Force majeure and hardship
A basic and universally accepted principle of contract law is “pacta sunt servanda.” This principle means that each party to an agreement is responsible for its non-execution, even if the cause of the failure is beyond his power and was not or could not be foreseen at the time of signing the agreement. The principle reflects natural justice and economic requirements because it binds a person to their promises and protects the interests of the other party. Since effective economic activity is not possible without reliable promises, the importance of this principle has to be emphasized.
On the other hand, practice has demonstrated that on many occasions application of this principle may lead to the opposite of its aim. That is to say, the situation existing at the conclusion of the contract may subsequently have changed so completely that the parties, acting as reasonable persons, would not have made the contract, or would have made it differently, had they known what was going to happen. This situation is unlikely to arise with short-term contracts, which often exhibit a simple structure where non-performances are exchanged for money. In international trade, however, many contracts are of a more complicated structure, and even if they are not long term contracts, they frequently exist over a substantive period. International trade transactions generally imply a greater element of uncertainty because they are subject to political and economic influences in foreign countries.
Different legal concepts deal with this problem of changed circumstances and provide for the discharge of the duty to perform of one or both parties when a contract has become unexpectedly onerous or impossible to perform. The classic concept of force majeure is primarily directed at settling the problems resulting from non-performance, either by suspension or by termination. Concepts likeimpr¿½visionor hardship are mainly directed at the adaptation of the contract.
Although all legal systems take notice of the situation of changed circumstances, the conditions under which they allow the defence of force majeure vary. Furthermore, the adaptation of the contract is not universally accepted. Attempts have been made to tackle these problems on an international level. In particular, the United Nations Convention on Contracts for the International Sale of Goods (CISG) addresses the issue of changed circumstances. It avoids reference to the existing concepts because it has developed a system of its own. This concept, however, is generally not regarded as being able to solve the problem entirely. Parties to international sales transactions, therefore, frequently include special clauses in their contracts dealing with matters of hardship and force majeure.
This paper aims to give some idea of the concepts of hardship and force majeure in the context of international sales transactions. First, the concepts will be discussed on a theoretical basis. The different approaches to the situation of changed circumstances in the major legal systems will then be discussed. Article 79 of the CISG will be introduced, interpreted, and its scope determined. It will then be possible to ascertain if, to what extent, and what kind of clauses dealing with the matter of changed circumstances, should be inserted into international sales contracts. Force majeure and hardship clauses will then be discussed in more detail. Finally, the use of standard forms of contract, with special regard to the UNIDROIT Principles of International Commercial Contracts, will be considered, and a recommendation as to force majeure and hardship clauses will be made.
FORCE MAJEURE AND HARDSHIP – THE CONCEPTS IN GENERAL
The two major legal concepts dealing with the problem of changed circumstances are those of force majeure and hardship. In order to understand the interpretation and discussion of Article 79 of the CISG and the deliberations on force majeure and hardship clauses in international sales contracts, the two concepts first have to be considered on a general and theoretical basis.
1. Force majeure
The concept of force majeure, providing for the discharge of one or both parties when a contract has become impossible to perform, “has evolved progressively in international trade practice by assuming many original and autonomous features distinct from similar legal concepts.” The approach of municipal legal systems to situations of force majeure varies from country to country. Despite these circumstances, certain general characteristics of the conception of force majeure can be determined.
The roots of the classic concept lie in the Code Napol¿½on, from which the words force majeure (an irresistible compulsion or coercion) are taken. An English court’s interpretation of the words held that they have a more extensive meaning than “act of God” or “vis major.” “Act of God” is defined as an event happening independently of human volition, which human foresight and care could not reasonably anticipate or avoid. According to the judgment, the words force majeure could cover the dislocation of a business due to a universal coal strike or accidents to machinery, but would not cover bad weather, football matches, or a funeral.In Brauer & Co. v. James Clark it was held that a party could not rely on force majeure simply because the price it was required to pay for the goods was considerably in excess of the price at which it had contracted to sell them.
In more general terms, it can be said that force majeure occurs when the performance of a contract is impossible due to unforeseeable events beyond the control of the parties. The following is a possible definition of force majeure:
Force majeure occurs when the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which the performance is called for would render it impossible. I promised to do this but I cannot due to some irresistible unforeseeable and uncontrollable event.
A similar definition is contained in Article 7.1.7 of the UNIDROIT Principles of International Commercial Contracts where, under the headline of “Force majeure,” it is stated that a party’s non-performance is excused if that party proves that the non-performance was due to an impediment beyond its control, and that it 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 the impediment or its consequences.
The aim of the classic concept of force majeure, as is reflected in Article 7.1.7 of the UNIDROIT Principles, is to settle the problems resulting from non-performance either by suspension or termination.
The concept of hardship is usually discussed in the context of hardship clauses, which are frequently introduced into contracts in international trade. The term “hardship,” however, has also been used in legislation, e.g., in the Australian National Security (Landlord and Tenant) Regulations and the Landlord and Tenant (Amendment) Act 1948-1964. With respect to those rules, courts had to interpret the term “hardship” and determine its scope. Thus, it was held that hardship, as used in the National Security Regulations, may be regarded as the subjective effect of a detrimental nature upon the person concerned. In another decision interpreting the Landlord and Tenant Act, hardship was said to include any matter of appreciable detriment whether financial, personal or otherwise.
The circumstances in which hardship generally exists (as usually set out in hardship clauses) normally incorporate three elements. First, the circumstances must have arisen beyond the control of either party; self-induced hardship is irrelevant. Second, they must be of fundamental character. Third, they must be entirely uncontemplated and unforeseeable.
A clear descriptive definition of hardship is contained in the UNIDROIT Principles. It reads as follows (Article 6.2.2):
There is hardship where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party’s performance has increased or because the value of the performance a party receives has diminished, and
- the events occur or become known to the disadvantaged party after the conclusion of the contract;
- the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract;
- the events are beyond the control of the disadvantaged party; and
- the risk of the events was not assumed by the disadvantaged party.”
The concept of hardship intends to solve problems of such fundamentally altered circumstances by adapting the contract to the new situation.
3. Differences between the two concepts
The concepts of hardship and force majeure seem to be related to each other, particularly since they share some features: they both cater to situations of changed circumstances. The difference between the two concepts is most aptly described in such a way: hardship is at stake where the performance of the disadvantaged party has become much more burdensome, but not impossible, while force majeure means that the performance . . . the party concerned has become impossible, at least temporarily. Moreover, there seems to be a functional difference between the two concepts. Hardship constitutes a reason for a change in the contractual program of the parties. The aim of the parties remains to implement the contract. Force majeure, however, is situated in the context of non-performance, and deals with the suspension or termination of the contract.
DIFFERENT APPROACHES OF DOMESTIC LEGAL SYSTEMS
The approach of municipal legal systems to the problem of changed circumstances varies from country to country. Although all these concepts are related to each other, since they share important features, the distinction between them is extremely important in drafting choice of law clauses in international contracts. Furthermore, it is important to have knowledge about the law that will apply when a force majeure or hardship clause is left out of a contract, and no unified international rules are applicable. Moreover, in order to have relevance and serve a purpose, force majeure and hardship clauses should differ from the doctrine that would be applicable to the problem of changing circumstances, if such clauses were left out of the contract. Thus, the scope of those doctrines has to be determined.
The illustration and comparison of force majeure and hardship will also give a deeper insight into the structure and functioning of these concepts in general. For this purpose English, American, French, German and South African law and their approaches to the situation of changed circumstances will now be analyzed.
“Consistent with the common law approach to strict liability for breach, the traditional common law rule was that conditions rendering performance impossible, that occurred after the execution of a contract, did not excuse performance.” The reason for this was stated inParadine v. Janewhere the King’s Bench held that:
“When the party by his own contract creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by the contract.”
Such a rigid interpretation prevailed in the United Kingdom until 1863. InTaylor v. Caldwell the court changed its traditional opinion: the strict rule should only apply when the contract is positive and absolute, and not subject to any condition either express or implied. The court held that in contracts where performance depends on the continued existence of a given person or thing, “a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance.” With this theory of implied condition, the doctrine of impossibility was introduced into English law.
The concept of frustration, which developed from the doctrine of impossibility, is based on the sole interpretation of the intent of the parties. If stemming from an act of God, “the performance of a contract is to take place under circumstances which are totally different from what the parties envisaged, and therefore, the agreement is frustrated.” The concept originates from the famousCoronation cases. For instance, in one such case, an apartment was rented for one day because it afforded a privileged view of the Coronation parade of Edward VII. When the parade was cancelled due to the King’s illness, the landlord sued for the rent. The court, however, decided the contract was frustrated because its execution was fundamentally and essentially different from what the parties had intended.
According to the doctrine of frustration, the concept dealing with situations of changed circumstances in English law today, a contract can be frustrated by impossibility, physical, e.g., destruction of the subject-matter, or for legal reasons, e.g., illegality, or by the occurrence of a radical change in circumstances, so that the foundation of the contract has been vitiated. If the contract were to retain its validity under such changed circumstances, it would amount to a new and different contract. The doctrine, by covering situations which do not amount to the impossibility of the performance is thus wider than the concept of force majeure. When a contract is frustrated, a judge cannot amend or adjust it to the new situation. Frustration simply discharges the contract. Although the prerequisites of frustration are rather similar to those required by the concept of hardship, the former is final, by disallowing the adaptation of the contract, directed at another aim.
2. United States
Also based on the doctrine of impossibility and its further developments, the United States’ doctrines regarding changed circumstances are carefully defined in both the U.S. Restatement (Second) of Contracts and the Uniform Commercial Code. Section 261 of the Restatement (Second) is entitled “Discharge by Supervening Impracticability” and reads as follows:
“Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event, the non-occurrence of which was a basic assumption in which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.”
The Uniform Commercial Code, in Section 2-615, entitled “Excuse by failure of presupposed conditions” also employs the term “Impracticable.” In both statutes this term encompasses “impossible.” The relevant paragraph of U.C.C. Section 2-615 reads:
“Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance: (a) Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not in breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was the basic assumption on which the contract was made or by compliance in good faith with any foreign or domestic governmental regulation or order whether or not it later proves to be invalid.”
U.C.C. Section 2-615 Paragraph (b) contains an allocation requirement in the event only part of a seller’s capacity to perform is affected. Paragraph (c) states a notice requirement. According to its wording, U.C.C. Section 2-615 only excuses the seller from the delivery of the goods contracted for. The general belief, however, is that this provision is to be considered equally applicable to buyers.
The concept of commercial impracticability, which discharges a party’s duty although the event has not made performance absolutely impossible, has been adopted in order to call attention to the commercial character of the context in which the excuse defence is used. Courts, however, have been reluctant to accept anything short of impossibility as an excuse for performance. The United States’ approach to situations of changed circumstances is broader than that of the classical concept of force majeure. The United States’ approach does not allow the adaptation of the contract and because of the court’s way of treating “impracticability,” it is not as far-reaching as the concept of hardship.
Under French law, the line is drawn between the impossibility of the performance on the one hand, i.e., force majeure, and, on the other hand, circumstances which destabilize the contract where economic conditions are such that fundamental and far-reaching changes occur. The latter is called the doctrine ofimpr¿½vision.
In France, the principlepacta sunt servanda(as incorporated in Article 1134 of the French Civil Code) prevails over the principlerebus sic stantibus. If the contract does not contain any provision regarding events of changing circumstances, then, the performance of the contract will be enforced without any changes to the contract. A judge is not supposed to appraise the economic situation of the parties or to rule in equity against the wording of a contract. In principle, the only excuse for non-performance of the contract is force majeure. The doctrine ofimpr¿½visionhas not been adopted by French courts.
Article 1142 of the French Civil Code stipulates that any obligation to do, or not to do, is dissolved by damages whenever the debtor does not execute the obligation. Article 1148, however, specifies that damages are not due in the case of force majeure. While courts have applied those Articles strictly, some change and more flexibility is noticeable in recent case law. Although courts do not apply the doctrine ofimpr¿½vision, they have not explicitly rejected it.
The application of Article 1148 requires four conditions to be fulfilled simultaneously:
- the event is “irresistible” (this clearly distinguishes the force majeure fromimpr¿½vision):
- the event must be unforeseeable:
- the event is to be an outside one: The failure of suppliers or subcontractors or associates is no excuse for the contractor:
- the debtor is not at fault: The event should be unavoidable and absolutely beyond the control of the debtor.
“Article 1148, in recognizing that a contract can be discharged due to force majeure, is not mandatory law. Parties are free to give their definition to force majeure events and the judge has to respect such definition.”
As the roots of the classical concept of force majeure lie in the Code Napol¿½on, this concept and the present approach to the problem of changed circumstances in France, correspond widely. A greater degree of flexibility in the latter has only been noted recently. The doctrine ofimpr¿½visionis the counterpart of the concept of hardship. The former, however, is not part of French law.
The German approach to the problem is rather flexible. Under German law, the rulepacta sunt servandais certainly not adhered to anymore in the strictest sense. This is not surprising in a country where, after World War I, the value of the items on the menu in a restaurant could change between the placing of the order and the arrival of the bill.
As a general rule, section 275 of the B¿½rgerliches Gesetzbuch discharges the debtor of his obligation if, after the conclusion of the contract, its performance was rendered impossible for reasons other than negligence, his own fault, or the negligence of his employees. The impossibility of performance (“Unm¿½glichkeit”) can be of a physical or legal nature. The performance may still be possible at a later time without unreasonable damage to the other party.
As a consequence of World War I, some judges and legal scholars began advocating the doctrine ofUnm¿½glichkeitfor application to economic impossibility. According to such experts, the debtor cannot be forced to comply with efforts or sacrifices which are beyond what parties reasonably envisaged in good faith. This doctrine is called “Opfergrenze.”
“The doctrine ofOpfergrenzeis a suitable stepping stone to the famous German doctrine of theWegfall der Gesch¿½ftsgrundlage. According to the latter doctrine, every contract has a basic aim, emanating from a basic intention of the parties, which cannot be achieved or realised in the absence of an existing environment, e.g. the prevailing economic and social order, the value of the currency, normal political conditions, etc. This definition of theGesch¿½ftsgrundlagebears close resemblance to therebus sic stantibus doctrine in international public law treaties.”
A line should be drawn between the so-called “erg¿½nzende Vertragsauslegung” (an interpretation of the contract which fills gaps) and theGesch¿½ftsgrundlagenlehre.According to the former, which requires a gap in the contract, the function of the judge is to complete the contract, whereby he should give an interpretation of what the parties actually would have wanted if a given event had been contemplated. According to theGesch¿½ftsgrundlagenlehre, the judge is not only allowed to complete a contract, but depending on the object of the contract, the judge can also change its terms or terminate it.
There is a little difference – and if so, not an essential difference – between the reasoning in the classical force majeure concept and the German reasoning in theUnm¿½glichkeit. Furthermore, the doctrine of theWegfall der Gesch¿½ftsgrundlage, aiming at an adaptation of the contract, is very similar to the concept of hardship.
5. South Africa
Until 1919, there was a general assumption that . . . no difference between South African law and English law on the effect of supervening impossibility. The English approach was adopted in a number of cases until the case ofPeters, Flamman andCo v. Kokstad Municipality was decided. According to this case, “if a person is prevented from performing his contract byvis majororcasus fortuitus. . . he is discharged from liability.”
In applying the principle that supervening impossibility discharges the contract, impossibility must be given the same meaning as when initial impossibility is under consideration, i.e., the impossibility must be absolute (as opposed to probable and relative) and it must not be the fault of either party. Most important is the fact that, ifvis majororcasus fortuitushas made it uneconomical for a party to carry out its obligations, it does not mean that it has become impossible. Additionally, sincePeters,Flamman and Co.there is no room in South African law for the English doctrine of frustration.
The decision in the recent case ofKok v. Osborne and Another, however, could be a first step toward recognition of the concept of commercial impossibility in South African law. The plaintiff in this case (Mrs. Kok) entered into a contract of sale as the buyer . . . wrongly assumed that the seller had already been paid by a third person. The court held that the contract between the litigants hinged on the assumption that the defendant indeed had been paid, which in fact did not happen, and that the contract failed due to supervening impossibility of performance. In this case, the court’s opintion was that South African law recognises commercial impracticability as a form of supervening impossibility as does the English.
This decision, however, has been heavily criticised by commentators for different reasons. As a result, the doctrine of frustration under the English law is not a recognised part of South African law. Moreover, it is properly stated that supervening impossibility is not applicable in the present case. For these reasons, it is not likely that the case ofKok v. Osborne and Anotherconstitutes the starting point for a change in the South African approach to the problem of changing circumstances.
Thus, one can conclude that the South African approach corresponds with the concept of force majeure. Situations of hardship do not discharge a party of its liability.
ARTICLE 79 CISG
Article 79 is the provision of the CISG, that deals with situations of changed circumstances. More precisely, it deals with the circumstances in which the buyer or seller may be excused from performance of his contractual obligations because of an extraneous event that is judged sufficiently important to warrant the excuse. This is a situation which is referred to as frustration, force majeure orWegfall der Gesch¿½ftsgrundlagein different legal systems.
In subsequent chapters the legislative history of Article 79 and its significance for international trade will be outlined. Its contents, scope of application, and legal effect will also be analysed and evaluated.
A. The significance of the CISG for international sales transactions
Never before has the increase in international commerce been as significant as it has been during recent decades. Many difficulties occur in the context of an international sale of goods as a consequence of the considerable differences in the national rules governing the law of sales. Thus, the expanding volume of international sales requires a common understanding of the legal rights and duties among partners to an international transaction.
The CISG is understood as a modern uniform substitute for the wide array of foreign legal systems. It is based on the Uniform Law for the International Sale of Goods (ULIS) and the Uniform Law on the Formation of Contracts for the International Sale of Goods (ULF), drafted by the “Rome Institute.” These two Conventions had a rather limited success; only nine countries have become members. The United Nations Commission on International Trade Law (UNCITRAL), therefore, in a further attempt to unify the law governing the international sale of goods, prepared the Draft Convention on Contract for the International Sale of Goods. This was finalised at a diplomatic conference in Vienna in 1980 and entered into force in 1988.
Nations are now ratifying or acceding to this Convention at a pace comparable to that of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards when it was promulgated. The latter is said to be the most successful instance of international legislation in the history of commercial law. The CISG harmonised interests and ideas of different legal systems and of countries on different levels of economic development. Thus, a text that is suited for implementation in civil law countries and common law countries and for economies that are developed and those which are developing.
According to Article 1, the Convention applies to international contracts for the sale of goods (if the parties have not rejected its application in their contract – Article 6) when the States where the parties have their places of business, are in different contracting states, or the rules of private international law lead to the application of the law of a Contracting State. As more than fifty countries have already enacted the Convention, among them major trading nations like the United States, Germany, France, or China, the Convention can apply to a large number of transactions. This number will continue to increase with the accession of further countries to the CISG. Only ten years after entering into force, the Convention can already be considered a success. Its significance for international sales transactions will increase in future years.
B. Legislative history of Article 79
1. The role of legislative history
As previously discussed, the CISG was created to free international commerce from a babel of diverse domestic legal systems. The ultimate goal of the Convention is the uniform application of the uniform rules.
The Convention will often be applied by tribunals (judges or arbitrators) who are only intimately familiar with their own domestic law. These tribunals will be subject to a natural tendency to read the international rules in the light of the legal ideas of those specific systems. In order to control the damage, there will be long-range correctives through international critique of questionable interpretations; to this end measures have been taken for the collection and publication of caselaw produced under the Convention, e.g., CLOUT (Case Law On UNCITRAL Texts). These measures, however, take time to become effective. Fortunately, there need not be a delay in using the legislative history, which sets out the evolution of the uniform law, to counteract the tendency to view the Convention through the lenses of domestic law. The Convention’s legislative history provides an international reference point in applying the uniform international law, and its record clarifies the purpose and intent of the Convention’s words.
2. The evolution of Article 79
Article 79 is a revised version of the exemption clause in ULIS (Article 74). Its development, as a part of the CISG, went through three stages: (1) The UNCITRAL Working Group (1970-1977); (2) Review by the full Commission (1977-1978); (3) The Diplomatic Conference (1980).
Article 74 ULIS was criticised during the discussions of the Working Group. The clause was thought to make it too easy for the promisor to excuse his non-performance of the contract. Grounds for relief were not only physical or legal impossibility, or circumstances which fundamentally altered the character of the performance owed, but the provision could also apply to situations where performance had unexpectedly been made more difficult. Several members of the Working Group were, therefore, in favour of restricting the grounds for relief and making them more objective. The Working Group set up a drafting party, but it could not agree on a revised wording. It submitted a draft which was provisionally adopted by the drafting party (Alternative A) and an alternative proposal of the Norwegian observer (Alternative B).
Following a study by the British delegate, the Working Group adopted a version which largely followed Alternative A. This based the promisor’s liability on fault, but transferred the basic concept of the “impediment” taken from Alternative B into the first paragraph. The version was adopted as Article 50 in the 1976 Geneva Draft.
In reformulating the grounds for exemption in Article 51 of the 1977 Vienna Draft, the former Article 50, the requirement of the promisor not being at fault was abandoned and replaced by an objective test of the “impediment beyond control.” The 1978 New York Draft adopted Article 51 of the Vienna Draft relatively unchanged as Article 65.
At the Vienna Conference, the Norwegian delegation proposed that paragraph (3) be supplemented by stating that if a temporary impediment ceased and the circumstances had radically changed to such an extent that it would clearly be unreasonable to continue to hold the promisor to his obligation, he should be released from that obligation. It was, however, argued that such an extension would introduce theth¿½orie de l’impr¿½visioninto the Convention, and the proposal was therefore rejected. There was, nevertheless, agreement that the limitation in paragraph (3) should be deleted, i.e., that an exemption was “only” for the period during which the impediment existed.
Contents of Article 79 CISG
The meaning and purpose of the different provisions of Article 79 will now be considered in more detail.
1. The general rule – paragraph (1)
Paragraph (1) sets out the conditions under which a party is not liable for a failure to perform any of his obligations. The expression “failure to perform” does not specify the nature of the non-performance. Thus, the scope of this expression has to be analysed first.
a. Failure to perform contractual obligations
The term “failure to perform” must be considered here in the broadest sense of the word. Accordingly, the non-performance may be total or partial, delayed or defective. Article 79 refers to any obligation, no matter which party is concerned. Thus, the buyer and the seller are subject to the same conditions. The obligation to deliver conforming goods is also within the scope of Article 79.
The text is silent on the point of the time of the impediment’s occurrence. Therefore, the question arises as to whether Article 79 applies in situations where the impediment existed at the time of the conclusion of the contract and was unknown to both parties. The Secretariat Commentary on the 1978 Draft affirms, without justifying its position, that Article 79 applies to this case. National laws often provide, . . . contracts regarding impossible performances are void, some authors believe that because of Article 4(a), domestic law has to be applied so that the Convention becomes irrelevant in this context. In this case, however, it can be said that domestic laws which accord legal recourse in situations where a party errs about the goods to be delivered would not apply under the Convention. This applies in instances in which these problems are specifically and conclusively regulated by the Convention, as is the case in Article 79.
Thus, Article 79, in its general wording, applies to non-performances that may have occurred at any time.
b. Conditions for exemption
Three elements must be proved by a non-performing party who seeks to establish that it is not liable for failure to perform:
- The failure was due to an impediment beyond his control;
- the impediment was reasonably unforeseeable at the time of the conclusion of the contract; and
- the impediment was reasonably impossible to overcome.
These elements constitute the traditional components of force majeure.
(1) Impediment beyond control
For an exemption to be granted, the non-performance of the contract must be due to an “impediment.” Article 74(1) ULIS used the word “circumstances.” “By adopting the word “impediment” the Vienna Conference’s aim was at emphasizing the objective nature of the hindrance rather than its personal aspect.” This wording, however, is very general and the actual meaning of the term “impediment” is unclear. This causes problems in determining the scope of the exemption provided by Article 79. These problems, however, will be dealt with in a later chapter.
In requiring that the impediment must be beyond the control of the party concerned, the scope of the latter’s risk is determined. The question of fault is not involved here since this concept has been set aside by the Convention. Within the control of the seller, for example, are all those factors which are connected with an orderly organisation of his manufacturing and/or procurement process, as are the personnel’s qualifications, the technical equipment and the disposition of the required financial means to ensure manufacture and procurement. In the case of generic goods, the seller always bears the risk of procuring the goods. Other goods may be obtained to replace those that are lost.
(2) Unforeseeability of the impediment
The requirement that the impediment must be reasonably unforeseeable is consistent with the basic idea that if the event were foreseeable, the defaulting party should be considered as having assumed the risk of its realisation. “Foreseeability should not only relate to the impediment per se, but also to the time of its occurrence. The closure of the Suez Canal was, for example, foreseeable in the more or less distant future.”
Everything regarding foreseeability, however, is a matter of measure, and it seems difficult to provide more details in a general text.
(3) Reasonably impossible to avoid or overcome
The parties are under an obligation to counteract the impediments. First, disturbances must be avoided. In order to achieve this, measures need to be taken against impediments which are generally looming. Second, if a disturbance has already revealed itself, it has to be overcome as quickly as possible; to overcome means to take the necessary steps to preclude the consequences of the impediment. The basis of reference is what can reasonably be expected from the party concerned, and that is what is customary, or what similar individuals would do in a similar situation. This criterion is, however, rather vague, and it will often be difficult to distinguish between what is possible and what is impossible to overcome. The issue raises the question of the distinction between impossibility andimpr¿½visionor hardship and whether cases of the latter fall within the scope of Article 79. This question is probably the most discussed problem in the context of Article 79 and is of major significance for this paper. Therefore, it will be considered separately in another chapter.
2. Non-performance by a third person – paragraph (2)
The third person must be someone who has been engaged to perform the whole or a part of the contract. It does not include suppliers of the goods or of raw materials to the seller. There must be an “organic link” between the main contract and the sub-contract.
3. Temporary impediment – paragraph (3)
Article 79(3) deals with an impediment for a limited time, but makes no provision as to an impediment affecting part of the contract. Unlike some legal systems, Article 79 does not speak of nullity of “the contract” but instead asserts that a party is not liable for failure to perform “any” of its “obligations,” – language that permits exemption to the extent that the impediment applies.
Article 51(1) reflects a policy that is consistent with this result: “(1) If the seller delivers only part of the goods . . . articles 46-50 (provisions on remedies for breach) apply in respect or the part that is missing. . . .”
4. Duty to notify – paragraph (4)
In the case of a failure of notification, it should be noted that the damages for which the non-performing party is liable are only those arising out of the failure of the other party to have received the notice, and not those arising out of the non-performance.
5. Legal effect of the exemption – paragraph (5)
Paragraph (5) restrains the effects of the exemption to one remedy alone and reserves to the party who did not receive the agreed performance all of its remedies except damages. These remedies include the right to reduce price (Article 50), the right to compel performance (Articles 46 and 62), the right to avoid the contract (Articles 49 and 64) and the right to collect interest as separate from damages (Article 78).
It could be argued that paragraph (5) entails unrealistic results. It would allow an action for specific performance in a case where the goods are destroyed and thus, the performance is physically impossible. A German proposal to extinguish the obligor’s obligation to perform if the grounds for exemption existed was, however, rejected at the Vienna Conference. The foremost reason for the rejection was the fear that a release from the obligation to perform could also extinguish collateral rights and secondary claims such as interest. It was also argued that, in cases where obligations are physically impossible to fulfill, the domestic legal doctrine ofimpossibilium nulla est obligatio(applicable according to Article 28) would generally prevent a demand for performance anyway. The general belief expressed at the Vienna Conference that judgment for a physically impossible performance would neither be sought nor obtained should lead to a reasonable limitation of Article 79(5).
Problems concerning Article 79 – are situations of hardship covered?
There is no rule contained in the CISG that specifically refers to situations, where as a result of radically changed circumstances, the performance of one of the parties has become much more onerous and difficult. This problem, therefore, has to be considered in the context of Article 79. As already stated, the question of whether situations of hardship are covered and provided for by Article 79 is probably the most discussed problem concerning Article 79. Ascertaining how parties drafting their contracts should respond to the applicability of the CISG, and Article 79, is also of major significance for this paper. The problem will now be analysed.
1. Direct reference to domestic laws
The Convention has developed a system of its own with regard to impediments, which in fact result from a slow maturation process that began with ULIS. “The Convention’s autonomy, illustrated by the lack of reference to accepted wording and concepts of domestic laws (force majeure, frustration, impracticability,Wegfall der Gesch¿½ftsgrundlage), renders the interpretation of Article 79 extremely difficult because one cannot resort to these laws as a guide.”
Many commentators, however, state that Article 79 is “vague or imprecise” and contains “elastic words” that will be read in the context of each system’s view. It is said that the general wording of Article 79, which makes use of phrases like “due to an impediment” and “not reasonably expected to overcome,” leaves room for judicial interpretation. The judge or arbitrator will have a natural tendency to refer to similar concepts in his own law. Because Article 79 is a “chameleon-like” example of “superficial harmony,” its character permits it to take on that meaning which best conforms to the reader’s background. For example, an English court using the doctrine of frustration could apply this extensive approach without further consideration to Article 79 – and cover both impossibility and unforeseen but surmountable contingencies. A French court would not follow suit.
The reference to domestic laws in interpreting Article 79 jeopardises uniformity in the application of the Convention. This uniformity is the Convention’s major goal, as set out in Article 7(1).
2. Reference to domestic laws according to Article 7(2)
The fact that Article 79 presents problems of application might tempt one to consider solving that problem by applying Article 7(2). Article 7(2) permits recourse to the applicable law by virtue of the rules of private international law when questions are not expressly settled by the CISG. The problem of hardship could thus be regulated by rules of domestic law if there was a gap in the CISG regarding the promisor’s invocation of radically changed circumstances, making its performance more onerous.
The history of Article 79, however, rules out the assumption of the existence of such a gap. Thus, UNCITRAL in its preparation of the 1977 “Sales” Draft, proposed that the following provision be added:
“If, as a result of special events which occurred after the conclusion of the contract and which could not have been foreseen by the parties, the performance of its stipulations results in excessive difficulties or threatens either party with considerable damage, any party so affected has a right to claim adequate amendment or its termination.”
In support of this proposal, it was stated that one of the most important problems for parties to a contract of sale of goods was the problem of changed circumstances which could not have been foreseen by the parties at the time of the conclusion of the contract. These changes could result in excessive difficulties for one of the parties. The committee, however, did not retain this proposal. Furthermore, a Norwegian proposal submitted at the Vienna Conference was rejected because it was feared that theth¿½orie de l’impr¿½visionwould be introduced into the CISG by the suggested alteration.
The problem of hardship has thus been considered during the drafting process of Article 79, but a provision which specifically dealing with it has been deliberately omitted from the CISG. The history of Article 79 excludes the possibility that there is an unstated hardship in the Convention. Article 79’s purpose of establishing definite limits as to a promisor’s responsibility for breach of contract supports this conclusion. Resort to domestic laws is precluded by Article 7(2). If the domestic law applicable under conflicts rules were applied to fill a supposed gap, there would be a danger of the CISG’s liability system “bursting.” This is due to the fact that domestic legal systems differ greatly from each other in regard to rules of hardship orimpr¿½vision.
3. Comparative law approach
To avoid the problem of undermining this objective of the CISG, it has been suggested that a comparative law approach be applied in interpreting Article 79. This approach seeks guidance from the prevailing patterns and trends of modern domestic law insofar as they are consistent with the necessities of international trade. The approach is supported by the fact that comparative studies, stimulated in part by the Convention, are proceeding apace. However, the idea of a comparative law approach is subject to criticism. Although it may prove rewarding in other circumstances, it would yield only limited results in the present case since no specific overall trend may be traced.
4. Contract practices as a guide
Contract provisions on impediments to performance have special value because impediments arise in a countless variety of circumstances. Contracts can and do take account of the conditions and needs presented by various types of transactions. Here the contractual practice can help to obtain ideas for the interpretation of the grounds for exemption of Article 79. Clauses, model contracts, and the like, which have prevailed in a certain context, can play a role in this regard. Principles of efficiency and fairness can best be distilled from contracts prepared with the cooperation of members from all the different interest groups involved. For example, the UNIDROIT Principles of International Commercial Contracts, which contain force majeure and hardship clauses state in their Preamble (Purpose of the Principles) that the Principles may be used to interpret or supplement international uniform law instruments. The role of the UNIDROIT Principles in this regard will be dealt with in a later chapter.
5. History of Article 79 as a guide
The drafting history of Article 79 reveals some interpretative insight into the problem discussed here. The drafters of the forerunner of Article 79 CISG, Article 74 ULIS, have already faced the dilemma of which obligations to excuse from non-performance. At the 1964 Hague Conference, the controversy centered on the choice between the terms “circumstances” and “obstacles” as the triggering events for excuse. The German delegation urged the use of the term “circumstances” because it feared that the use of “obstacle” might refer only to supervening and external events. This is in contrast to the more personal issue regarding the seller’s due care or fault and might bar excuse based on an extreme and onerous change in economic circumstances.
As has been shown, Article 74 ULIS had been criticised during the discussions of the UNCITRAL Working Group. Because the clause could also apply to situations where performance had unexpectedly been made more difficult, it was thought to make it too easy for the promisor to excuse his non-performance of the contract. Therefore, wording of Article 74 was revised and the term “circumstances” was replaced by “impediments.” This illustrates the intention to narrow the scope of the exemption and to introduce an objective and more certain criterion. Thus, Article 79 CISG represents a retreat from the more lenient grounds for excuse in ULIS.
A Norwegian proposal at the Vienna Conference was rejected because it was feared that the suggested amendment would introduce the doctrine ofimpr¿½visioninto the CISG. This fact also shows that the drafters of Article 79 intended to exclude from the scope of this provision cases where performance merely became more difficult.
There was agreement at the Vienna Convention, however, that the limitation in paragraph (3) should be deleted, i.e., that an exemption was “only” for the period during which the impediment existed. This agreement can be interpreted as indicating that after a temporary impediment has ceased, a final exemption for the promisor on account of a change in circumstances cannot be ruled out.
6. Wording of Article 79
The legislative history of Article 79 indicates that the promisor cannot claim relief on the ground that performance has become unforeseeably more difficult or unprofitable. The majority of commentators, however, want to allow those changes in circumstances to be seen as impediments in serious cases. According to some of these authors, this is a natural consequence of the literal interpretation of the provision of Article 79. The issue here is the obligation to avoid and/or overcome the impediment. If one takes this wording literally and applies it to the main case of changed circumstances, i.e., to the changes in the ratio between performance and counter-performance, it has to be noted that the subsumption is not actually that extraordinary.
The insurmountable character of the impediment, however, is defined rather strictly even though it is subject to the requirement of reasonableness. “The borderline between impracticability and a reasonably insurmountable impediment is, of course, uncertain.” The application of Article 79 to unanticipated economic difficulties should be consistent with the general principles applicable to this provision:
- Exemption is confined to barriers to performance (i.e., delivery or payment);
- An impediment to performance may result from general economic difficulties and dislocations only if they constitute a barrier to performance that is comparable to other types of exempting causes.
Thus, the CISG is said to refer to a more flexible standard than that of traditional force majeure, but it is undoubtedly stricter than frustration or hardship.
7. The principle of good faith as a basis for exemption
Another approach to the problem of an extreme and onerous change in circumstances is to base exemption in those cases on the principle of good faith, as stated in Article 7(1) CISG. This approach is taken mainly by German commentators who refer to cases ofimpr¿½visionor great difficulty to perform as “economic impossibility” (wirtschaftliche Unm¿½glichkeit).
In the event of a subsequent, unforeseeable impediment to performance as a result of a material change in economic conditions, there must be a “limit of sacrifice” (Opfergrenze). Beyond this, in view of the severe economic disadvantages involved, the promisor can no longer be expected to perform the contract. Some authors base this result on Article 79 in connection with Article 7(1). Others, taking an outsider position and denying that economic impossibility constitutes an impediment in the meaning of Article 79, find it purely through the requirement that good faith in international transactions should be promoted.
In the latter case, renegotiation of the contract may be allowed in extreme situations. This position, however, has rightly been heavily criticised: The principle of good faith must not be used to bypass explicit provisions of the Convention particularly Article 79(5), which states the legal effects of the exemption. Furthermore, the notion of good faith is of practically no avail to the judge. If it were to be regarded as the legal basis of the theory ofimpr¿½visionin international sales, harmony would be jeopardised and the aim of the Convention, as stated in Article 7(1), would not be attained.
8. Case law
Very little case law on Article 79 exists. In a 1989 case involving an Egyptian buyer and a Yugoslavian seller, an ICC arbitral tribunal, ruled that a 13% rise in the world market price of steel was neither sudden, substantial, nor unforeseeable, and would not exempt the seller from his obligation to perform under Article 79. In a Russian arbitral tribunal case, a seller claimed that he should be discharged from liability because the manufacturer of the contracted for goods refused to supply them. The tribunal held that the seller should bear liability for failure to fulfill his obligation because he was unable to establish that he could not have been expected to take that obstacle into account, or to avoid or overcome the obstacle or its consequences.
a. Nuova Fucinati S.p.A. v. Fondmetall Int’l A.B.
There is only one case that expressly deals with the question of whether instances of hardship fall within the scope of Article 79. This is the decision of the Italian Tribunale Civile di Monza in the caseNuova Fucinati S.p.A. v. Fondmetall International A.B. An Italian seller of metal (Nuova Fucinati) sought to be excused from his sales contract with a Swedish buyer (Fondmetall Int’l) on the grounds of hardship. In terms of the February 3, 1988 contract, the seller was to deliver 1,000 tons of ironchrome. The contract permitted the buyer to choose a delivery date between March 20, 1988 and April 10, 1988.
Between the date the contract was entered into and the date selected by the buyer for delivery, the price of the ironchrome increased by almost 30%. Apparently, the contract did not contain a clause specifically providing for excuse of performance in cases of force majeure. At a hearing before the court, the seller argued that the contract should be avoided because of “supervening excessive onerousness” caused by the market price increase.
The court voided the contract because of the seller’s non-performance, and rejected the seller’s request for dissolution on the basis of supervening excessive onerousness. The court held that the CISG did not apply in this case. The court concluded that even if Article 79 had applied, it only provided release from a duty made impossible by a supervening impediment, similar to the rule in Article 1463 of the Italian Civil Code. According to the court, Article 79 – in contrast to Article 1467 of the Civil Code – does not seem to contemplate the remedy of dissolution of contract for supervening excessive onerousness.
The distinction between “impossible” and “excessively onerous” performance is a crucial one in the court’s reasoning because it highlights the important role of the structure of the Italian Civil Code in the outcome of the case. From the court’s first mentioning of Article 79 CISG, Italian domestic law was used as a frame of reference for deciding the meaning of an “impediment” to performance. Even if the court had found that the CISG did apply to the dispute at hand, it would have read the “impediment” term as meaning “impossible” – which is suggested by the Civil Code.
This case, which excludes situations of hardship from the scope of application of Article 79, illustrates the aforementioned danger that judges interpreting Article 79 would refer to similar concepts in their own law.
The majority of commentators rightly want to allow for changes in circumstances, those making performance more expensive or difficult, to be seen as impediments in serious cases. Although the reasoning differs, there is evidence that the barrier evoked by the use of the term “impediment” is not limited to physical or legal bars to performance.
Despite the fact that Article 79’s “impediment” connotes a barrier that prevents performance, it refers to a more flexible standard than force majeure. It is, however, not evident how insurmountable the standard should be in practice. There may be a nuance between great difficulty of performance and absolute impossibility. Here, a case-by-case analysis is required. Article 79 is a rather young provision, and there is very little case law dealing with it. In this absence of an “acquired patina of legal meaning”, it is probable that elastic terms like “due to an impediment” will be read in the context of each system’s view of the limits within which an excuse of that kind should be admitted.
The discussion shows that at present it cannot be determined with sufficient certainty how the issue of radically changed circumstances, where the performance of one of the parties has become much more onerous and difficult, can be decided on the basis of the CISG. Furthermore, the appropriate legal remedy in such cases of hardship orimpr¿½visionis principally the right to renegotiate the contract and to adapt it to the changed circumstances. The adaptation of the contract by the judge, however, is not expressly allowed by the CISG, and must therefore be regarded as impossible.
In light of Article 6 contracting parties are urgently recommended to include in their contracts a provision which defines impediments and excuses and the consequences thereof, in the manner desired by the parties.
FORCE MAJEURE AND HARDSHIP CLAUSES
The CISG was drafted in general terms to avoid excessive detail and certain controversial issues as shown in regard to Article 79. Detailed attention to relevant issues in the contract itself is highly recommended. Under the CISG, the contract is the important document or, as it has been put, the dominant theme of the CISG is the role of the contract made by the parties.
Force majeure and hardship clauses, frequently introduced into contracts for international sales transactions, deal with situations of changed circumstances. In these clauses, the contracting parties define impediments, excuses, and the consequences thereof. The sphere of operation and the purpose of force majeure and hardship clauses in international contracts will now be considered in more detail.
A. Hardship clauses
Some legal systems have not accepted hardship as an excuse for non-performance. As a result of this fact and the unwillingness of courts and legislatures in many countries to assist parties in modifying their contracts to fit fundamentally changed circumstances, hardship clauses have been introduced into these contracts. The CISG has not resolved the existing problems. Hardship clauses may, therefore, be highly desirable in cases where the CISG applies.
Hardship clauses organise the revision of the contract whenever a change of circumstances significantly modifies the economy of the contract. They apply to situations of changed circumstances in which the parties intend not to dissolve the contract but to continue it. Sometimes, the parties are compelled by economic circumstances to consider the continuation rather than the dissolution of their contract, in spite of changed circumstances. The construction of a factory, for example, has to be completed, or the supply of crude oil or natural gas has to be continued in spite of those changes.
Hardship clauses always consist of two main parts. The first part of the clause defines the hypothesis when the clause applies. The second part deals with the effects of hardship, i.e., what happens whenever the hypothesis is realised.
1. The hypothesis
The hypothesis of a hardship clause has two aspects: the clause sets out the circumstances in which hardship exists; it then describes the consequences or effect of these circumstances on the parties to the contract.
Hardship clauses usually state that the circumstances at the time of the conclusion of the contract have changed. This change of circumstances must be serious or substantial and beyond the control of either party. Finally, the change must be entirely uncontemplated and unforeseeable. The wording of hardship clauses can be very broad and refer to “events” as the circumstances which are to be considered. Sometimes, the wording is more specific. For example, “monetary events,” or specific changes in environmental conditions are taken into account. In sum, it seems advisable to use broad wording, give a list of specific circumstances as examples, and insert the excluded circumstances.
The effect of the change in circumstances is that the contract is out of balance, leading to a substantial economic hardship. Here, some clauses set out the requirement that a party is prejudiced. This, however, seems too extensive. The use of more subjective criteria, such as “unfair” or “inequitable” should also be avoided due to their vagueness.
2. Effect of a hardship clause
Usually, hardship clauses provide for revision of the contract. Some clauses set out criteria for the revision of the contract. An example of such a clause is, “to restore the equilibrium between the parties as it was at the time of the conclusion of the contract.” A more subjective approach would be, for example, “with fairness” or “equitable adjustment.”
In a case where no agreement between the parties can be reached, hardship clauses provide for sanctions. The stipulation of revision of a contract is only useful if it is followed by a sanction that deals with the situation in which no agreement can reached. “A hardship clause without a sanction is hardly worth the paper on which it is written.” Sanctions are usually the termination of the contract or adaptation of the contract by a third person. In the latter case, provision can be made for the intervention of an arbitrator, an expert, or even a court.
B. Force majeure clauses
Force majeure clauses, often very detailed, are almost invariably included in international business contracts, irrespective of their proper or selected governing law. They only have relevance, however, if they differ from the doctrine of force majeure that would be applicable without the existence of such a clause.
Force majeure clauses are generally drafted in such a way as to offer a definition of the concept, followed by a non-exhaustive list of the events agreed upon by the parties as constituting force majeure. Furthermore, a duty of notification, obliging the affected party to give notice of the force majeure event, is often provided. Finally, force majeure clauses set out the legal effect of a force majeure situation.
1. Situations of force majeure
The prerequisites for a given event to constitute force majeure in international trade practice are less restrictive than in municipal law. Thus, in some modern clauses, events of force majeure are defined as events that do not necessarily render the contract performance impossible, but hamper the normal discharge of the contract obligation, or make it exorbitant from a commercial standpoint. An overlap with situations of hardship is evident here. Even the requirement of the unforeseeability of the event, always present in municipal law, is sometimes relaxed in international trade practice or, as suggested by some authors, omitted entirely. The requirement of domestic law, however, that the force majeure events must not be attributable to the obligee and must be irresistible or beyond the control of the parties, is also contained in force majeure clauses in international contracts.
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