Coronavirus has now become our new acknowledged truth affecting daily human lives over the past one year when we started witnessing its repercussions. While lives gradually are getting back on track, the pandemic may anticipatedly lead to some inevitable upheaval in some sectors, one of which is International commercial transactions.
All of the laws governing international commercial transactions provide for such an event, in their force majeure exception clause, as a valid exemption. However, issues emerge when exchanges are represented by the United Nations Convention on International Sales of Good (‘CISG’). As while CISG covers the initial calamity under the force majeure exception, the same does not include any consequential hardships that flow from such a calamity. (i.e. price rate increase of the commodities) Evidently, one of the essential reasons behind this is its reluctance towards commercial hardship exemption.
In this article, the author attempts to highlight this problem and the cause behind it. While in the concluding part the author has tried to give a suggestion which can assist with taking out this forthcoming disarray.
THE CISG- AN OVERVIEW
The CISG is a multinational treaty that aims to facilitate international trade. In effect since 1st January 1988, the CISG has been described as having, “the greatest influence on the law of worldwide trans-border commerce” including among non-Contracting States.
The importance of the CISG can be deduced from the fact that unless expressly excluded by the contracting states parties any transaction between them will always be governed by the CISG. In this light, even if an explicit reference is made to either of the contracting states’ domestic law as the parties’ choice of the law of a Contracting State will always be understood as a reference to the application of CISG itself.
ANALYSING THE PROBLEM
The covid-19 pandemic is an exemption under every law governing international commercial transactions, including the CISG . Furthermore, the CISG in the past has recognized such circumstances (i.e avian flu outbreak ) as a valid exemption, for instance in Macromax v Globex International Inc.
However, in other governing laws such as the Uniform Law on the International Sale of Goods (‘ULIS’), even the repercussions of the Covid-19 would be enough to provide an excuse, (i.e. price increase). On the contrary,under the CISG it would not be sufficient in certain scenarios. (discussed in the next sub-heading)
Article 79 (1) of the CISG provides ‘impediments’ in the occurrence of which parties would not be liable for the damages even if they failed to perform their obligations. Under this article five conditions have been prescribed fulfillment of which make any circumstance an impediment under the CISG. Such conditions are-
- There must be an impediment,
- That impediment should be beyond the control of the parties,
- It could not reasonably foresee at the time of the conclusion of the contract,
- The parties Could not have overcome or avoided the impediment,
- There must be a direct link between the impediment and non-performance of the contract.
The concerns arise when we read this provision in conjunction with Article 79 (2) of the CISG. Article 79(2) prescribes that a party will be exempted (under Article 79 (1)) for the non-performance or defective performance from other party if that considered as the ‘third party’.
Third-party as explained covers only those who are acting independently and are neither within the one party’s organizational sphere nor under his responsibility. However, about the suppliers it has been explicitly stated that they are not considered as the third party under the CISG. Here, it is important to note that under the CISG the commercial hardship has not been considered as an impediment.
Gathering all this and to highlight the problem, let’s consider a situation where A (the buyer) has contracted B (the seller) for the delivery of particular goods. Now, B in turn used to take raw materials from C. Here, in the present case C will be nothing but only a supplier. So, if B failed to provide the goods to A due to non-performance of C, it will not be an excuse for him under the CISG.
At the peak of COVID-19, all the parties to a commercial contract were ordinarily entitled to successfully invoke the exemption under Article 79. However, if we consider the present time when instead of the COVID-19 pandemic itself, the repercussions of it are causing hurdle in transactions,one of such is a significant increase in the market price of the commodities, the situation becomes different.
Considering it again from the view of B (the seller) who was taking goods from C have seen very high growth in price of raw materials supplied and the reason behind it is covid-19, thus making it economically infeasible for the B to deliver on his contract. However, as pointed out earlier B would be bound to perform the contract on two grounds-
- C is merely a supplier, not the third party, therefore, how his prices may be affecting the contract would be irrelevant for A, even though the cause i.e. covid-19 is well known to him.
- Economic hardship is not an impediment under Article 79. Therefore, no matter how much it costs to B, he has to perform the contract or suffer the liability of damages under Article 74 to 76.
TRENDS AND CAUSE OF THE PROBLEM
The parties to CISG contracts have often asked to avail of a force majeure exemption for the non-performance by their supplier; for instance in the Chemical Fertilizer Case, wherein the supplier could not for technical reasons use the package which he was prescribed by the seller ultimately resultant in financial detrimental to the buyer, However, such a claim has been conspicuously rejected because bearing the supplier’s responsibility has been considered as an integral part of the contract for the seller.
The reason behind such a narrow interpretation being given to the force majure clause is to prioritize the fulfillment of the contract which in turn promotes the good faith principle contained in Article 7 of the CISG. Good faith principle specifies that as involved with the contract parties are ought to be clung to the successful execution of the contract.
Such an observation about the commercial hardship has been made at the Vienna conference where the debate was held and 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 for claiming exception for non-performance under the CISG.
Further, in the subsequent cases Tomato concentrate case, Vital Berry Marketing v Dira-Frost and NuovaFucinatiSpA v Fondmetal International AB a similar ruling was reiterated. As of now in around twenty cases the parties took the defense of commercial hardship or economic unaffordability under Article 79 and all of them have resulted in unsuccessful claims.
The underlying reason behind such a strict observation by the courts and tribunals, notwithstanding the facts of the cases, has been found to the intention of the convention drafters. The deciding authorities always refer to the conference debate where they stressed more on the improvements from existing laws such as PECL and ULIS. So, that the parties can be motivated more for the accomplishment of the contract instead of finding a pardon for the non-execution.
While the issue regarding to treatment of the third party to not include suppliers is an appropriate governing law, this is on the grounds that in the above speculation B could attainably obtain crude material from another provider, that would nor be an obstacle for him nor should it be. The approach towards commercial hardship under the CISG is something that needs to be re-considered particularly in the current context. Particularly, considering the grappling effects of covid-19 the increase in the market price of the commodities is a universal fact that means B would be bound to suffer the financial loss. Since he has to perform the contract because he can not avail of a commercial hardship exception.
Therefore, it is not wrong to say that in its current form the CISG has a loophole which can be prejudicial to one party of the contract (Such as B in the discussed hypothesis). Understanding this, the author has suggested a different approach for the tribunals and courts while dealing with such disputes.
As said above, disputes under the CISG are inevitable in the upcoming time and one of the essential reasons behind it has already been highlighted. To overcome this the author suggests a relatively different approach for the tribunals and courts.
The author suggests that the court should acknowledge commercial hardship as a valid impediment under Article 79. Essentially, this would not be a complete change in their approach. As the secretariat commentary has also recognized that a party is liable to provide only commercial reasonable substitutes to the buyer. Moreover, the CISG Advisory Council 7 describes the circumstances that can lead to an exemption based on economic impediment as: “economic impossibility” which, while short of an absolute bar to perform, imposes what in some legal systems is conceptualized as a “limit of sacrifice” beyond which the obligor cannot be reasonably expected to perform”.
Additionally, in couple of cases such an endeavor has effectively been made for instance in the Chinese goods case the court perceived the presence of commercial hardship as a legitimate hindrance, however, since it was not the substantive finding of the case it went unnoticed by the tribunals in in subsequent cases such as Iron molybdenumcase where even the triplication of the commodity’s price was not considered as a valid impediment.
Further, in Woods case the tribunal even allowed the exemption to the buyer when there was fear of paying double the amount necessary under the contract, thus, impliedly accepting the notion of commercial hardship. Moreover, in Scafom International BV v. Lorraine Tubes S.A.S too the court of the first instance recognized the hardship as an impediment. Nonetheless, later, the court of appeal overturned the decision mainly on the ground that the commercial hardship is not an impediment under the CISG. This again points out the crux of the discussion that the author wants to bring up.
So, In this Scafom case when the court of first instance before arriving at any conclusion inspected all the facts and circumstances of the case. It considered the increase of 70 % in the market price of commodity strong enough to provide a valid exemption to the party on the ground of commercial hardship. While contrary to this the court of appeal did not delve into the consideration of fact and circumstances of the case and instead it strictly reitertated the notion that the commercial hardship is not an excuse at all under the CISG. Consequently, refused to provide any relief to the seller. However, such approach as explained in the hypothesis can prove prejudicial to one party in few circumstances (particularly in this aftermath scenario of covid-19).
So, although the courts and tribunals have not given the direct reference towards commercial hardship notion, the above given cases illustrate their indirect reference of acceptance of this notion which can be considered by the courts or tribunals in upcoming cases to address this issue.
Thus, it would not be an altogether new line for the courts to bargain upon. The court instead of rejecting the parties’ claims on hardship prima facie should consider the facts of every individual case and acknowledge the change in economic circumstances to decide the case accordingly. Scholarly writings have also supported this view. This will also balance the parties’ position under the contract more appropriately. To illustrate this again in the context of the previous hypothesis, the tribunal in a dispute between A and B due to non-delivery of goods should not simply reject B’s excuse of increase in the price of the commodities sought; rather it should consider all the circumstances surrounding the contract and only if the difference in prices is minimal then should it reject the claim. However, if this difference is very high then the court should allow the exemption. This will balance the position of both parties under any international commercial transactions governed by the CISG.
Therefore, concerning the prevailing narrative of pandemics likely to become more common in the near future, it is very necessary for the deciding authorities to realize this opportunity to settle the existing loopholes of the CISG.
Views are personal.
Image credits: Eurasian Research Institute
ABOUT THE AUTHOR
Shivam Mishra is currently pursuing law from Dr. Ram Manohar Lohiya National Law University, Lucknow.
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