Force Majeure And Hardship: To What Extent Does Article 79 Of CISG Excuse Liability for Non Performance?


Force Majeure And Hardship: To What Extent Does Article 79 Of CISG Excuse Liability for Non Performance?

ABSTRACT: The fundamental underpinning of any International business contract is pacta sunt servanda, the assurances of the performances of the contract as agreed. However, circumstances are, when a supervening event, which was not within the contemplations of both parties at the time of concluding the contract, occurs to preclude a party from carrying out his assumed obligations under the contract. This fundamental change in circumstances has always been taken care of by the force majeure or hardship clause in a contract. With the coming into effect of the United Nations Convention on Contract for the Sale of Goods (CISG) and its being adopted as the choice of law regulating International business transactions on the sales of goods in modern time by parties, controversies have been stoked as to whether its Article 79 on changed circumstances incorporates the concepts of force majeure and hardship as a defence for non performance. It is the objective of this paper to determine whether Article 79 covers both concepts and examine the extent to which it will excuse liability in the event of non performance.

1.0 INTRODUCTION

The traditional fundamental underpinning of any business contract law is the principle of sanctity of contract or pacta sunt servanda-contract must be performed as agreed. This presupposes that parties to a contract are bound by their agreement and deemed to have foreseen events which could interfere with the equilibrium of the contract .As such, it presupposes that, a non performance by a party through changed circumstances beyond his control which may be unforeseen or unforeseeable by the parties at the time of signing the contract will not excuse him from liability .This principle is not only based on natural justice and economic requirements but also legal certainty and stability . However, this rigid and formalistic attitude to contract has in practice led to inequitable situations which are contrary to its objectives. In fact, the changed circumstances may have altered the foundation of the contract and affected the position of the parties, who acting as reasonable persons, would not have made the contract at all or would have made it differently had the changed situation been known to them.

Many legal systems have developed legal concepts to resolve the problem of changed circumstances in order to regulate the relationship of the parties optimally. Although, the adopted concepts are similar yet there are differences in the conditions in which they allow them as a defence to non performance. A fundamental difference in the concepts is engendered by the event the changed circumstances may constitute. The supervening event may be such that fundamentally alters the foundation of the contract and make its performance impossible either permanently or temporarily while on the other hand, it may only significantly disrupt the economics of the contract. The parties in the former situation may decide to invoke force majeure clause for the suspension or termination of the contract while the parties in the latter case may be desirous of continuing the contract but seek its adaptation to the changed circumstances through the invocation of the hardship clause.

At the international level especially in relation to international trade, the parties have devised the concepts of force majeure and hardship clauses to deal with the issue of changed circumstances in their contractual situations . Although, it has been observed that it is highly unlikely to have such radical change of circumstances in a short term contract for the sale of goods, the complicated structure of international trade contract coupled with the high level of uncertainty engendered by the political and the economic influences of the foreign countries involved raise the need to make provisions for situations when this principle of pacta sunt servanda can be derogated from .

With the coming into effect of the United Nations Convention on Contract for the Sale of Goods (CISG) and its being adopted as the choice of law regulating international business transactions on the sales of goods in modern time by parties, controversies have been stoked as to whether its Article 79 on changed circumstances incorporates the concepts of force majeure and hardship as a defence for non performance. It is the objective of this paper to determine whether Article 79 covers both concepts and examine the extent to which it will excuse liability in the event of non performance.

2.0 GENERAL OVERVIEW OF THE FORCE MAJEURE AND HARDSHIP CONCEPTS

A general overview of both concepts is considered in order to determine their evolution, meanings and the rationale for their adoptions. This is done with a view to examine the situations in which each will apply and the consequences of their invocation by the parties to a contract. The intention is to highlight their similarities and differences if any, for subsequent juxtaposition with the provisions of Article 79 of CISG. The aim is to establish whether the phrase ‘impediment beyond his control’ incorporates both the concepts of force majeure and hardship where the parties fail to insert the clauses and CISG is the governing law of the contract.

2.1 FORCE MAJEURE: MEANING AND RATIONALE
Force majeure is a legal concept which deals with events or occurrences, which none of the contracting parties is responsible for, that hindered or permanently made impossible the performance of a contractual undertaking. It is based on the two concepts of fault and exemption principles; the former being the feature of continental law while the latter is that of common law . Although, force majeure is not a feature of the common law but mostly that of the civil law, it escapes the issue of the conflict of law in its application because it is one of the risk allocation clauses that is commonly included in a commercial contract and thus its definition and extent of application relies solely on the clause providing for it in a contract .
Its modern origin is traceable to the French Civil Code of 1804 but its historical underpinning idea may be found in most families of law . Force majeure has been variously defined as circumstances outsides one’s control ; a superior force ; acts more than acts of God etc. However it is mainly seen as an occurrence or event which makes the performance of a contract impossible due to unforeseen events beyond the control of the parties . This event has been held not to consist of a situation where the price a party initially contracted to pay for goods is in excess of the price he had contracted to sell them.
All these attempts at defining force majeure are made in general terms, that is, force majeure occurs when the performance of a contract is impossible to be performed as agreed owing to unforeseen or unforeseeable circumstances beyond the power of the parties. Hence Puelinckx definition of force majeure after acknowledging the different treatment accorded the concept in different jurisdictions becomes instructive because it demonstrates the practical application of the concept. He posited thus,” 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.” This definition emphasizes the features of an event or occurrence that will constitute force majeure and that the event must be recognized by law as such.

Therefore force majeure applies in situations where the contract has become impossible or extremely difficult to be performed due to the supervening event. The impossibility could be temporary which may lead to suspension of the contract or permanent which will lead to the termination of the contract.

2.2 HARDSHIP: MEANING AND RATIONALE
The theory of hardship as a concept of law deals with situations where the performance of a contract is possible but owing to the radical change in the economics underpinning of the contract the performance has become burdensome and its continued performance will expose the affected party to undue hardship. Although the origin of the concept is traceable to the evolution of Roman law with its principle of rebus sic stantibus, its modern origin is attributable to the disruptions caused by the First World War on the basis of a French administrative court ruling in a dispute between a private power company and the City of Bordeaux, France . The concession contract granted to the company by the City to provide gas lighting became onerous to perform for the company because the coal price became triple as a result of the war. The court held that since the economic viability of the contract had been undermined by the insufficiency of the agreed fee for its execution due to the fundamental change in circumstances the company could not be required to perform the services. The court then went on to set out the conditions under which the defence of hardship will be allowed. The event that led to the fundamental change must be external to the parties, exceed all reasonable expectations and result in a profound unbalancing of the contract. The underlying element is unforseeability of the event. This why it is referred to as the theorie de l’imprevision in French and referred to as “hardship” in English.

However, the theory of hardship is normally appraised in the light of hardship clause being one of the risk allocation clauses inserted in international business agreements. This is due to the fact that some legal systems will not excuse liability for non performance on the basis of hardship and the reluctance of the courts and legislatures in many countries to help in adapting contracts to changed circumstances as a result of disruption of the contract economic equilibrium. Hence, hardship clauses usually set out the three elements to determine its existence. The first element is that the circumstances must be beyond the control of the parties and must not be induced by either of the parties. In addition they must be such that have fundamentally affected the contract and lastly the circumstances must be such that are not within the contemplation of the parties nor foreseeable by them.
In essence, hardship clauses are designed to allow the renegotiation of the contract between the parties in the event of a change of circumstances which have significantly altered the economic equilibrium of the contract. These clauses are only applicable in situations where the parties are desirous of continuing the contract in spite of the changed circumstances .Therefore, a hardship clause is directed at the adaptation of the contract to the new circumstances caused by the changed circumstances.

2.3 DO THEY DIFFER?
Hardship and force majeure as the two concepts of risk allocation in a contract have developed some parallelism. They are both designed as rules to deal with situations of changed circumstances or supervening contractual circumstances which have radically altered the complexion of an agreed contract. They are both exceptions to the cardinal canon of pacta sunt servanda and ameliorate its strictness .Yet, they differ. The differences between both concepts become accentuated when the situations they are to deal with are considered. Hardship deals with a situation where the performance of the affected party has become onerous and difficult normally in financial terms, but not impossible, while force majeure deals with a situation where the performance of the contractual undertaking of a party to the contract has become impossible even if it is temporary. In addition, the aims of the clauses also differ. Hardship clauses are inserted in order to allow the revision or renegotiation of the contract when performance becomes burdensome so that the contract will be adapted to the new situation. The parties are still desirous of executing the contract. Force majeure clause on the other hand is inserted to deal with a situation where the performance of the contract is impossible and the parties either seek the termination or the suspension of the contract .

3.0 ANALYSIS OF ARTICLE 79
Article 79 of the CISG covers the issue of changed circumstances in international Sales of Goods contract by using the term “impediments” to illustrate circumstances in which a party, be it the buyer or seller, can be excused for non performance of its assumed contractual undertaking under the contract. The Article deliberately avoids the use of the words force majeure and hardship neither does it make reference to any terms that can be culturally linked to any country. Its analysis becomes important in order to determine its scope, rationale and the legislative history. The contents will be highlighted for the purpose of doing a critique of the Article. This should lay the foundation for the answering of the question whether the article covers both force majeure and hardship where the contract for the Sale of Goods does not provide for them.

3.1 HISTORY OF ARTICLE 79
The fundamental objective of the CISG is to provide a uniform set of rules to govern the conduct of international trade and serve as a replacement for the multifarious foreign legal systems adorning the international plane. Hence, its departure from employing traditional commercial terms that are culturally linked to any country and deliberate effort to base it 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) so that it would avoid the defects contained in both which made them unpopular and present a uniformly accepted law. The legislative history of the convention is, thus, a significant and valuable aid to interpret the convention provisions because its record helps in identifying the purpose and the intention of drafters of the Convention .

It is therefore not surprising that Article 79 of CISG is an improvement of Article 74 of ULIS which was criticized for excusing non performance not only for physical or legal impossibility but also for situations performance had become more onerous or burdensome .The UNCITRAL Working Group on the drafting of the CISG decided to draft Article 79 in a stricter manner that would not provide relief for a party who has failed to perform simply because the performance has become unforeseeably more burdensome or unprofitable. At the Vienna conference where the debate was held the drafters rejected the Norwegian delegation proposal of supplementing paragraph (3) of Article 79 on the ground that it would allow commercial or economic hardship as a basis of claiming excuse for non performance under the CISG. The drafters chose the word ‘impediment’ after subjecting the Article to three stages of debates in order to define the extent of the promisor’s liability for non performance and that the Convention will only exempt liability for physical or legal impossibility and not for theories of imprevision or hardship that are based on changed circumstances .

3.2 THE HIGHLIGHTS OF THE CONTENTS
The contents of Article 79 are encapsulated in five (5) paragraphs and placed under the section captioned ‘exemption’. The wordings of the paragraphs show that they can be relied upon by either of the parties to the contract. The first paragraph articulates the conditions in which either of the parties will not be liable for failure to perform its contractual undertaking in a contract and places the burden of proof on the party relying on the exemption. For ease of reference and because the paragraph forms the fulcrum of the paper, it is reproduced below and the operative words are underlined by the writer:
“A party is not liable for failure to perform any of his obligation 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.”
The second paragraph provides for a situation where a party can still claim exemption from liability where the failure to perform is due to the failure of a third person who he has engaged to perform the whole or a part of the contract. The third paragraph deals with a situation where the impediment is a temporary one. The fourth paragraph provides for how the provision of the Article could become operative through notification while the fifth paragraph provides the extent to which the party who has not received performance may still seek other remedies in the Convention but not damages.
Paragraph (5) of the Article is now set out below since it is going to be a point of reference in later discussion on the extent to which Article79 excuses liability for non performance:
“Nothing in this Article prevents either party from exercising any right other than to
claim damages under this Convention.”

3.3 A CRITIQUE OF ARTICLE 79
Having set out the contents of the Article in 3.2 above, it becomes important to do a critique of its contents in order to determine the extent of the exemption provided in Article 79. For the exemption to be successfully relied upon the party must satisfy three stringent conditions as stipulated in the general rule in paragraph 1. However, a critique of the Article should of necessity start with the meaning of the phrase failure to perform contractual obligations. This phrase is given its widest definition and as such non performance could be total or partial, delayed or defective . Also, the use of the words any obligation reveals that the Article applies to both the seller and the buyers. Furthermore, the Article does not specify when the impediment would occur. This omission has raised some controversies; some writers have asserted that an impediment which is in existence at the time of concluding the contract would vitiate the validity of the contract. And since the Convention by virtue of its Article 4(a) does not deal with the issue of the validity of a contract, they reason that Article 79 does not cover impediments in operation before the conclusion of the contract which was unknown to the parties. This issue has been resolved by the Secretariat commentary on the 1978 drafts which confirms that Article 79 covers this .

The party who is relying on the Article to escape liability for non performance must satisfy three conditions. The first condition is that his failure to perform was due to an impediment beyond his control. The second condition is that the impediment is reasonably unforeseen by him at the time of signing the contract while the third condition is that it is reasonably impossible for him to avoid or overcome the impediment or its consequences. These conditions are mainly the requirements for force majeure. A critique of these conditions reveals that in an effort to maintain neutrality, the drafters of the CISG, in particular Article 79, threw some uncertainty into the extent of the exemption provided by the Article. The word impediment is unclear because it is based on the objective nature of the hindrance instead of its personal aspect which makes its too loose for a precise definition, hence, raising the issue of what it covers and what it does not. However, the requirement that the impediment must be beyond the control of the affected party imputes the presumption of knowledge of the trade in his favour. To Kessedjian any party to an international transaction by the provision is deemed to be a professional therefore matters in relation to efficient co ordination of his manufacturing and procurement process including transportation and analysis of the markets are deemed to be within his control. This precludes a party from claiming that a defect in production is an impediment beyond his control.

The impediment must be one which was reasonably unforeseeable by the party. It follows that it must not be within the contemplation of the party that the occurrence is likely at the time of concluding the contract, if it was, the party would be deemed to have assumed the risk of its eventuality. The third condition of reasonable impossibility of avoidance or overcoming of the impediments raises some fundamental issues which could question the adequacy of CISG to effectively take care of changed circumstances situations in a contract. For an impediment to be unavoidable that means it must be looming and certain efforts must have been made by the party to avoid or overcome it. The test will be what a reasonable man in his position will do to avoid or overcome the impediment. Although the reasonable man’s test is vague and subjective, the question will be asked that if the avoidance of the impediment will require substantial increase in the agreed price in the contract, will the party be liable for not taking this step? This will be considered in 3.4 below because his liability may depend on how far Article 79 accommodates the concept of hardship.

Article 79 (2) deals with non performance by a third party who has been engaged to perform the whole or part of the contract. The concerned party can only rely on Article 79 if there is a link between the contract and the sub contract. Although, this paragraph will not avail a seller whose suppliers of goods or raw materials have failed to perform.
The Article in its paragraph (3) deals with temporary impediment. It fails to stipulate the duration of time the impediment will be in operation to be considered as such and it also fails to provide for how the differences that might have occurred between the time of the contract suspension due to the impediment and its resumption will be reconciled. It also fails to address the issue of when the impediment affects part of the contract. Meanwhile, suggestions have been made that Article7 and its good faith requirements should be applied to adapt the contract to the new circumstances in order to maintain the initial equilibrium of the contract and Rimke has also opined that Article 51 on when sellers deliver parts of the goods and the remedies in Articles 46-50 should be construed to address the situation in which the impediment affects part of the contract. These are scholarly opinions which might not be acceptable by the parties.

Paragraph (4) imposes the duty of notification of the failure to perform on the affected party. Where he fails to give such notice the legal consequence is that he will only be liable to pay damages for the breach of non performance as to issuance of notice and not for non performance of the contract. The legal effects of the exemptions in Article 79 are contained in paragraph (5). The paragraph restricts the exemption granted to damages but allows the party who has not received performance to pursue other remedies in the Convention. The other remedies open to him are contained in Article 50 on the right to reduce price, Articles 46 and 62 on the remedy of specific performance, the right to terminate the contract in Articles 49 and 64 and Article 78 on the right to receive interest which is separate from damages. The practical implication of this paragraph is discussed in 3.5 below.

3.4 DOES ARTICLE 79 COVER FORCE MAJEURE
AND HARDSHIP?

The analysis of the Article done above reveals that force majeure is covered by the Article. This is reflected in the conditions laid down in paragraph 1 for a non performing party to comply with while claiming non liability for non performance. However, the legislative history of the CISG has revealed that the drafters did not want Article 79 to cover the concept of hardship. In some of the cases in relation to Article79 the arbitral tribunals have tried to avoid the issue of hardship by either ruling that the economic hardship is not sudden, substantial or unforeseeable and in another case that the impediment could have been taken into account. Even in Nuova Fucinati S.P.A v Fondmetall Int’l A.B, where the basis of dispute was whether hardship is covered by Article 79 the court held that Article 79 did not apply without giving reason for its non application.

3.5 EFFECT OF ARTICLE 79 ON NON PERFORMANCE
The legal effect of Article 79(5) on non performance only precludes the party who has not received performance from claiming damages but he can still exercise his other rights under the Convention. The interpretation of this provision naturally raises a question as to the extent to which the Article exempts the affected party from liability. However, the general consensus at the Vienna Conference that judgment should not be sought nor obtained for physically impossible performance would make for a reasonable limitation to the effect of the Article . Although, it is not expressly stated, a successful plea of Article 79 should extinguish liability for force majeure.

4.0 CONCLUSION
The CISG through Article 79 provides exemption for non performance of contractual undertaking occasioned by force majeure, that is, a situation in which performance is impossible. It does not provide exemption for hardship which is a change in circumstance that does not exclude performance but makes it burdensome or onerous such as economic impossibility or commercial impracticability. Yet, there is possibility of its occurrence in a sale of goods transaction. Scholars have argued that Article 79 can be expanded through Article 7 of the Convention which is on good faith to accommodate the concept of hardship. However, these are academic opinions that do not have binding legal effects.

It should be noted at this juncture that the CISG does not lay claim nor pretend to be a comprehensive legislation on international sale of goods, hence, its provision in Article 6 that parties are free to derogate or add supplemental Law to it in the regulation of their business. It is thus recommended that parties should take advantage of this provision by including hardship clause in their contract in order to avoid the risk of expensive and time consuming dispute that its occurrence might engender.

-By Babatunde Lot Ogungbamila

BIBLIOGRAPHY

1. PRIMARY SOURCES

STATUTES
The United Nations Convention on Contract for the Sale of Goods 1988

French Civil Code of1804

Uniform Law on the Formation of Contract for International Sales of Goods

Uniform Law for the International Sale of Goods

CASES
Brauer&co v. James Clark, [1952] W.N 422.

Case Law on UNCITRAL texts (Egypt v. Yugoslavia), International Comm. Arb. No. 6281(1989) available in http://cisgw3.law.pace.edu.

Gaz de Bordeaux Case.
Maktsoulis v Priestman & co 3[1925]1 K.B 681

Nuova Fucinati S.p.A v Fondmetall Int’l A.B

Trib.civil di Monza, 14 Jan. 1993 n.R.G.4267/88, available in http://cisgw3.law.pace.edu

2. SECONDARY SOURCES

2.1 Books

Honnold, J.O., Documentary History of the Uniform Law For International Sales 2(1989).
Honnold, J., Uniform Law for Sales Under the 1980 United Nations Convention, (2nd edition, 1991.

Kritzer, A. H, International Contract Manual-Guide to Practical Applications of the United Nations Convention on Contracts for the International Sale of Goods-Detailed Analysis 623
.
Tallon, D., in Commentary in International Sales Law-The 1980 Vienna Sales Convention 576 at 579(C.M. Bianca & M.J. Bonnell eds., 1987

2.2 Articles

Amkhan, A., Force Majeure and Impossibility of Performance in Arab Contract Law,(
Arab Law Quarterly V.16, no3, 1991).

Horn,N., Changes in Circumstances and the Revision of Contracts in Some European Laws and in International Law in Adaptation of Renegotiation of Contracts in International Trade and Finance,p.17(Horn.N., ed., London,Kluwer Law International, 1985).

Maskow, D., Hardship and Force Majeure, (AJCL, 1992)

Puelinckx, A.H., Frustration,Hardship,Force majeure, Imprevision, Wegfall der Geschaftsgrundlage, Unmoglichkeit, Changed Circumstances,( J.IA, 1986).

Schmitthoff, C. M., Hardship and Intervener Clauses, (J.B.L., 1980).

Smith, Impossibility of Performance as an excuse in French Law: the Doctrine of Force Majeure, (45 Yale Law Journal, 1936)

2.3 Other

Harrap’s Standard French and English Dictionary.

2.3.2 Internet Sources
Flambouras, D., GUIDE TO ARTICLE 79: Comparison with Principle of European Contract Law (PECL) at http://cisgw3.law.pace.edu/cisg/text/peclcomp79.html.(last visited on the 21 June,2007).

Fucci, F.R., Hardship and Changed Circumstances as Grounds for Adjustment or non performance of Contracts at http:/www.thelen.com/index.cfm?section=article&functions=viewarticleID=3165#top (last visited on the 20th June,2007).

Kessedjian, C., Competing Approaches to Force Majeure and Hardship at http://cisgw3.law.pace.edu/cisg/biblio/kessedjian.html (last visited on the 10/07/2007).

Rimke,J., Force majeure and Hardship: Application in International Trade Practice with Specific regard to the CISG and the UNIDROIT Principles of International Commercial Contracts, at http://www.cisg.law.pace.edu/cisg/biblio/rimke.html. last visited on the 10/07/2007.
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About Tope Adebayo LLP

Tope Adebayo LLP is a full-service Nigerian Law Firm with its head office in Lagos, registered as a Limited Liability Partnership under the Partnership Laws of Lagos State, to carry on the business of legal practice within Nigeria. We are also registered with the Corporate Affairs Commission (CAC) of Nigeria, the Securities and Exchange Commission (SEC) as a capital markets operator and the Financial Reporting Council of Nigeria (FRCN). Our professional services are comprehensively insured under a professional indemnity as a mark of our professional competence, dedication, and determination to always render bespoke legal services. View all posts by Tope Adebayo LLP

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