be performed¹⁰⁹, according to the other view, this issue must be resolved pursuant to Article 57 of the Convention¹¹⁰. Accordingly, the place of payment for damages will be the place where the place of business of the party suffering a loss from the breach is located. In Turkish law, on the other hand, pursuant to Article 89 of the TCO, pecuniary obligations are paid at the creditor's place of residence at the time of payment.

E. Currency in Which Damages Shall Be Paid

Pursuant to the freedom of contract that generally dominates the law of obligations, if the parties have agreed upon the currency in which damages are to be paid, the damages will be paid over this currency. However, in practice, parties rarely make such a determination¹¹¹. In the CISG system, however, there is no special provision regarding the currency in which damages are to be paid. In that case, a determination will be made in resolving this issue by departing from general principles. Pursuant to the principle of full compensation adopted in the Convention, the currency in which damages are to be paid should not be the currency in which the price determined in the contract is to be paid, but the currency in which the suffering party claims to have suffered a loss¹¹². This will generally be the currency of the place where the place of business of the party to whom the damages are to be paid is located. However, in subjective facts, the currency in which the loss is suffered may be a different currency, in which case the damages will be paid over that currency¹¹³.

IV. CALCULATION OF THE LOSS

A. Difference Theory and Exchange Theory

Perhaps one of the most important issues in determining damages is the calculation of the loss. Although the calculation of the loss is simpler in terms of unilateral contracts, it presents some problems concerning bilateral contracts such as the contract for the sale of movables. Chief among these is the problem of whether, in the event of non-performance by one party, the loss will be calculated by also taking into consideration the other party's performance or solely by taking into consideration the unperformed obligation. In this regard, the exchange theory and the difference theory have been put forward. The exchange theory treats both performances separately, accepting that the loss will be calculated solely by taking the unperformed obligation into consideration and that the damages to be awarded will be exchanged with the creditor's performance¹¹⁴. According to the difference theory, however, the loss emerges as the difference between the unperformed value and the value of the counter-performance¹¹⁵.

To explain the difference between the two theories with an example; pursuant to a barter contract, (A) will transfer the ownership of an apartment flat he owns to (B), and in return, (B) will transfer the ownership of his automobile to (A). The value of the flat is 300,000,00-USD, and the value of the automobile is 400,000,00-USD. If (B) does not perform its obligation, liability for damages towards (A) will arise. If the exchange theory is applied when determining the damages, (A) will be able to claim the 400,000,00-USD value of the automobile from (B), and in return, its obligation to transfer the flat to (B) will continue. In the difference theory, on the other hand, (A) will be released from its obligation to transfer the flat and will be able to claim the 100,000,00-USD difference between the values of the performances from (B)¹¹⁶.

Although the benefit and detriment between the theories could be debated for the party claiming damages in a barter contract as in the example, since the performance of one of the parties is the obligation to pay the price in the contracts for the sale of movables covered by the CISG, it is obvious that the difference theory is more suitable in calculating the loss. Even though Article 74 has not made an explicit determination on this issue, it has gained acceptance that the difference theory will be applied in calculating the loss under the CISG¹¹⁷. The formula of the difference theory put forward by Mommsen within the framework of the full compensation principle is essentially as follows: the difference between the favorable hypothetical situation the suffering party would be in had the contract not been breached and the unfavorable factual situation it is in due to the breach of the contract will be compensated¹¹⁸.

B. Abstract and Concrete Methods in Difference Theory

In terms of the method of determining the difference in the difference theory, there are two methods: the concrete and the abstract method. While the concrete method, for example, takes into consideration the difference between the price of the substitute transaction made and the price in the contract if a substitute purchase is made; the abstract method makes an evaluation within the scope of the current price in the market and does not require the condition of a substitute transaction. Under Article 74, it is accepted that damages must generally be calculated by the concrete method¹¹⁹. In essence, the distinction between the concrete and abstract method is explicitly seen between Articles 75 and 76 in the CISG damages system. In Turkish law, however, this distinction has manifested itself in Articles 213 and 236 of the TCO¹²⁰.

1. Calculation of Damages under Article 75 for Substitute Transactions

Article 75 relates to the compensation of the loss arising from a substitute purchase or sale of goods in the event of the avoidance of the contract. The text of the article is as follows: "If the contract is avoided and 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 damages may recover the difference between the contract price and the price in the substitute transaction as well as any further damages recoverable under article 74."

Accordingly, the first condition that must exist to be able to claim damages based on Article 75 is that the contract has been avoided¹²¹. The conditions regarding the avoidance of the contract are determined by Article 26. According to the provision of Article 26, the declaration of avoidance of the contract will only take effect if notice is given to the other party. In certain cases, claiming the difference in damages¹²² or the notification of a substitute transaction¹²³ may also be deemed sufficient¹²⁴. The second condition is the necessity for the substitute transaction to be made within a reasonable time after the contract is avoided. This period may vary according to the nature of the event. For example, while two weeks were seen as a reasonable time in one decision¹²⁵, a three-month period was accepted as reasonable in another decision¹²⁶.

The third condition for damages to be awarded is that a substitute purchase or sale has been made¹²⁷. It is important to note that the probability of making a substitute transaction is not included in the article; the compensation of the loss comes to the fore after the substitute transaction is made. The substitute transaction must be connected to the sales contract and must be made reasonably, in a manner that covers the expected benefit of the suffering party¹²⁸. The standard of reasonableness here is again determined by taking into consideration the transaction that an ordinary businessperson would make¹²⁹. The suffering party must not act contrary to the interests of the party in breach, for example, by waiting for prices to change in his favor¹³⁰.

Along with the specified conditions, in the event that the substitute transaction has been made, the suffering party will be able to claim the price difference between the price agreed upon in the contract and the substitute transaction. At the same time, if the suffering party's loss is above this price difference, it will also be able to assert its other losses within the scope of Article 74. Because a substitute transaction is made based on the loss that emerges with Article 75, the calculation of the loss is made by the concrete method¹³¹. To give an example of the damages that can be claimed under Article 75; the buyer concluded a sales contract for 50,000,00-USD with the seller. However, the seller did not perform his obligation and did not deliver the goods. The buyer gave notice that the contract was avoided and was only able to buy the desired goods from another seller for 65,000,00-USD. The buyer will be able to claim this 15,000,00-USD loss in between from the seller. Again in the same example, considering that the buyer did not accept the sent goods and thereupon the seller terminated the contract and was able to sell the goods to another buyer at the highest price of 40,000,00-USD, this time the seller will be able to claim the 10,000,00-USD difference from the buyer.

In Turkish law, the provisions showing similarities to Article 75 of the CISG are Articles 213/2 and 236/2 of the TCO. These provisions are reflections of each other; while 213/2 regulates the obligation of compensation in case of the seller's default and the concrete calculation of the loss in the buyer's substitute purchase, 236/2 relates to the concrete calculation of the loss in the seller's substitute sale in case of the buyer's default.

According to Article 213/2 of the TCO: "If the seller does not perform its obligation, the buyer may claim compensation for the loss to be calculated according to the difference between the sales price and the price it paid in accordance with the rules of good faith to purchase another one instead of the sold good that was not transferred to it." The paragraph provision has many similarities with the CISG. First of all, the substitute purchase must be made according to the rule of good faith. The necessity of making the purchase within a reasonable time is also included in this. Upon the impossibility of performance, the expiration of the determined term, or the renunciation of specific performance within the meaning of Article 125/2 of the TCO, the substitute purchase must be made within a sufficient time before it is too late¹³². Again, the substitute purchase must also be reasonable. Pursuant to Article 236/2 of the TCO, it is stated that "The seller may claim from the buyer, who has fallen into default in paying the sales price, the compensation of the loss to be calculated according to the difference between this price and the price he obtains from the sale of the sold good to someone else in accordance with the rules of good faith", and pursuant to this article as well, the seller must act in accordance with the rule of good faith while making the substitute sale and must try to sell the good to be sold at the highest possible price.

2. Abstract Calculation of Damages under Article 76

In cases where the contract is avoided but a substitute transaction is not made, if there is a current price for the goods subject to the contract, the Convention envisages that apart from the general provision in Article 74, the difference between the current price and the price agreed upon in the contract can be compensated based on Article 76. According to the text of the article;

"(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 75, recover the difference between the price fixed by the contract and the current price at the time of avoidance as well as any further damages recoverable under article 74. If, however, the party claiming damages has avoided the contract after taking over the goods, the current price at the time of such taking over shall be applied instead of the current price at the time of avoidance.

(2) For the purposes of the preceding paragraph, the current price is the price prevailing at the place where delivery of the goods should have been made or, if there is no current price at that place, the price at such other place as serves as a reasonable substitute, making due allowance for differences in the cost of transporting the goods."

Article 76 grants the suffering party the opportunity to calculate the loss abstractly by determining the difference between the contract price and the market price in cases where the contract is avoided. The reason this calculation is named the abstract method is that it is based on the assumption that the suffering party will make a substitute transaction from the current price at the moment the contract terminates. Even if a substitute transaction does not yet exist and there is no current loss arising from this substitute transaction, the difference between the market price and the price in the contract is assumed to be the loss¹³³. For this reason, within the scope of Article 76, no concrete evidence concerning the loss arising from the non-performance of the obligation is needed¹³⁴. One of the advantages of this situation for the suffering party will be that it no longer has the obligation to disclose commercial secrets regarding the substitute transaction it will make¹³⁵.

In order to be able to claim damages based on Article 76, just as in Article 75, the contract must first be avoided. How the condition of the avoidance of the contract will be fulfilled is debatable for some situations. According to one view, if one of the parties has clearly and unequivocally manifested that it will not perform its obligation, a separate notification should not be needed for the contract to be avoided in this case. In such a situation, there is still the opportunity to determine the moment when the current price will be taken as the basis. This conclusion arises from the rule of good faith and fair dealing found in Article 7 of the Convention¹³⁶. Those who do not join this view express that the CISG provisions are not suitable for accepting the automatic avoidance of the contract and that giving notice to the other party pursuant to Article 26 is necessary for the contract to be avoided¹³⁷.

In order to be able to claim damages under Article 76, unlike Article 75, a substitute transaction must not have been made. Because if the contract has been avoided and a substitute transaction has been made, the calculation of loss will come to the fore according to the concrete method in Article 75, no longer according to the abstract method in Article 76¹³⁸. According to one view, even if a substitute transaction exists, if this transaction does not meet the conditions envisaged in Article 75, damages can still be claimed based on Article 76¹³⁹.

Finally, for a claim for damages pursuant to the article, there must be a market price for the goods subject to the contract. What should be understood from the market price is the current price applied for the same kind of goods sold in a certain geographical area under similar conditions in the relevant commercial branch¹⁴⁰. The place where the current price will be determined is the place where the goods would have been delivered had there been no breach of contract; however, if a current price cannot be determined at this place, the prices at a reasonable substitute place may be taken into consideration. In situations where the current price cannot be determined in any way, the possibility of calculating the loss by the abstract method pursuant to Article 76 ceases to exist. In this case, the suffering party will be able to claim damages based on the general provisions in Article 74¹⁴¹. But in this case, the principle of foreseeability, which is not applied in Article 76, will also come into play¹⁴².

It should be importantly noted that for the abstract method in Article 76 to be applicable, a sales price must absolutely be determined in the contract. Unlike the concrete method in Article 75, there is no possibility of determining the sales price in the contract based on Article 55¹⁴³ here. In such a case, the sufferer will again be able to claim the compensation of his loss based on Article 74¹⁴⁴.

In Turkish law as well, in cases of default by the seller and the buyer, the parties can request that their losses be calculated abstractly and compensated¹⁴⁵. According to Article 213/3 of the TCO which will be applied in case of the seller's default; "If the sold good is among those that are listed on the stock exchange or have a market price, the buyer may request the compensation of the loss to be calculated according to the difference between the sales price and the market price on the determined performance day, without having the obligation to purchase another one in its stead." Again for situations where the buyer's default is in question, Article 236/3 of the TCO has regulated the abstract calculation of the loss: "If the sold good is among those that are listed on the stock exchange or have a market price, the seller may request from the buyer the compensation of the loss to be calculated according to the difference between the sales price and the price of the good on the determined payment day, without the need for such a sale."

V. DUTY TO MITIGATE THE LOSS

The party suffering a loss from the breach of contract has the obligation to take reasonable measures to mitigate the loss arising from the breach. This issue is regulated in Article 77 of the Convention: "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. If it 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." The duty to mitigate the loss is essentially a reflection of the rule of good faith which takes place in international trade and is also stated in Article 7 of the Convention¹⁴⁶. The suffering party will not deserve compensation concerning the losses it could have prevented. Damages arising from the breach of contract and other compensation items including loss of profit can only be compensated provided that reasonable measures are taken and to the extent they could not be prevented despite these measures¹⁴⁷.

It should be noted that the Convention has placed the burden of only taking reasonable measures on the suffering party to mitigate the loss. There is no need for the suffering party to take extraordinary measures¹⁴⁸. However, at this point, a debate regarding whether a measure is insufficient, reasonable, or extraordinary may come to the fore. Although it may vary according to the concrete circumstances of each case, a reasonable measure can generally be defined as the measure a reasonable person under the same conditions would take pursuant to the rule of good faith and fair dealing¹⁴⁹. For example, in the event of the delivery of defective goods contrary to the contract, the buyer may have to take some measures to prevent the spread of the defect and to prevent the losses following the defect¹⁵⁰. Or the parties may find themselves in a position having to make a substitute transaction to prevent the increase of the loss¹⁵¹. Measures such as these will be accepted as reasonable measures. In Turkish law as well, the duty to mitigate the loss is regulated in Article 52 of the TCO, with the reference of Article 114/2¹⁵². Pursuant to the article, the duty to mitigate the loss is explicitly stated by saying "if the suffering party has consented to the act causing the loss, or has been effective in the occurrence or increase of the loss, or has aggravated the position of the obligor of compensation, the judge may reduce the damages or remove it completely."