With Covid-19 on its rampant peak, it has turn the world upside down, once the flourishing GDPs, Profitable business, and companies whom all were enjoying their success, are now struggling to maintain their positions in the market and many of the world economies are daggering themselves to recover the COVID-19 economic crisis or are on the hardcore mode of trying to avoid the economic crisis in the country. Between all these international and nationwide travelling bans, cross-border trade restrain have severely affected the demand-supply chain, the cross border business transaction and contract are forced to get breached. The distress caused by Covid-19 has already affected the performance of the international sales contract. This article mainly focuses on a very important question i.e, are any relief from liability under the United Nations Convention on Contracts for the International Sale of Goods (CISG) in a situation where the buyer/seller breaches the contract by failing to deliver the goods due to COVID-19?
Before focusing on the issue, firstly, we have to understand under contract law, both are parties are bound by the principle of”pacta sunt servanda”.This principle implies that each party to a contract 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.
But herein comes the twist of contractual liability in international law. In international trade, however, 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.
Herein, then comes the concept Force Majeure plays a very important role in determining the validity of the discharge of either or both of the parties from the performance of the contract.
As per Article 7.1.7 of the UNIDROIT[i], Principles of International Commercial Contracts wherein, 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.
In more general, 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.
If we go onto the early interpretation of “Force Majeure”. As per Napoleon code, Force Majeure is the ‘act of god’ or ‘vis major’[ii]. But in the late 20th century, According to the English court’s interpretation of the words held that they have a more extensive meaning than “act of God” or “vis major”[iii].
A “force majeure” clause in a contract would typically include an exhaustive list of events such as acts of God, war, terrorism, earthquakes, hurricanes, governmental acts, explosions, fire, plagues or epidemics or a non-exhaustive list in which the parties simply describe what generally constitutes force majeure events and subsequently add ‘and other acts or events beyond the control of the parties’.
The primary focus of Force majeure is on to settle the problems resulting from non-performance either by suspension or termination.
The Contract for the International Sale of Goods
The CISG is understood as a modern uniform substitute for the wide line-up of foreign legal contractual systems[iv]. It is primarily based on the “Uniform Law for the International Sale of Goods (ULIS)[v]” and the “Uniform Law on the Formation of Contracts for the International Sale of Goods (ULF)[vi]”, which is drafted by the “Rome Institute”. Both of them convention has rather, a limited success.
In a new attempt with a motive to unify the law governing the international sale of goods, The “United Nations Commission on International Trade Law (UNCITRAL)”, therefore, prepared the Draft Convention on ‘Contract for the International Sale of Goods’. This was finalized at a diplomatic conference in Vienna in 1980 and entered into force in 1988[vii]. More than 100 States have ratified this Convention.
The essence of CISG is to harmonized 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[viii].
When Does the CISG Apply?[ix]
The CISG sets forth when a party can be excused from performance, would likely apply in supply contracts that meet each of the following criteria:
- The contract does not contain a force majeure clause, or the force majeure clause does not reference the CISG.
- The parties to the contract are from different countries (called “Contracting States”), each of which has adopted the CISG and made it applicable in its choice-of-law rules. The United States, China, European Union countries, and most countries of the world are the Contracting States. Note, that the CISG can sometimes apply to contracts between domestic corporations if their relevant places of business are in the different Contracting States.
- The contract is for the sale of goods, such as manufactured goods, raw materials, and commodities. But the CISG does not apply to contracts for services only, or sales of goods bought for personal use, or to sales of ships, aircraft, or electricity.
- The contract does not state that the CISG will not apply, even if it does not provide that the CISG applies.
For example, in a supply contract between two parties from different Contracting States that does not contain a force majeure provision and provides that New York law governs, but does not otherwise indicate that the CISG is disclaimed or inapplicable, then the CISG would likely apply. This is because the CISG is also part of the law of New York.
Force Majeure and Article 79 (1) of CISG
“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[x].”
Article 79(1) of the CISG provides for exemption from liability for damages if the damages were caused by an impediment beyond the control of the party claiming the exemption and restrict an undue or harsh result by limiting strict liability[xi].
Here, exemption means that a disgruntled party shall not be entitled to claim damages for breach of a contract. Article 79 of CISG provides only for the exemption from damages and leaves other claims unaffected.
3 elements must be proved by a non-performing party who seeks to establish that it is not liable for failure to perform:
(a)The failure was due to an impediment beyond his control;
(b) the impediment was reasonably unforeseeable at the time of the conclusion of the contract; and
(c) the impediment was reasonably impossible to overcome.
These elements constitute the traditional components of force majeure[xii]. This is a situation which is referred to as frustration, force majeure, or in different legal systems.
Force Majeure in Article 79 of the CISG during COVOD-19
To get an excuse from the performance of the contract and get the benefit of Force Majeure, the non-performing parties have to comply with (a) impediment beyond his control (b) reasonably unforeseeable (c) impossible to overcome the impediment.
If we applied all these conditions to the COVID-19 outbreak, therefore, a party would be excused if the COVID-19 outbreak prevented it from manufacturing and delivering the goods and that the party had no way to avoid or overcome that impediment.
But the question here arises is that as per Article 79 of CISG do not provide or state what an impediment is or what things qualify as an impediment. The term impediment is in itself is of exhaustive and broad nature.
Unfortunately, if we see the legal determination of what an impediment is from most of the cases if can’t figure out a clear cut meaning of impediment. For instance, what if the affected supplier was not forced by the government to close its factory, but did so voluntarily[xiii].
If we see the precedent case laws dealing in non- performance of the contract by parties in times of pandemic, there is precedent CISG case law from CIETAC concerning the SARS outbreak. In the said arbitral award dated 2005, SARS was not considered a force majeure event, the non-performing party was not excused from performance under Article 79 of the CISG, because SARS had happened a few months before the contract was signed [xiv].
If we take both the SARS outbreak and COVID-19 outbreak into consideration with Article 79(1) of CISG. We may be considered the Covid-19 outbreak as force majeure, but without any proper precedent or solid judicial findings, force majeure on non-performance of the contract have to decide on a case-to-case basis.
Whether the pandemic has added up to the case of force majeure or will affect the supply contractual relationship of the company, cannot be answered uniformly. As it depends on the agreements between the parties and the circumstances of the individual case.
For legal certainty and to avoid uncertainties if in case a supplier invokes a force majeure clause, it should be examined in each case whether a case of force majeure exists and what the legal consequences of the respective clause are, it must be examined whether the CISG or national law is applicable.it is advisable to include a corresponding force majeure clause in future contracts. Also, existing clauses should be adapted accordingly.
Although Article 79 provides a safe spot to sellers in international trade and protect the vulnerable from contractual imbalance. Therefore, if the party that has highly been impacted on the impairment should be given due relief; if the misdeed has been triggered by COVID-19, this should be a ground for force majeure.
- [i] The International Institute for the Unification of Private Law (UNIDROIT), https://www.unidroit.org/instruments/commercial-contracts/unidroit-principles-2010/404-chapter-7-non-performance-section-1-non-performance-in-general/1050-article-7-1-7-force.
- [ii] James Stroud’s Judicial Dictionary II 1008 (1986).
- [iii] Brauer and Co. v. James Clark, 1952 W.N. 422 (Eng. 1952).
- [iv] See Albert H. Kritzer, International Contract Manual – Guide to Practical Applications of the United Nations Convention on Contracts for the International Sale of Goods (1994).
- [v] See, Harry M. Flechtner, United Nations Convention on Contracts for the International Sale of Good, 1980, https://legal.un.org/avl/ha/ccisg/ccisg.html.
- [vi] Ibid
- [vii] See John O. Honnold, Documentary History of the Uniform Law For International Sales (1989), http://www.cisg.law.pace.edu/cisg/biblio/honnold.html.
- [viii] Ibid
- [ix] See Miller Canfield, Invoking Force Majeure for COVID-19 in International Supply Contracts,https://www.lexology.com/library/detail.aspx?g=7bc40f55-0b0e-470f-b8c6-36e2951a56b6.
- [x] United Nations Convention on Contracts for the International Sale of Goods, https://www.uncitral.org/pdf/english/texts/sales/cisg/V1056997-CISG-e-book.pdf.
- [xi] Ibid
- [xii] Supra at 4.
- [xiii] Supra at 7.
- [xiv] Gizem Alper, COVID-19: Force Majeure under CISG,https://www.jurist.org/commentary/2020/05/gizem-alper-force-majeure/#