According to the data of the UN Conference on Trade and Development, the value of year-on-year global merchandise trade affected by the covid-19 pandemic is estimated to have declined by 18% in the second quarter of 2020. For international trade merchants, the performance of international trade contracts has encountered unprecedented obstacles caused by the suspension of production and traffic control. How to protect the legitimate rights and interests of sellers and buyers under the framework of the UN Convention on Contracts for the International Sale of Goods (CISG) has become a common concern for both sides.
The basic principle of the CISG is party autonomy, hence the parties’ special agreement on obstacles to the performance of contracts caused by the covid-19 pandemic shall be respected. In the absence of such a special agreement, the parties may invoke article 79 of the CISG to seek an exemption. Article 79 of the CISG creates the concept of an “impediment”, but it also brings difficulties in understanding and application, which will be explained below.
Four requirements for applying article 79 of the CISG
Pacta sunt servanda (agreements must be kept) shall always be honoured in the performance of contracts. If the parties want to exempt themselves from the liability of non-performance of the contract by invoking article 79 of the CISG, they must prove that the obstacles to performance meet the following four requirements, and thus constitute an “impediment”: (1) beyond control of the party; (2) unable to be foreseen; (3) unable to be avoided or overcome; and (4) there is a causal relationship between the impediment and the party’s non-performance.
To better understand the meaning of the impediment “beyond control of the party”, it is useful to investigate the meaning of the impediment within control of the party. Some scholars believed that the obstacles “within” control of the party shall be connected with an orderly organisation of his/her manufacturing or procurement process, as are the personnel’s qualifications, the technical equipment, and the disposition of the required financial means.
The judicial practice usually qualifies those administrative rules and governmental actions as a cause beyond the parties’ control, and some compulsory pandemic prevention and control measures taken by the government under specific circumstances can also be regarded as impediment beyond control of the party.
The requirement that the impediment must be 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. For example, in an arbitration case with regard to severe acute respiratory syndrome (SARS) in 2003, the tribunal rejected a plea of exemption under article 79 of the CISG, finding that because the outbreak of SARS happened two months prior to the signing of that contract, the impediment was foreseeable.
Furthermore, if the party could reasonably overcome the impediment by providing a “commercially reasonable substitute”, the exemption will not be supported. For instance, in the litigation of a German court, the seller relied on impediment because the components of the equipment were out of production. The German court denied exemption because the seller was capable of renovating the components, and could supply goods equipped with components not offered by the original manufacturer.
It has been particularly common for upstream and downstream manufacturers to stop production during the covid-19 pandemic period, and once there is the possibility of delivering a commercially reasonable substitute, the parties should not rely too much on the exemption effect of article 79 and neglect to perform the contract.
Finally, the impediment must be the exclusive cause for the non-performance, which means if the impediment event is a concurrent cause of the failure to perform, the party cannot seek exemption. For example, if the goods are lost due to defective packaging or delayed delivery in an unforeseeable natural catastrophe, the party still shall be liable for the failure to perform. This suggests that the parties need to strictly perform the contract to avoid the failure to exercise the exemption right of article 79 of the CISG due to the existence of performance defects.
The effect of the exemption
If the party successfully proves the above four requirements, the party can only claim exemption from the damages caused by non-performance of the contract, and the other party still retains all other remedies available to him/her except the claim to damages, such as specific performance after the impediment is removed, and renegotiation of the contract terms. Meanwhile, if the non-performance constitutes a fundamental breach, the other party may declare the contract voided.
It should be noted that the exemption effect of article 79 of the CISG is temporary, and when the impediment perishes, the party still needs to perform the contract. As a result, the parties must try their best to remove the impediment in a timely manner.
For international trade merchants, it is always a pursuit to obtain benefits and avoid risks. The most rational way for them is to make reasonable arrangements for the commercial risks that may be caused by the covid-19 pandemic in the contract text, such as using clear wording like “epidemic”, “plague”, “pandemic” and “infectious disease” in the exemption clause.
As mentioned above, if the performance defects exist together with the impediment, the parties cannot be exempted from damages. Therefore, the parties should strictly perform the contract to avoid losing the right of exemption because of performance defects. In view of existing commercial disputes, the parties should timely communicate with the counter-party, preserve evidence, investigate the local government’s pandemic prevention and control policies, and use the legal weapons given by the CISG to safeguard their legitimate interests.
Gao Zhuang is a case manager of Beijing Arbitration Commission/Beijing International Arbitration Centre (BAC/BIAC)