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Publication of the Faculty of Law of the University of Turku, Private law publication series B:55. Entered on the Internet courtesy of the CISG-Finland website, Prof. Tuula Ämmälä ed.

Impossibility of Performance and
Other Excuses in International Trade

Tom Southerington
 Turku 2001

Abstract (Finnish)
Tables
   Table 1. Impossibility, force majeure and hardship
   Table 2. Exemptions under the law applicable in Finland
   Table 3. Exemptions under the UNIDROIT and EU Principles
Index of authorities
   Official travaux préparatoires
   Unpublished
   Internet
   Table of cases
Abbreviations

1. INTRODUCTION
    1.1. The problem and objects of study
    1.2. Changed circumstances and the law
    1.3. Materials used and previous studies

2. IMPOSSIBILITY, FORCE MAJEURE AND HARDSHIP
    2.1. Concept of impossibility
    2.2. Classifications of types of impossibility
    2.3. Force majeure
    2.4. Hardship
    2.5. Conclusions

3. IMPOSSIBILITY IN FINNISH LAW (Sale of Goods Act, CISG, Contracts Act)
    3.1. Applicable law

 3.1.1. Choice of law
 3.1.2. Sale of Goods Act or CISG?
    3.2. The Sale of Goods Act
 3.2.1. Primary obligations: exemptions from performance
       3.2.1.1. Seller's delay
       3.2.1.2. Seller's failure to cure non-conformity
       3.2.1.3. Buyer's obligations
       3.2.1.4. Buyer's failure to perform
 3.2.2. Secondary obligations: exemptions from damages
       3.2.2.1. Seller in breach
       3.2.2.2. Buyer in breach
    3.3. CISG
 3.3.1. Primary obligations: exemptions from performance
       3.3.1.1. Seller in breach
       3.3.1.2. Buyer in breach
 3.3.2. Secondary obligations: exemptions from damages
 3.3.3. Problem of specific performance
    3.4. Contracts Act
    3.5. Conclusions

4. IMPOSSIBILITY IN INTERNATIONAL INSTRUMENTS
    4.1. UNIDROIT Principles for International Commercial Contracts 45
    4.2. Principles of European Contract Law
    4.3. Conclusions

5. IMPOSSIBILITY IN ENGLISH LAW
    5.1. Introduction
    5.2. Development of the doctrine of frustration
    5.3. Operation of the doctrine

 5.3.1. Frustration by impossibility
       5.3.1.1. Sale of goods
       5.3.1.2. Death or incapacity
       5.3.1.3. Unavailability of an essential factor
       5.3.1.4. Failure of a particular source
       5.3.1.5. Method of performance impossible
       5.3.1.6. Impossibility versus impracticability
 5.3.2. Frustration of the common venture
 5.3.3. Illegality
 5.3.4. Limitations
    5.4. Effects of frustration
    5.5. Justification of frustration
    5.6. Conclusions

6. CONCLUSION

APPENDIX 1: Exempting events under the Sale of Goods Act (SGA) and the CISG.


1. INTRODUCTION

1.1. The problem and objects of study

The main question addressed in this study is: How can a party be exempted from his obligations under a contract for the international sale of goods in a case of changed circumstances? The question is studied with reference to the law applicable in Finland and England as well as two recent international instruments. Special attention is given to the role of impossibility of performance in the systems studied. The focus is on changed circumstances and therefore, for example, initial impossibility will not be studied in detail. This is justifiable since the solutions provided by the law differ in cases of supervening and pre-existing events. The study does not aim at giving a detailed description of the rights and duties of the seller and the buyer. Mainly rules related to release from performance or damages are discussed and references to other norms are scarce.

The aim of the study is not so much in comparing the individual rules, though this will also be done to an extent, but instead the different structures in the rule systems. In other words, the aim is to compare and discuss the solutions the different sets of rules as a whole provide for the problem of changed circumstances and impossibility in particular. Nevertheless, the study operates on two levels: individual rule and system. There are four main issues to which attention will be given: The effects of changed circumstances on the primary and secondary obligations (performance and damages) of the parties will be discussed. The nature and extent of the changed circumstances acknowledged by the law will also receive attention. The possibility to adjust the contract and, finally, effects on the validity or existence of the contract are observed where appropriate.

The studied legal instruments are the Finnish Sale of Goods Act, the United Nations Convention on Contracts for the International Sale of Goods (the CISG), the Finnish Contracts Act (briefly), the common law doctrine of frustration (with references to the Sale of Goods Act 1979), the UNIDROIT Principles of International Commercial Contracts (UNIDROIT Principles) and the Principles of European Contract Law (EU Principles). These laws or instruments represent different types of legal systems.[1] The Finnish Sale of Goods Act belongs to a Nordic or Scandinavian system, which is a part of the Roman-German civil law system. The doctrine of frustration represents the common law while the CISG and the UNIDROIT and EU Principles are internationally drafted instruments which combine elements from both civil law and common law systems. The important difference between the said Principles and the CISG is that the CISG is binding law in the countries that have accepted it.

One of the reasons for choosing the above mentioned objects of study is the question of applicable law in international sales. Between parties from countries that have ratified or acceded to the CISG, in most cases the CISG is the governing law. However, from the important trade partners of Finland, Great Britain is one of the few that have not accepted the CISG.[2] Therefore it may happen that the applicable law is the English law,[3] which often is not well known in the civil law countries. The reviewed Principles on the other hand may be applied by arbitral tribunals or used to interpret or supplement other legal instruments.

There is also another reason for the choice of objects. This is the historical or evolutionary perspective. It seems that the law has gradually changed from absolute contractual obligations, the strict pacta sunt servanda, towards more flexible attitudes, especially in relation to changed circumstances.[4] The doctrine of frustration represents the first phases of relieving the strict rules and even within the doctrine development can be observed. The Finnish Sale of Goods Act and the CISG represent a fairly modern civil law type of codification. The same applies to the Contracts Act 36 §, which allows judicial review of the contract on the basis of unconscionability. The UNIDROIT and the EU Principles in turn represent the latest developments in the field of contract law and combine civil law and the common law as well as international contract practices.

The study is organised so that the more familiar civil law type of codes are discussed first and only after them the English system. The nature of the material necessarily leads to a different kind of approach since the common law is based on case law.

1.2. Changed circumstances and the law

According to Tallon, in the nineteenth century contract law abandoned the doctrine of absolute obligations and legal systems started to provide for the discharge of one or both parties when a contract becomes impossible to perform. In many systems this was achieved by referring to the concept of force majeure, in England by the doctrine of frustration. In the twentieth century a number of new theories emerged, for example imprévision, frustration of the common venture, impracticability and Wegfall der Geschäftsgrundlage. These extended the existing doctrines beyond the sphere of absolute impossibility to situations where unexpected changes in circumstances made performance far more expensive than anticipated. In some legal systems, like the French, such situations produce no effect. In other systems, like the English, it may be synonymous with impossibility, while in some, like the German or American, it may allow the court to adjust the contract (the Finnish system would be in this category too). In addition to these theories, various types of contract clauses are used, such as hardship, renegotiations clause and the like.[5] Frustration under the common law will be discussed in chapter 5 and the French force majeure briefly in 2.3.

According to Nystén-Haarala, for example, the principle of pacta sunt servanda has always had the counter principle of clausula rebus sic stantibus, under which a contract becomes unbinding in the case of changed circumstances. In the nineteenth century, from this principle as well as from another principle of Roman law, namely the impossibilium nulla est obligatio, evolved the German doctrine of impossibility, which later was codified in the German Civil Code.[6] In the middle of the nineteenth century, the theory of assumptions arose in Germany. This theory was later succeeded by the doctrine of Wegfall der Geschäftsgrundlage, under which a contract becomes ineffective if the basic assumptions under which it was entered into cease to exist.[7] The theory of assumptions was further developed in Scandinavia in the beginning of the twentieth century and is still in use at least in Sweden. In Finland the theory of assumptions has been rejected.[8] Also in Germany a theory of termination for an important reason (aus wichtigen Grund) was developed. Traces of this theory can also be found in Scandinavian legislation.[9]

Changed circumstances have also been addressed by adjusting the contract. In the Nordic countries this can be done under the general clause in Contracts Act 36 §.[10] There is also special legislation, in Finland for instance on consumer protection and marriage settlements. Contracts Act 36 § will be briefly discussed in chapter 3.4.

In addition to the above-presented national theories on changed circumstances, international measures have been developed. These combine the different domestic rules and compromise between various approaches. Such instruments are in this study represented by the CISG, and the UNIDROIT and EU Principles. For example, the solutions adopted in CISG Article 79 do not follow any of the national laws as such. It does not use the terms force majeure, frustration or the like, and it forms a system of its own autonomic from the national systems.[11] From international instruments, the newly formed rules may find their way back into national systems which in part harmonises the law (cf. KL 27 § and CISG Article 79, for example).

1.3. Materials used and previous studies

Two important studies on impossibility of performance were published in the 1950's in Finland: Godenhielm's "Om säljarens bundenhet under ändrade förhållanden" in 1954 and Vihma's "Suorituksen mahdottomuus varallisuusoikeudellisessa sopimussuhteessa" in 1956. These works have served as an introduction to the subject of impossibility and changed circumstances and have been used as sources of information mainly in chapter 2. It is to be noticed that after these works considerable changes have taken place in the field of trade law. A number of other works, such as Hellner's "Speciell avtalsrätt II," have also been valuable. In the discussion on the Finnish Sale of Goods Act the Government Bill 93/1986 has been used quite extensively. For this part of the study also Sevón, Wilhelmsson and Koskelo: "Kauppalain pääkohdat," and the second edition of this work Wilhelmsson, Sevón and Koskelo: "Huvudpunkter i köplagen," as well as Eero Routamo's "Kaupan lait" have been important. Decisions of the European Court of Justice have been available on the Celex database.

In chapter 3.3. on the CISG, the main sources of information have been Honnold's "Uniform Law for International Sales under the 1980 United Nations Convention," Schlechtriem's "Uniform sales law" and "Commentary on the UN Convention on the International Sale of Goods (CISG)" edited by him, as well as "Commentary on the International Sales Law" edited by Bianca and Bonnell. Also a number of articles have been reviewed, most of which have been conveniently available on the world wide web service provided by the Pace University. A few cases have also been discussed. In finding them the Pace www-service has again been helpful. Chapter 4.1. on the UNIDROIT Principles is indebted to the commentary by UNIDROIT and chapter 4.2. on the EU Principles to the work by Lando and Beale (eds.): "The Principles of European Contract Law," which has provided material for other parts of the study as well.

On the doctrine of frustration, mainly acknowledged textbooks have been used. These include most importantly Atiyah's "The sale of goods" and "An introduction to the law of contract," Cheshire, Fifoot and Furmston's "Law of contract" as well as Treitel's "The law of contract." "Force majeure and frustration of contract" edited by McEndrick has also been useful. Unfortunately, attempts to find some of the fairly recent materials on this subject have failed. For example, only parts of Treitel's "Frustration and force majeure" have been available for the study.

2. IMPOSSIBILITY, FORCE MAJEURE AND HARDSHIP

2.1. Concept of impossibility

Vihma presents four definitions of impossibility of performance. The concept of impossibility of performance in every day use seems to be referring to a situation where performance by no means can be accomplished (at the time and in the manner required). The performance is physically impossible, like when in a sale of specific goods the goods are accidentally destroyed. Such impossibility has been called natural or logical impossibility. On the other hand, the law may give impossibility less strict definitions. It may also take into consideration circumstances where performance is in practice impossible (practical impossibility). The specific goods subject to the sales contract have not been destroyed but stolen, for instance. Furthermore, the concept may include situations where performance is illegal (juristic impossibility). According to Vihma, juristic impossibility is sometimes understood more widely to include situations where performance would require unreasonable sacrifices. As examples, he gives an abnormal rise in prices and the death of a child of a comedian just before the show.[12] In this study, juristic impossibility is understood as referring only to illegality.

In his study, Vihma uses a definition of impossibility which includes logical and practical impossibility as well as illegality.[13] The concept is, however, somewhat elusive. According to Vihma, his definition is well justified because it covers all the occasions where performance in practice cannot be done without infringing the legal order.[14] Nevertheless, the definition leaves considerable room for discretion. First of all, it may in many cases be difficult if not impossible to judge whether performance is logically impossible or illegal. A bigger problem yet may be the question as to when performance is practically impossible.

To illustrate the problems mentioned, we may consider two examples: If there is a contract for the sale of a painting by Gallen-Kallela, and the painting is destroyed before the contract is fulfilled, the performance of the contract clearly becomes (logically) impossible. If there is instead a contract to provide a hall where to keep concerts as in Taylor v. Caldwell, a leading case representing the common law doctrine of frustration (see below chapter 5), and the hall burns down in an accidental fire six days prior to the concerts, how do we judge the case? In the said case, the court considered the performance to have become impossible.[15] It is submitted that how we judge impossibility in this case may depend, for example, on how we interpret or construe the contract.

A reasonable construction of the contract perhaps were that it was to allow the plaintiffs to use one particular music hall, which cannot be replaced by another hall even if it would be exactly like the one intended and situated in the same place. In this case we could speak of logical impossibility. However, we might construe the contract so that it could have been performed by rebuilding the burned down music hall and allowing the plaintiffs to use the new one. This might have been possible in the logical sense, but the costs and trouble would have been enormous.[16] Now we may speak of practical impossibility. But what if the hall had been destroyed not six days but six weeks or six months before the concerts? Would the performance still have been impossible? How do we distinguish practical impossibility from less serious occurrences like hardship or mere inconvenience?

Treitel has stated in reference to Taylor v. Caldwell that in the given circumstances no reasonable businessman would perhaps be expected to incur such expenditure as would be required in order to be able to perform the contract. According to him, this has lead to a trend in the U.S. to use words like impractical and impracticality instead of impossible and impossibility, which in his opinion would seem "to be intended to widen the scope of the doctrine of discharge by supervening events."[17]

The Finnish legal order, including the CISG, does not refer to impossibility as such as will be seen later. The law is built on other more general kind of concepts. Though according to Vihma,[18] for instance, the concept of impossibility deserves special attention in law and jurisprudence, the situation seems to have somewhat changed after his dissertation. It is submitted that in Finland especially the enactment of the Sale of Goods Act and the new 36 § of the Contracts Act as well as the adaptation of the CISG have diminished the role of impossibility at least in sale of goods cases [19] and that force majeure type of concepts (see 2.3. below) have taken its place. At Vihma's dissertation's time, the only reference to impossibility was to be found in the Maritime Act (merilaki) 131 §, now it is in chapter 14, 32 §. In England, on the other hand, the concept of impossibility would seem to have more significance since the common law [20] doctrine of frustration revolves around it (see 5.3.1.6 below). However, as Hellner has stated, the focus is not on the impossibility or increased difficulty of performance. Instead the contract as a whole has to be looked at.[21] Nevertheless, the concept and the classifications of types of impossibility may be helpful in analysing cases and court decisions as well as in classifying different types of changed circumstances. Despite the difficulties with the definitions of impossibility described above, it is submitted that Vihma's concept of impossibility (logical, practical and juristic) would seem to be satisfactory in relation to the material discussed in this study. Therefore, impossibility in this study will encompass logical, practical, and juristic impossibility. However, one must acknowledge that especially practical impossibility is a concept whose scope is subject to discretion and seems to depend on what is considered just, reasonable or conscionable in each case, and that the border line between practical impossibility and impracticability is negotiable.

2.2. Classifications of types of impossibility

Several classifications of impossibility have been introduced in the literature. Their value would seem to be in distinguishing different kinds of situations from another where the legal consequences of impossibility should be different.

Often a distinction has been made between initial (pre-existing, original) and subsequent (intervening) impossibility. Initial impossibility refers to a situation where performance has been impossible already at the moment the contract was concluded, whereas subsequent impossibility refers to situations where performance was initially possible but became impossible after the conclusion of the contract.[22] As mentioned earlier, this study concentrates only on subsequent impossibility. Impossibility is therefore seen as an extreme example of changed circumstances. The division of impossibility into initial and subsequent seems to be useful since different kinds of solutions have been introduced to manage some of these situations. Initial impossibility may, for example, lead to the use of rules related to mistake or perhaps fraud and subsequent impossibility to the rules on frustration.[23]

Another way to classify cases of impossibility is to divide them into objective and subjective impossibility. In the first class, no one would be able to perform as required, whereas in the latter someone else would be able to perform but not the party that has committed himself to performance. A division into final and temporary (passing) impossibility has also been made on the basis of whether the impossibility will be removed in some future time or not. Furthermore, impossibility has been divided into total and partial in order to distinguish whether it affects the whole contract or just some part of it. These classifications would also seem to lead to different rules and rulings in some cases and therefore be useful.[24] A division into absolute and relative impossibility has also been made but, according to Vihma, the definitions seem to be unclear and the usefulness therefore questionable.[25] In this study, however, where the term absolute impossibility is used it refers to objective, logical impossibility.

The above classifications do not refer to the causes of impossibility. However, often the legal consequences of impossibility depend on the cause. Sometimes authors speak of economic impossibility as a subclass of subjective impossibility. Here performance becomes impossible due to a lack of economic resources.[26] Godenhielm further separates economic impossibility from commercial impossibility. Commercial impossibility occurs when the value of what is to be received in return for performance diminishes fundamentally (which could be classified as a case of hardship, see 2.4. below).[27]

Aurejärvi does not seem to make this distinction.[28] To him, economic impossibility is not real impossibility and he, like some other Finnish authors, sees economic impossibility and the Finnish term liikavaikeus as synonyms. It is submitted that liikavaikeus has been used in relation to practical economic impossibility, economic force majeure or hardship and the term lacks distinctiveness. Often it may be most accurately used instead of hardship, since liikavaikeus usually does not exempt from liability in damages.[29] Vihma, in turn, ponders whether economic impossibility exists or not, but does not reach a conclusion.[30] (See also 2.3. and 2.5. below.) Often a case of practical impossibility could be described as economic impossibility, consider for example the facts in Taylor v. Caldwell.

According to Treitel, in the common law an obligation to pay money is never considered to be impossible. [31] It should be noted that an obligation to pay money might still be impossible in fact, though the law does not acknowledge this. Different rules apply to monetary and non-monetary obligations also in the Principles discussed in this study and in the Finnish Sale of Goods Act. A force majeure type of approach would not categorically rule out the possibility of an exemption from (damages for a breach of) an obligation to pay money but would rather consider the causes of the inability to perform.

We may also make the division into self-caused and other impossibility. Moreover, foreseeable and nonforeseeable impossibility can be distinguished from one another. These kinds of qualifications bring us closer to the concept of force majeure (see 2.3. below). What kind of impossibility is relevant in the legal sense would seem to differ between branches of law, different jurisdictions and so forth.

2.3. Force majeure

The roots of force majeure are in the Roman concept of vis maior, and the term has been explicitly used in the French Code Civil. In Roman law as well as in French law, force majeure serves as a limit to liability not based on fault.[32] The term force majeure does not have an authoritative definition, although Schmitthoff does state that the term has a clear meaning in (English) law, namely that it includes every event beyond the control of the parties.[33] Force majeure has also been said to refer to an event that the performing party is unable to overcome (for example war, natural catastrophe or a ban by a legal authority), which prevents due performance, and which usually releases the obligor from liability in damages.[34] Sometimes the term may be used as a general term referring to any event that serves as a basis for an exemption from liability.[35]

Force majeure type of regulations can be found in national laws as well as in standard terms and individual contracts. According to Mestad, a force majeure rule must have at least the four following elements: (1) a definition of relevant events (causes), (2) a requirement that performance be prevented, (3) a requirement of a causal link between the events and the fact that performance is prevented, and (4) consequences of the three prerequisites being fulfilled. In addition to these essential elements the rule may also include stipulations as to (5) foreseeability, (6) avoiding or overcoming the event, and (7) procedural matters the party claiming force majeure should follow.[36]

The elements of force majeure in French law (Articles 1147 and 1148 in the Code Civil) have been said to be (1) irresistibility: the event and its consequences could not have been avoided or overcome, (2) unforeseeability: the event must have been unforeseeable to a reasonable person at the time and in the circumstances the contract was made, (3) externality: the cause of the event is not the performing party or persons at his responsibility, (4) impossibility: the event has to make performance impossible, not merely more onerous (Vihma's definition of impossibility would seem to apply here also, see 2.1. above). In French law, force majeure leads to a release from liability in damages.[37] Similarly, in the new Russian Civil Code of 1994, force majeure releases the obligor from liability for breach of his obligations and refers to an event that is extraordinary and irresistible in the given circumstances.[38]

In Article 7.1.7 of the UNIDROIT Principles for International Commercial Contracts (see 4.1. below), force majeure is in question when non-performance is caused by an impediment beyond the performing party's control which he cannot reasonably be expected to have taken into account at the time of the conclusion of the contract and which or whose consequences he cannot reasonably be expected to have avoided or overcome.[39] Article 7.1.7 exempts the obligor from performance or damages. Similarly, in the Principles of European Contract Law, a force majeure type of rule releases the obligor from his primary and secondary obligations. The commentary to these Principles connects force majeure with impossibility (see 4.2. below).[40]

In the practice of the European Court of Justice, force majeure has been defined to be an event unusual, unforeseeable and beyond the trader's control, the consequences of which could not have been avoided even if all due care had been exercised.[41] Furthermore, in some cases the Court has stated that the consequences of the event have to be such that the affected party's performance becomes objectively impossible [42] and, in association with particular regulations, that absolute impossibility is required.[43] In some other cases the Court has maintained that absolute impossibility is not required but that force majeure nevertheless requires abnormal difficulties, independent of the will of the person concerned and apparently inevitable even if all due care is taken.[44] The Court has emphasised that the concept of force majeure differs in content in different areas of law and in its various spheres of application and that the precise meaning of the concept therefore has to be decided by reference to the legal context in which it is intended to operate.[45]

In conclusion it is submitted here that in most cases the term force majeure refers to an external event that is unforeseeable and irresistible which makes the performance of the contract at least practically impossible. If we accept this definition we can also say that the relation of impossibility to force majeure is that force majeure can be defined as qualified impossibility: it is impossibility restricted by the type of cause and foreseeability.[46]

The use of the terms is, however, inconsistent in literature. For example, Nystén-Haarala refers to economic force majeure as a synonym for commercial impracticability and a translation of the Finnish liikavaikeus and states that it does not require impossibility of performance [47] (see also 2.2. above and 2.5. below). Adlercreutz uses the terms economic impossibility and economic force majeure as synonyms. [48] According to our definition, economic force majeure would be defined as qualified economic impossibility: economic impossibility that has been caused by an irresistible, unforeseeable and external event.

The Finnish law does not refer to force majeure as such. The term is mentioned neither in the Sale of Goods Act nor the CISG. The rules, however, have force majeure-type of elements. English law does not have a general doctrine of force majeure but (as well as in Finland) the term can often be found in contracts and the courts must therefore be prepared to attribute some meaning to it.[49]

2.4. Hardship

Hardship can be understood as a situation, which does not quite amount to being a force majeure. It means that the performance of a contract has become more onerous for the performing party.[50] A typical example of hardship would be a steep rise in the prices of raw materials after the conclusion of the contract.[51]

According to Perillo, hardship recognised by Italian law (onerosità) has to be the result of events that do not constitute a normal risk of contracts of the type in question and that are extraordinary and unforeseeable.[52] According to Hellner, hardship clauses in contracts usually refer to a fundamental change in the obligations of the parties. Furthermore, in his analysis hardship (clauses) differ from force majeure (clauses) in relation to the demand for unforeseeability: in hardship cases, it may have been foreseeable that circumstances shall change, as long as the cause of the changes and the seriousness of them have not been.[53]

In the UNIDROIT Principles for International Commercial Contracts (see 4.1. below) hardship has been defined as follows:

"Article 6.2.2 Definition of hardship

There is hardship where the occurrence of events fundamentally alters the equilibrium of the contract whether because the cost of a party's performance has increased or because the value of the performance a party receives has diminished, and

(a) the events occur or become known to the disadvantaged party after the conclusion of the contract;

(b) the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract;

(c) the events are beyond the control of the disadvantaged party; and

(d) the risk of the events was not assumed by the disadvantaged party."

According to this definition, hardship can also occur in situations where the value of what the performing party is to receive in return for his performance has diminished, whether or not this has affected his ability to perform. This definition of hardship would seem to include force majeure (qualified impossibility) and some cases of impossibility outside force majeure as well as other types of events that fundamentally affect the balance of the contract. Impossibility of performance is not necessarily required and there is no reference to not being able to avoid or overcome the situation.

Tillotsson states that the difference between hardship (clauses) and force majeure (clauses) is in their different purposes (functions). According to him, the purpose of hardship stipulations is to provide for renegotiations or adjusting the contract in order to allow the contractual relationship to continue, while force majeure provisions in turn are usually called for at the termination of the relationship.[54] Also according to Schmitthoff, the distinguishing factor is the purpose: the parties do not wish to dissolve the contract but to continue it.[55] These views seem to be supported by rules in some legislatory instruments as well. According to Perillo, under Italian law a contract can be terminated or equitably modified (adapted, adjusted) because of hardship.[56] Hardship in the UNIDROIT Principles leads to a duty to renegotiate, adaptation or termination of the contract (see also 4.1. below).

2.5. Conclusions

In conclusion, we may make a proposal for definitions which would seem to serve most purposes: The concept of impossibility of performance refers to a situation where performance required by the contract cannot be accomplished either because it is not possible in the logical (physical) or practical sense, or because it is not allowed by the legal order. The term force majeure refers to those cases of impossibility where the cause or source of impossibility is irresistible, unforeseeable and external. Hardship does not presuppose impossibility: it may or may not be caused by it. The term refers to cases where the balance of the contractual obligations by the parties has been significantly disturbed and which often are subject to the same type of qualifications of unforeseeability, irresistibility and externality as the cases of force majeure. The qualifications for hardship may, however, be less stringent.

Furthermore, another dividing factor of the above mentioned concepts can be found in the function the rules concerning them serve (according to law or under contract) [57] or in the consequences they lead to. This division may in fact have more distinctiveness than the definitions given above. The functions are not overlapping but the events qualified under each concept may be (see Picture 1 below). Moreover, it is submitted that the event-based definitions of the concepts discussed depend on the functions. For example, the preconditions of force majeure are chosen in accordance with the idea of what kind of circumstances should lead to an exemption from damages. The definitions are therefore essentially dependent on notions of justice and values.

As has become apparent in chapters 2.2. and 2.3. above, economic difficulties have sometimes inconsistently and interchangeably been referred to as economic impossibility, economic force majeure or hardship. The source of this unclarity perhaps is that economic difficulties are usually less willingly acknowledged by the law. The parties are often held to be strictly liable for having sufficient economic resources to perform their contract.[58] Therefore, from the legal point of view, economic difficulties may often lead to the same conclusions. The terms can, however, be distinguished according to the criteria presented above – impossibility, qualified impossibility and disturbed balance together with the consequences in law.

As a rule of thumb, it can be said that impossibility frees the performing party from specific performance. In force majeure circumstances, the party may be released from paying damages for non-performance as well. Hardship, on the other hand, in many jurisdictions does not affect the parties' rights or duties in one way or another,[59] but where it does, or where the parties have so provided, its primary purpose usually is to try to preserve the contract. It may lead to, for example, renegotiations, adjustment of the contract or, where nothing else is of avail, to termination and excuse from obligations.

It is proposed that the definitions of the discussed legally relevant concepts should consist of both a description of the relevant circumstances and their consequences in law. Table 1 below provides a rough illustration of the discussed concepts. The table is to be read from left to right. In column two the table presents typical preconditions for the changed circumstances to be regarded as the phenomenon named in column four. Column three contains typical consequences in law that the events may have. These can also represent the functions of the concepts in column four. The category "mere inconvenience" refers to events that do not lead to any consequences and which the party facing them therefore has to suffer.

Table 1. Impossibility, force majeure and hardship

Changed circumstances that affect the contract

Performance impossible (logical, practical or juristic impossibility) Cause irrelevant ®
Exemption from performance
=  
Impossibility
Cause
1. Irresistible
2. Unforeseeable
3. External
®
Exemption from damages as well
=  
Force majeure
Balance of the contract disturbed, not necessarily an impediment to performance A qualified change in contractual balance ®
Attempts to rebalance the contract + other consequences
=  
Hardship
Qualifications in the contract / rule not met ®
No effect
=  
Mere inconvenience

It should be noticed that the categories presented in Table 1 are not mutually exclusive. For example, the group of events classified as force majeure belong also to the category of impossibility. Impossibility, however, is a wider concept. Hardship could, depending on the exact definition, typically contain all the cases of force majeure and some of the cases of impossibility not qualified as force majeure plus a number of events not qualifying under these two categories. However, as has been stated above, the functions of the discussed terms in their pure form are mutually exclusive. Picture 1 illustrates the relations of the events that may classify under the different categories.

Picture 1. Events leading to impossibility, force majeure and hardship in relation. [Picture omitted. To view this picture, go to the presentation of this commentary on the CISG-Finland website <http://www.utu.fi/oik/tdk/xcisg/southerington.pdf> at page 23.]

3. IMPOSSIBILITY IN FINNISH LAW (Sale of Goods Act, CISG, Contracts Act)

3.1. Applicable law

3.1.1. Choice of law

In this study, we are interested in contracts for the sale of goods that posses international characteristics, more precisely contracts the parties to which are from different countries. The choice of law is governed by the Act on the Applicable Law for International Sales of Movable Goods (laki kansainvälisluonteiseen irtainten esineiden kauppaan sovellettavasta laista, 387/1964) as well as by the choice of law rules in CISG Article 1.

It is provided in 3.1 § of the above-mentioned act on the choice of law, that the parties to a contract may agree on the applicable law. According to 4 §, if there is no agreement on the applicable law, the main rule is that the sale be governed by the law of the country where the seller had his place of residence at the time he received the order for the goods. However, if the order was received by the seller's subsidiary, the law of the country where the subsidiary is located is to be applied. Furthermore, the law of the country where the buyer had his place of residence, or where his subsidiary, which received the order, is located, is to be applied in cases where the seller or a representative to him has received the order for the goods in this country (4.2 §). The rules are limited by an ordre public clause in 6 §.

If there is, for instance, a contract between a Finnish buyer and an English seller, the governing law is the law applicable in England, unless otherwise agreed and unless the seller received the order in Finland. Were the roles the opposite, Finnish law would govern. Then the question of whether to apply the Sale of Goods Act or the CISG were to be answered.

3.1.2. Sale of Goods Act or CISG?

The Sale of Goods Act entered into force on 1 January 1988 and the CISG in 1 January 1989. Pursuant to KL 5 §, the CISG prevails over the Sale of Goods Act where the CISG is applicable. CISG Article 1 provides:

"Article 1

(1) This Convention applies to contracts of sale of goods between parties whose places of business are in different States:

(a) when the States are Contracting States; or
(b) when the rules of private international law lead to the application of the law of a Contracting State.
(2) The fact that the parties have their places of business in different States is to be disregarded whenever this fact does not appear either from the contract or from any dealings between, or from the information disclosed by, the parties at any time before or at the conclusion of the contract.
(3) Neither the nationality of the parties nor the civil or commercial character of the parties or of the contract is to be taken into consideration in determining the application of this Convention."

According to Article 1(1)(a), whenever the parties' places of business are in different countries which are parties to the CISG, the Convention is the applicable law. Furthermore, under Article 1(1)(b), the CISG is the applicable law even in cases where both of the parties do not have their places of business in a CISG country if the rules of private international law lead to the application of the law of a CISG country.

If the parties are from China (CISG) and Germany (CISG), for example, the Convention is the applicable law. If the buyer is from England (non-CISG) and the seller from Finland (CISG), again the Convention is to be applied. If the buyer is from Finland and the seller from England and they have agreed that their contract be governed by the "Finnish law," again the law is the CISG, not the Sale of Goods Act,[60] though this may be subject to interpretation or construction of the contract by the court.[61]

Reservations to the CISG may modify the choice of law rules. For example, China and the United States have excluded the application of Article 1(1)(b).[62] Finland has made a declaration under CISG Article 92 regarding Part II: Formation of Contract. Therefore, Part II shall not be applied where the CISG is the governing Finnish law. Instead the provisions in the Contracts Act govern the formation of contract. However, in cases where the rules of private international law lead to the application of a CISG country other than Finland, Part II is to be applied unless the said country has made a similar declaration. Furthermore, for example, Finland, Sweden, Norway, Denmark and Iceland have, in accordance with CISG Article 94, declared that the Convention is not applicable when the parties have their places of business in these countries. Therefore in a sale between a Finnish seller and a Swedish buyer, the Finnish Sale of Goods Act would be applicable.

Both the sale of Goods Act and the CISG are mainly non-mandatory. The parties may exclude them by agreement and trade usages may replace them. It should also be remembered that a sales contract is governed by general contract law as well as by sales law. If Finnish law is applicable then the contract is also governed by, for example, the Contracts Act, which, among other norms, contains rules on validity of the contract – a question outside the scope of application of both the Sale of Goods Act, and the CISG.[63]

3.2. The Sale of Goods Act

3.2.1. Primary obligations: exemptions from performance

3.2.1.1. Seller's delay

The seller's primary obligation is to deliver goods as required by the contract. Delivery has to be made in the time provided in the contract and the goods have to be in conformity with the contract terms and the terms implied by the Sale of Goods Act (17, 18 and 19 §, if not excluded by the contract). The buyer's right to require performance and the seller's effective excuses in situations of delay of delivery (mora) according to KL 23 § are:

23 §    "The buyer has the right to keep to the contract and to require its performance. However, the seller is not under obligation to fulfil the contract if there is an impediment to such fulfilment which the seller cannot overcome, or if fulfilling the contract would require sacrifices that are unreasonable in comparison to the benefit to the buyer from the fulfilment of the contract by the seller.

If the impediment or imbalance is removed within a reasonable time the buyer is, however, entitled to require the seller to fulfil the contract.

The buyer loses the right to require performance if he does not use the right within a reasonable time."

The seller is released from the obligation to deliver the goods on two alternative grounds: (1) there is an impediment he cannot overcome, or (2) performing would require unreasonable sacrifices in comparison to the benefit the buyer would receive. Even if the seller is exempt under KL 23 § he is still in breach of the contract. The buyer may then avoid the contract and claim damages (KL 25-29 §). The requirements for an exemption from paying damages (KL 27 §) are stricter than the ones in KL 23 § and the remedies under KL 23 § and 27 § are not linked to one another.[64]

The first prerequisite under KL 23 § is that after the conclusion of the contract, circumstances have so changed that performance is prevented. Anything that in practice prevents performance is covered by KL 23 §. For example, unique goods that were to be delivered have been destroyed or the specified lot from which the goods were to be taken has been destroyed. Also an import or an export ban has been given as examples by the Government Bill.[65]

The second prerequisite is that the impediment to performance has been such that the seller cannot overcome it. Objective impossibility is, however, not required. The seller may invoke impediments that affect his performance only.[66] Neither is logical impossibility required.[67] Nevertheless, the seller is under obligation to try to overcome the difficulties caused by the changed circumstances. He may, for example, have to fulfil his obligations in some other manner than what he had in mind at the time the contract was concluded. The main rule is that the seller is under obligation to perform even though it may be significantly more costly and troublesome than what he had expected.[68] Wholly disproportionate financial sacrifices are not required. In this sense, the impediment may also be economic.[69]

For example, failure of a particular source is usually not sufficient to excuse the seller from performing if the goods can be obtained from another source. The same applies to the method of performance: if, for instance, the means or route of carriage that had been presupposed cannot be used, the seller is normally obliged to find other ways to deliver the goods.[70] However, the question of what constitutes an impediment beyond the seller's control has to be analysed taking into consideration the contract as a whole and the circumstances of the case. The parties may have agreed upon some restrictions to the seller's performance. The contract may, for instance, provide that the timber to be delivered is to be from a specified area (cf. 5.3.1.4. and 5.3.1.5.).[71]

In addition to the above mentioned rules, the seller can be exempted where performing the contract required sacrifices unreasonable in comparison to the benefit the buyer would receive should the seller fulfil the contract. The sacrifices referred to in the section can be either physical or economic. The reasons why performance has become more onerous than expected are not important as such.[72] This rule has a close connection to the requirement that the seller try to overcome impediments to performance: the seller is released from this duty if it required unreasonable sacrifices.[73]

KL 23 § applies in cases where the balance of the contract has been disturbed by changed circumstances. According to some commentators, it is not enough that the contract has become unprofitable to the seller. KL 23 § requires that the economic basis of the contract has been so radically disturbed that the seller's sacrifices would clearly exceed what the parties could reasonably expect with respect to the type of contract in question.[74] It is submitted that the focus under KL 23 § should not be on the fairness of the contract but rather on the fairness of the remedies: whether or not the buyer's rights and expectations can be protected through the seller's liability in damages. Where the cost of performance would exceed the amount of damages needed to compensate the buyer's losses, the seller could be exempted.

The existence of imbalance is to be analysed case by case. One factor to be taken into consideration is the goods in question. In the case of goods notoriously prone to price changes, for example, or in cases where the circumstances imply that the seller has assumed the risk of circumstances changing, the discussed rule can only be applied in extreme instances.[75] An example of a case where KL 23 § might apply is a situation where the production of certain goods has ended, and the goods in stock have been destroyed without the seller being aware of this. If the seller would have to resume production, this might cause sacrifices unreasonable in comparison to the buyer's benefits from this.[76]

The sacrifices have to be unreasonable in comparison to the benefits to the buyer. As stated above, the disturbance in the balance of the obligations has to be of exceptional proportions. A comparison of the parties' obligations is always required when applying the rule. For example, a rise in prices does not normally affect the balance since the benefit of the performance to the buyer often grows proportionally to the sacrifices of the seller. On the other hand, if the buyer would easily be able to obtain the goods from another source, the benefit he would receive from this particular sale should be deemed small, and the seller would therefore be more easily exempted from performing.[77]

KL 23 § certainly covers cases of impossibility of performance. Impossibility frees the seller from performing. However, the rule applies to other, less serious occurrences as well. Impediments that could be overcome but not without unreasonable sacrifices also release the seller from performing. In this aspect, the rule resembles hardship-type of situations. The key element is the emerged contractual imbalance. However, it is not enough that the seller's obligations become more onerous, or that the value of the performance the seller is to receive diminishes. If the buyer's benefits from the sale grow proportionally to the difficulties of the seller, KL 23 § does not usually apply. If, for example, the value of what the seller is to receive in the sale diminishes, this may make performance more burdensome to the seller, but it will usually also make it more beneficial to the buyer since it is unlikely that he would be able to negotiate another sale at the same low price.

Contracts Act 36 § may also apply in the same type of situations as the discussed KL 23 §. According to the Government Bill, the Sale of Goods Act is the primary source of law in questions of what kind of effects changed circumstances have on the contractual relations of the parties, and that adjustment under 36 § therefore comes into question in exceptional cases only. However, KL 23 § applies in cases of supervening events only. If the imbalance existed already at the time of the conclusion of the contract, the case is to be decided under Contracts Act 36 §.[78]

3.2.1.2. Seller's failure to cure non-conformity

If the seller has delivered non-conforming goods, the buyer may, subject to the preconditions laid down in Chapter 6 of the Sale of Goods Act, require the seller to cure the non-conformity by repair or by a substitute delivery of conforming goods, or to lower the price or he may terminate the sale (contract) and claim damages in addition. Furthermore, he may retain from making the payment (KL 30 §). For the purposes of this study, cure and liability in damages need to be discussed in more detail (on damages see 3.2.2. below).

The buyer's right to require repair or new delivery is stipulated in KL 34 §:

34 §     "The buyer has the right to require that the seller repair the non-conformity without causing any costs to the buyer, if the non-conformity can be cured without unreasonable costs or unreasonable trouble to the seller. Subject to 36 §, the seller may instead of repairing the non-conformity make a new delivery.

The buyer has the right to require new delivery if the breach of contract has fundamental significance to the buyer and the seller understood or he ought to have understood this. However, the buyer does not have this right, if an impediment or imbalance such as described in 23 § exists. Furthermore, the buyer does not have the right to require new delivery, if the sale is of goods that existed at the time of the conclusion of the contract and which, taking into consideration the qualities of the goods in question and what has to be assumed that the parties have presupposed, cannot be substituted by other goods.

If the seller does not fulfil his obligation to repair the non-conformity, the buyer has a right to compensation for reasonable costs required for repairing the non-conformity."

The buyer's right to require repair is subject to the unreasonableness of the costs or the trouble caused to the seller. The seller's obligation to cure non-conformity by repair depends, for example, on his technical and human resources. If he lacks the technology, skill, personnel or organisation or if procuring spare-parts and other equipment needed would become very expensive, the seller may be excused under KL 34.1 §. Also the fact that the goods are in a geographically remote place may lead to an exemption. The significance of the repair by the seller to the buyer has to be taken into consideration as well. It may in some instances be easier for the buyer to repair the goods or to have them repaired by a third party and then claim damages from the seller. Furthermore, where the seller is required to cure the non-conformity, the buyer has to contribute in a reasonable manner in order to allow the seller to perform, for example, send the goods to the seller (at the seller's expense).[79] As the above mentioned examples show, the seller may be excused on subjective causes, limited to his performance only.[80]

Under KL 34.2 §, the buyer may require new delivery if the breach has fundamental significance to him. Fundamentality is to be analysed case by case from an objective viewpoint. Logically, the seller is exempted from making a new delivery if the circumstances are such as described in KL 23 §. These have already been discussed above. The Government Bill gives a few additional examples. If, for instance, the non-conformity is caused by faulty design, it may be that all the goods produced are subject to the same non-conformity and conforming goods do not exist and therefore cannot be delivered. Also non-conformity which has been caused by a misrepresentation by the seller or someone else earlier in the supply chain can mean that conforming goods do not exist. An unreasonable imbalance under KL 23 § may also occur in a situation where the goods sold are of a type that is no longer in production and cannot be found on the market at the time non-conformity is discovered.[81] This could typically happen in a case of hidden defect that is discovered only a long time after the sale.[82]

KL 34.2 § further stipulates that the seller be excused from delivering conforming goods if the contract concerned existing goods that are unique, irreplaceable judging by their qualities and what the parties have presupposed (when the parties have intended that the subject of the sale is the object in question). If the seller is excused, the buyer may still use his right to require repair under subsection 1. The seller's excuse from new delivery applies, for example, in second hand sales and sales of unique pieces of art. If the question is of a used car, the buyer cannot normally require new performance. On the other hand, if a new car of a specified type is sold, the seller can seldom be exempt under KL 34 §. The discussed exemption does not cover sales of future goods, for example, goods that are to be manufactured especially for the buyer after his order. However, the seller may still be exempt if the circumstances amount to such as provided in the KL 23 § (impediment or imbalance).[83] KL 34.3 § will be discussed in 3.2.2.1. below.

3.2.1.3. Buyer's obligations

KL 50 § provides that firstly, the buyer is to contribute to the sale in a manner which can reasonably be expected from him in order to enable the seller to fulfil the contract and secondly, the buyer is to collect the goods or to take delivery of them. Naturally, the buyer also has to pay the price as agreed in the contract. Breach of these obligations may give rise to the seller's remedies under the Sale of Goods Act. KL 51 § provides that if the buyer does not pay the price timely or does not contribute to the sale as required by KL 50.1 § and this has not been caused by the seller or a factor within his control, the seller may require payment or other performance of the contract or terminate the contract and in addition claim damages. A breach of the buyer's duty to collect the goods or to take delivery of them can seldom lead to a breach of contract (KL 51.2 §), and can never be the subject of an order for specific performance.[84]

The obligation to contribute to the sale refers to the time before delivery. What kind of contribution is required has usually been agreed in the contract. It may consist of, for instance, a duty to deliver blueprints or other instructions, materials or personnel or perhaps of a preliminary inspection of the goods to be delivered. Whatever the precise obligations are, the buyer's contribution has to be a prerequisite for the seller being able to fulfil the contract. Otherwise, no remedies are available for the seller in cases where the buyer fails to contribute.[85]

3.2.1.4. Buyer's failure to perform

According to KL 52 §, the seller has the right to keep to the contract and to require payment. However, in cases where the buyer cancels an order concerning goods that have to be produced or procured especially for the buyer, the seller may not keep to the contract by continuing production or other preparations for the delivery of the goods and by requiring payment, unless terminating the preparations would cause him essential harm or danger that the damage caused by the cancellation will not be compensated (KL 52.2 §). It has been argued that essential harm may also refer to substantial effects on the seller's ability to employ workforce.[86]

The only exception that may in some situations release the buyer from paying the agreed price concerns cases of cancellation of an order. In these situations, the seller's right to require payment may turn into a right to claim damages instead. Cancellation is considered to be an intentional breach of contract, and the seller is therefore entitled to damages for indirect losses as well (on damages see 3.2.2.2. below). KL 52.2 § applies only where the goods are to be produced or procured especially for the buyer. If the goods have already been produced or procured, the excuse is unavailable. It has been contended that KL 52.2 § is an expression of the principle according to which the parties are under obligation to mitigate damages. Furthermore, if the buyer cancels his order, the seller is to take also the buyer's interests into consideration (this could be seen as an expression of the principle of good faith or loyalty). Also from an economic perspective, it would be senseless to produce goods for which there is no demand.[87]

KL 53 § reads as follows:

53 §     "The seller may also keep to the contract and require that the buyer contribute to the sale as required by 51 § subsection 1. However, the buyer is not under obligation to fulfil the contract if there is an impediment to such fulfilment which the buyer cannot overcome, or if fulfilling the contract would require sacrifices that are unreasonable in comparison to the benefit to the seller from the fulfilment of the contract by the buyer.

If the impediment or imbalance is removed within a reasonable time the seller is, however, entitled to require the buyer to contribute to the contract.

The seller loses the right to require performance if he hesitates unreasonably long in making the requirement."

This section governing the seller's rights to require the buyer to contribute to the sale mirrors KL 23 § on the buyer's rights to require the seller to perform and reference can be made to the discussion in 3.2.1.1. above. In judging the imbalance between the buyer's troubles and the seller's benefits, one has to take into consideration, for example, how important it is to the seller that the contract is kept and how good the seller's possibilities to get compensation in damages from the buyer are.[88]

3.2.2. Secondary obligations: exemptions from damages

The Sale of Goods Act provides for three types of liability in damages. The main rule is the one adopted in KL 27.1-2 §, 40.1 § and 57.2 §, sometimes referred to as control liability, where intent or negligence are irrelevant.[89] KL 27.4 § is an example of culpa or fault liability, which only follows intent or negligence (dolus, culpa). According to the Sale of Goods Act, liability in damages for indirect losses is always culpa liability (direct and indirect losses are distinguished in KL 67 §), unlike in the CISG. The buyer's liability in damages for the unpaid price in KL 57.1 § represents strict liability.[90]

The Act also provides for adjustment of damages in KL 70.2 §. According to this section, damages may be adjusted if they are unconscionable taking into consideration the liable person's possibilities to take into account and prevent the losses as well as other circumstances. It may therefore happen that even though the performing party cannot efficiently invoke an exemption, he may still be relieved from paying part of the damages under 70.2 §. (See also 3.4. below.) The CISG does not contain a provision similar to KL 70 §, but Article 74 contains the requisite that the losses be foreseeable which may in some cases have a similar effect. Surprising losses on the other party's side may be left outside of liability in damages.[91]

3.2.2.1. Seller in breach

Delay. The seller's excuses from paying damages for delayed performance are regulated in KL 27 §. Liability in damages is stricter than liability for performance under KL 23 §. This is based on the notion that although it may not be possible or conscionable to make the seller fulfil his obligations specifically, it may still be justified to allocate him the risk of economic losses caused by his delay to the buyer.[92] KL 27 § reads as follows:

27 §     "(1) The buyer is entitled to a compensation for the loss he suffers as a consequence of the seller's delayed performance, unless the seller proves that the delay was caused by an impediment beyond his control, which he could not reasonably be expected to have taken into account at the time of the conclusion of the contract and whose consequences he could not reasonably have avoided or overcome.

(2) If the delay is caused by a person whom the seller has used to assist him in fulfilling his contractual obligations or a part of them, the seller is exempted from the duty to pay damages only if the said person would be exempted under subsection 1. The same applies where the delay is caused by the seller's supplier or other parties on earlier marketing levels.

(3) A loss described in 67 § will not be compensated under subsections 1 and 2 of this paragraph. The buyer is always entitled to compensation if the delay or loss is caused by negligence on the seller's side."

There are four prerequisites the seller has to prove in order to be released from liability in damages: (1) the delay has been caused by an impediment that prevents performance, (2) the impediment has to be beyond the seller's control, (3) the seller could not reasonably be expected to have taken the impediment into consideration at the time of the conclusion of the contract, and (4) the seller could not reasonably have avoided or overcome the impediment or its consequences.[93] All of these facts have to be proven true before the seller can be excused from paying damages.

(1) Impediment. It is not sufficient that the seller's performance becomes more expensive or more difficult. There has to be an impediment that prevents the seller from performing at the right time. According to the Government Bill, objective impossibility is not necessarily required, an impediment preventing just the seller from performing may be enough. The impediment has to be such that, even though the circumstances would not amount to (logical) impossibility, they would make the performance exceptionally burdensome, so that from an objective viewpoint it would clearly be unreasonable to require the seller to suffer the sacrifices necessary to perform the contract. It is enough that the impediment in practice prevents timely performance.[94]

The Government Bill gives a few examples of the kind of impediments that may prevent performance. For instance, a natural catastrophe may prevent deliveries or cause a shortage of electricity that prevents production. An accident, like a fire or an explosion as well as industrial action may stall the seller's activities. Also governmental activities, such as export or import bans, can prevent performance. Whatever the cause is, it has to prevent performance in order to come under KL 27 §. For example, an import embargo is irrelevant in cases where the goods can be obtained from domestic sources as well. KL 27 § does not exclude financial difficulties; these are, however, usually within the seller's control (see below).[95]

In judging whether there has been an impediment to performance or not, time is often a crucial factor. If, for instance, the sale concerns standard type of goods, and the goods are destroyed in an accident on the way to the place of delivery (at the seller's risk), there is an impediment to performance if there is not enough time left for a new delivery. The contract is another important factor. If the goods to be delivered have to be from a designated bulk, lot or crop, or a certain ship, for example, there is an impediment to performance if the source is destroyed, or does not come into existence at all (like a crop of wheat from a specified field). The more restricted and specified the seller's duties are, the more likely it is that an impediment prevents performance.[96]

Though impossibility is not necessarily required according to the Government Bill, the section should be interpreted strictly. This argument is further strengthened by the notion that release from paying damages should be more difficult than being excused from specific performance. Taking into consideration also the precondition number four, the impediment in KL 27 § would be comparable to the insurmountable impediment in KL 23 §, whereas KL 27 § contains no basis for excuse due to unreasonable sacrifices.[97] At least it is clear that objective impossibility qualifies under KL 27 § while a mere rise in prices does not.[98] It should also be noted that commentators to CISG Article 79 often interpret the word impediment in terms of impossibility (see 3.3.2. below).

(2) Beyond control. The impediment that prevents performance has to lie beyond the seller's control. What kind of events are within the seller's control is to be judged on the basis of objective criteria. All events preventing performance that are within the seller's control lead to liability in damages. The seller is naturally responsible for the actions of his employees, subcontractors and so forth. Nevertheless, industrial action is usually beyond the seller's control. However, if a strike, for example, has been caused by the seller's breach of labour laws or other such condemnable conduct, the situation may be judged to be within his control.[99]

The seller is responsible for actions he may influence by planning, organising or supervising. If the seller runs his business in an improper way, this may lead to liability in damages. A raw material shortage is not an excuse, if it could have been prevented by more careful planning. However, it is not required that the seller has acted in an improper manner. For example, sudden technical problems in production are considered to be within his control and therefore cannot be used as an excuse for delayed performance. Such occurrences are at the seller's risk. Another example of events that are usually within the seller's control are financial difficulties. If the seller cannot perform due to insufficient financial resources, he cannot avoid liability in damages. If, however, the difficulties are caused by a strike that suspends payment transactions and financing activities, this may perhaps be used as an excuse.[100]

(3) Unforeseeable. The impediment has to be such that it could not reasonably be expected that the seller would have taken it into consideration at the time the contract was concluded. Not all events that can be envisioned beforehand are relevant, however. Typical risks that may affect the seller's performance are considered foreseeable, but more unusual and remote events should be taken into account only if there is an acute risk of such an event occurring and preventing performance. For example, normal bad weather is usually to be taken into consideration, whereas exceptionally bad weather conditions might come under KL 27 §.[101] The requirement that the impediment be unforeseen has been recognised already before the Sale of Goods Act. In the case KKO 1944 II 131, the seller claimed that his performance had been prevented by an insurmountable impediment and that he should therefore be exempted from paying damages. The court held that the seller had to have taken the impediment into account at the time of the conclusion of the contract and that therefore he could not be exempted.

It has been argued that the requirement of unforeseeability also means that the impediment has to have occurred only after the conclusion of the contract.[102] This argument does not seem to be directly supported by the wording of the section and also differs from the acknowledged interpretation of the almost identical CISG Article 79(1), discussed in 3.3.2. below. If a pre-existing impediment is considered to prevent applying KL 27 §, the case could be settled under the Contracts Act as the Government Bill proposes in relation to KL 23 § (see 3.2.1.1. above).

(4) Unavoidable. The impediment or its consequences have to be such that the seller cannot have avoided or overcome them. The seller has to take reasonable action to avoid events that are beyond his control and that have been unforeseeable at the time of the conclusion of the contract or to overcome the consequences of such an event. The seller has to react to events that were not foreseeable at the time of the contract but become foreseeable before delivery.[103]

As it was not required that the impediment render performance absolutely impossible, it is not required that the impediment is impossible to avoid or overcome. Only reasonable action has to be taken. An example of avoiding or overcoming the impediment could be keeping sufficient storage of raw material in order to secure production. In some instances, the seller may be required to use alternative ways to perform than what he originally had planned, for example, to procure goods from another source or to use an alternative method of carriage.[104]

Third persons. KL 27.2 § strictens the preconditions of subsection 1 in situations where the delay has been caused by a person whom the seller has used to assist him in fulfilling the contract or by a supplier or another earlier link in the supply chain. In such circumstances, the seller is exempt only if the said person would be exempt under subsection 1 as well. Subsection 2 lays down a requirement for a "double force majeure," as described by Koskelo.[105] This means that the third person in question has to have been prevented from performing by an impediment meeting the criteria of subsection 1 and that this has formed an impediment to the seller, that would exempt him under subsection 1. The onus is on the seller to prove that the preconditions for an exemption have been met with.[106]

In many cases the possibility of an exemption is excluded already by subsection 1, under which the seller has the duty to ensure that the third party fulfilling the contract or a part of it has been elected and supervised in a proper manner. The third party is normally within his sphere of control. Furthermore, subsection 2 does not apply if the third person has not been used by the seller to assist him or, if the supplier does not supply goods or raw material but, for example, electricity. Then the case is to be analysed solely on the basis of subsection 1. Subsection 2 may be excluded, for instance, in situations where it can be inferred from the contract and other circumstances that the third party has not been chosen by the seller. This may typically happen when the buyer has demanded that a certain person or company be used and this party has in fact been assisting the buyer, not the seller. The fact that due to the structure of the market the seller has had no actual choice in electing the third party does not lead to the exclusion of subsection 2.[107]

It should be noted that the scope of application of KL 27.2 § is wider than that of CISG Article 79(2) (see 3.3.2. below). The rule is therefore stricter since the criteria of "double force majeure" are to be applied more widely. The CISG does not refer to suppliers or other parties on earlier marketing levels, although Article 79(2) does apply to such suppliers that are directly linked to the specific contract in question.[108]

Time factor. In addition to the above-presented prerequisites the time the impediment arose and its duration have also to be considered. If the impediment arises after the seller is already in breach of his contract, he will not be exempted from damages if the impediment would not have affected the fulfilment of the contract had the contract been performed at the right time. If the impediment described in KL 27 § is only temporary, the seller is exempted from liability for only such losses as the buyer has suffered during the time the circumstances described in KL 27 § lasts.[109] This follows from the requirement for causality between the impediment and the performance, though there is no express provision such as in CISG Article 79(3).[110]

It should also be noted that the seller cannot be exempted from compensating losses that have occurred because he has not informed the buyer of the impediment. According to KL 28 §, if the seller cannot perform in time, he is to give notice to the buyer of the impediment and its consequences on the possibility to fulfil the contract. Unless the buyer receives such notice within a reasonable time after the seller became or should have become aware of the impediment, the buyer is entitled to compensation for loss that could have been avoided had he received the notice in time.

Non-conformity. The seller's excuses from paying damages for losses caused by non-conformity of goods delivered are regulated in KL 40 §. This section refers to KL 27.1-2 §. A reference can therefore be made to the discussion above. It should be noted that the prerequisites laid down in KL 27 § are seldom met in cases of non-conforming goods. In most situations non-conformity is within the seller's control. Defects caused by production, storage, materials, construction or design are always within the seller's control. However, if the delivered goods have a hidden defect that can be found in all the same kind of products and the defect has been caused by a factor beyond the seller's control, the seller may be exempted. This is more likely to happen in cases of natural products: for example, a nightly interruption in the supply of electricity affects goods in a cooled storage. Likewise, if the question is of second hand goods or other existing specific goods, the seller may be excused more easily. A hidden defect in goods of a unique character may mean that conforming goods do not exist and the seller may be excused if he can show that the cause of the defect has been beyond his control.[111]

Apart from KL 40 §, also KL 34 § contains a provision on damages in cases of non-conformity. According to KL 34.3 §, if the seller is not excused from his obligations to repair the non-conformity and he does not fulfil this obligation at all or within a reasonable time (see KL 37.1), the buyer is entitled to compensation for the costs needed to repair the non-conformity to an amount that is reasonable (necessary and justifiable). This provision does not restrict the buyer's right to damages for non-conformity under 40 §. It is aimed at securing the buyer's rights to compensation in cases where he cannot recover damages under KL 40 § (see also 3.2.1.2. above). Therefore, if the buyer has the right to require repair in accordance with KL 34.1 § (does not cause unreasonable costs or unreasonable trouble to the seller) and the seller does not perform, he cannot be excused from paying damages for reasonable costs to repair the non-conformity.[112] It has been argued that the strictness of KL 34.3 § was adopted into the Sale of Goods following the model of CISG Article 46(1).[113] However, it should be noted that a possible exemption under CISG Article 79 applies to damages for all types of losses; there is no separate article for losses caused by a failure to repair non-conformity. Furthermore, the CISG contains the anomaly that the seller may be exempted from damages even though he would not be exempted from specific performance.

3.2.2.2. Buyer in breach

The seller's right to claim damages for losses suffered as a consequence of delayed payment or a breach of the buyer's other obligations is governed by KL 57 §, which reads as follows:

57 §     "The seller is entitled to a compensation for the loss he suffers as a consequence of the buyer's delayed payment, unless the buyer shows that the delay is caused by a provision of law, an interruption in public traffic or payment transactions or other similar impediment, which he could not reasonably be expected to have taken into account at the time of the conclusion of the sale and whose consequences he could not reasonably have avoided or overcome.

The seller has also on similar grounds as are laid down in 27 § a right to compensation for loss which he suffers because the buyer fails to contribute to the sale as required by 50 § subsection 1, or because the buyer fails to collect or take delivery of the goods in time where it can be inferred from the contract or the circumstances that the disposal of the goods is especially significant to the seller."

The buyer's excuses for not performing in time are stricter than the seller's. The types of impediments that may qualify as an excuse have been restricted by the examples given in the section. Furthermore, the impediment that prevents timely payment has to be objective in the sense that it affects all payments, not just the buyer's. Also the scope of liability is broader. The buyer is strictly liable for both direct and indirect losses caused by the late payment. As has been discussed above, the seller's liability is restricted to damages for direct losses except for cases of intent or negligence (fault).[114]

KL 57 § does not contain an express requirement that the impediment to timely payment be beyond the buyer's control. The section, however, does contain this requirement as can be inferred from the examples. The examples also show that the buyer's financial difficulties do not excuse him from damages for late payment.[115] The section refers to force majeure type of events.[116] However, impossibility as such does not seem to be required. The scope of application of the section is largely subject to interpretations of what would be reasonable in relation to avoiding or overcoming the consequences in each case.

The buyer is also liable for the loss the seller suffers as a consequence of the buyer's failure to contribute to the sale as required or to collect or take delivery of the goods if it is especially important for the seller to dispose of the goods. This liability is similar to the seller's liability governed by KL 27 § and a reference can be made to the discussion above in 3.2.1.1. It should also be noted that KL 57 § does not govern the buyer's obligation to pay damages for the costs incurred in taking care of and storing the goods in the case the buyer has not collected or taken delivery of them. This obligation is governed by KL 75 §, according to which the buyer is liable for such costs. The causes of why he has not collected or taken delivery of the goods are of no relevance.[117]

3.3. CISG

3.3.1. Primary obligations: exemptions from performance

3.3.1.1. Seller in breach

The seller's obligations have been laid down in Article 30. According to this Article, the seller must deliver the goods, hand over any documents relating to them and transfer the property in the goods, as required by the contract and by the CISG. Pursuant to Article 35, the seller is to deliver goods which are in conformity with the contract. The principal rule concerning the buyer's right to require the seller to fulfil his obligations is to be found in Article 46, which reads:

"Article 46

(1) The buyer may require performance by the seller of his obligations unless the buyer has resorted to a remedy which is inconsistent with this requirement.

(2) If the goods do not conform with the contract, the buyer may require delivery of substitute goods only if the lack of conformity constitutes a fundamental breach of contract and a request for substitute goods is made either in conjunction with notice given under Article 39 or within a reasonable time thereafter.

(3) If the goods do not conform with the contract, the buyer may require the seller to remedy the lack of conformity by repair, unless this is unreasonable having regard to all the circumstances. A request for repair must be made either in conjunction with notice given under Article 39 or within a reasonable time thereafter."

Article 46 provides that the buyer has the right to require the seller to specifically perform the contract. Specific performance here refers to cure (new delivery or repair) as well. The Article also applies to partial non-performance. The buyer loses his right if he has resorted to a remedy that is inconsistent with the demand for specific performance. Such remedies include avoidance and reduction of price. Claiming damages for late performance does not prevent the buyer from requiring specific performance.[118]

It would seem that the seller would have no excuses for non-performance. However, Article 28 mitigates the strictness of Article 46:

"Article 28

If, in accordance with the provisions of this Convention, one party is entitled to require performance of any obligation by the other party, a court is not bound to enter a judgement for specific performance unless the court would do so under its own law in respect of similar contracts of sale not governed by this Convention."

The effect of Article 28 according to the Government Bill, is that the party requiring performance can only be entitled to it in the extent that the municipal laws [119] of the country where the court resides governing similar contracts of sale as the CISG will grant. This also means that, in cases where the municipal laws would grant specific performance, the court must grant it (if the party has the right to it under CISG, see 3.3.3. below). If a case is brought before a Finnish court, the right to performance can be settled in accordance with both CISG Article 46 and the relevant sections of the Sale of Goods Act.[120] However, Article 28 does leave the court wider discretion than it would have under its own law,[121] so at least in theory it would be possible to grant specific performance even in cases where the Sale of Goods Act would not allow it. It is submitted that in practice the courts will probably follow the rules they are more familiar with, and will not grant specific performance unless their domestic rules would lead to such a decision. The procedure, therefore, is first to analyse whether the party has the right to require performance under the CISG and then, if the answer were yes, to analyse whether the domestic rules would lead to a different result.

In cases of late performance, specific performance may be granted in accordance with Article 46(1) and KL 23 §. The seller does not have to perform if there is an impediment to such fulfilment which the seller cannot overcome, or if fulfilling the contract would require sacrifices that are unreasonable in comparison to the benefit to the buyer from the fulfilment of the contract by the seller (see 3.2.1.1. above).

If the seller has delivered non-conforming goods, the buyer may require delivery of substitute goods in accordance with Article 46(2) and KL 34.2 §. Firstly, the lack of conformity has to constitute a fundamental breach of contract. According to Article 25, a breach is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result. Therefore the seller may be excused from a new delivery if the results of him delivering non-conforming goods have been unforeseeable as described in Article 25. Secondly, under KL 34.2 §, the seller is excused if the breach of contract did not have significant importance to the buyer or when it did but the seller did not understand this and he ought not to have understood this. Thirdly, under KL 34.2 §, the seller is excused in cases of an impediment or imbalance such as described in KL 23 § (see 3.2.1.1. above). Finally, the seller does not have to perform if the contract was of existing goods with unique characters as described in KL 34.2 §.

The question of repair is subject to Article 46(3) and KL 34 § subsection 1. According to Article 46(3), the buyer may require the seller to remedy the lack of conformity by repair, unless this is unreasonable having regard to all the circumstances. Under KL 34.1 § the seller is excused if the non-conformity cannot be cured without unreasonable costs or unreasonable trouble to the seller.

3.3.1.2. Buyer in breach

According to CISG Article 53, the buyer must pay the price for the goods and take delivery of them as required by the contract and the CISG. Article 60 provides that the buyer's obligation to take delivery consists of doing all the acts which could reasonably be expected of him in order to enable the seller to make delivery and of taking over the goods. According to Article 62, the seller may require the buyer to pay the price, take delivery or perform his other obligations, unless the seller has resorted to a remedy which is inconsistent with this requirement (such a remedy can mainly be avoidance).[122]

These obligations are also subject to Article 28: a court is not bound to enter a judgement for specific performance unless the court would do so under its own law in respect of similar contracts of sale not governed by the CISG (see above 3.3.1.1. and 3.3.3. below). Both the CISG and the Sale of Goods Act are therefore relevant if the case is decided in Finland.

Article 62 does not provide for any excuses for the buyer to be exempted from his obligations. This is also the case in KL 52 § concerning the seller's right to require payment (except for cases of cancellation, see 3.2.1.4.). KL 51.2 § provides for the situation where the buyer does not fulfil his obligation to collect or take delivery of the goods. According to it, the seller may declare avoidance or claim damages. Therefore, specific performance regarding the obligation to collect or take delivery of the goods cannot be granted. The buyer's duty under Article 60(a) is at least in part overlapping with the buyer's obligation to contribute to the sale under KL 50.1 §. Therefore, KL 53.1 § also has to be taken into account. As has been noted above in 3.2.1.2., under KL 53.1 § the buyer is excused from contributing if there is an impediment to such fulfilment which the buyer cannot overcome, or if fulfilling the contract would require sacrifices that are unreasonable in comparison to the benefit to the seller from the fulfilment of the contract by the buyer.

3.3.2. Secondary obligations: exemptions from damages

Article 79 governs both the seller's and the buyer's chances of being exempted from paying damages for breach of any of their obligations. The Article closely resembles KL 27 §, which is no accident since paragraphs (1) and (2) of Article 79 have served as a model for KL 27 §.[123] According to Articles 45 and 61, liability in damages does not depend on questions concerning fault (intent or negligence). This applies also to indirect losses since the CISG does not distinguish them from direct losses (see Article 74). Anglo-American influence can be detected behind these provisions.[124] Under the CISG, liability in damages is always control liability. Article 79 provides:

"Article 79

(1) 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.

(2) If the party's failure is due to the failure by a third person whom he has engaged to perform the whole or a part of the contract, that party is exempt from liability only if: (a) he is exempt under the preceding paragraph; and (b) the person whom he has so engaged would be so exempt if the provisions of that paragraph were applied to him.

(3) The exemption provided by this Article has effect for the period during which the impediment exists.

(4) The party who fails to perform must give notice to the other party of the impediment and its effect on his ability to perform. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, he is liable for damages resulting from such non-receipt.

(5) Nothing in this Article prevents either party from exercising any right other than to claim damages under this Convention."

The four prerequisites the seller has to prove in order to be released from liability in damages are the same as discussed above in 3.2.2.1: (1) the delay has been caused by an impediment that prevents performance, (2) the impediment has to be beyond the seller's control, (3) the seller could not reasonably be expected to have taken the impediment into consideration at the time of the conclusion of the contract, and (4) the seller could not reasonably have avoided or overcome the impediment or its consequences.[125] All of these conditions have to be proven true before the seller can be excused from paying damages. The examples of the situations where exemption can be granted given in the Government Bill are similar to those given in the bill concerning the Sale of Goods Act.[126] The Article should, however, not be applied on the basis of domestic laws, but one should keep in mind Article 7, which provides, among other things, that the Convention's international character is to be appreciated as well as the need to promote uniformity in its application.[127]

(1) Impediment. There has to be an impediment to due performance. According to Honnold, the word impediment "implies a barrier to performance, such as delivery of the goods or transmission of the price rather than an aspect personal to the seller's performance." Furthermore, performance has to be prevented by the impediment.[128] According to Stoll, who sees Honnold's definition of impediment as too narrow, the term refers to events external to the party in breach which may be "natural, social, or political events or physical or legal difficulties." Purely personal circumstances, such as personal inadequacy or a mistake of law could not amount to an impediment within the meaning of Article 79.[129]

Article 79 does not use the term impossibility. The requirement that performance be prevented does, however, seem to refer to impossibility instead of impracticability or other less forceful event. Tallon, for example, states that the Article deals with "one of the most delicate questions in contract law [:] the effects of the impossibility to perform one of the obligations of the contract."[130] In the case Nuova Fucinati S.p.A. v. Fondametall International A.B.[131] the tribunal of Monza found that Article 79 would not excuse a party unless performance had become impossible.[132] It is noticeable that the authorities seem to be of the mind that the impediment or impossibility should be objective. As has been discussed in 3.2.2.1. above this was not required under KL 27 §.

The impediment may have existed already at the time of the conclusion of the contract (as in cases of initial impossibility),[133] unlike under KL 27 § according to some commentators (see 3.2.2.1. above). It may also be economic, as long as it fulfils the requirements provided by Article 79.[134] For example, increased procurement and production costs as a rule do not constitute an exempting impediment since the performing party is usually understood to have guaranteed his financial capability to fulfil the contract.[135] On the other hand, at least according to Huber, a party might be exempted when war, blockade or other such event does not make performance impossible, but makes it possible only with unforeseeable expenses clearly out of proportion to the price agreed.[136]

(2) Beyond control. The impediment must be beyond the promisor's control. According to Stoll, this requirement is based on the assumption that there is a typical sphere of control: a sphere within which it is objectively possible for, and can be expected of, the promisor to be in control. For example, manufacturing defects fall within the manufacturer's sphere of control even if reasonable measures had been taken to prevent them, whereas disadvantageous qualities of goods (cf. tobacco) discovered at some later date do not, provided that they were manufactured in accordance with the relevant technical rules and existing scientific knowledge.[137] According to Schlechtriem, the obligor is always responsible for impediments that he could have prevented but, despite his control over preparation, organisation, and execution, failed to do so. Negligence, however, is not required.[138] For example, in a case decided by the High Arbitration Court of Russia, the buyer had paid the price, but the money was stolen from the foreign bank before the seller had obtained it. The Court held that the failure of the buyer was not due to an impediment beyond his control.[139]

(3) Unforeseeable. The impediment has to be reasonably unforeseeable. If there is a realistic risk of an impediment to performance and the contract is nevertheless unconditionally entered into, the risk of the impediment has been assumed and exemption cannot be successfully claimed.[140] Where neither the explicit or implicit terms of the contract show that the impediment was in fact foreseen, it has to be determined whether the nonperforming party could reasonably have been expected to take it into account at the time of the conclusion of the contract. This can only be made on a case by case basis.[141] In a Russian arbitral award of 17 October 1995, the buyer requested discharge from liability on the basis that he did not have the foreign currency necessary for the payment. The tribunal firstly held that the lack of foreign currency did not qualify under the force majeure clause in the contract and went on to state that the buyer had not taken any measures to ensure that the payment could actually be made.[142]

(4) Unavoidable. The impediment and its consequences must have been unavoidable. An impediment may be avoided or overcome, for example, by choosing another form of transport or another route (like shipping the goods via the Cape of Good Hope instead of the Suez Canal) or even by delivering a commercially reasonable substitute for the performance which was required by the contract. However, the promisor should not be expected to risk his own existence by performing his obligations at all costs,[143] even though the Secretariat Commentary does state that the obligor must do all in his power to carry out his obligation.[144]

Third persons. Article 79(2) represents the same kind of "double force majeure" regulation as does KL 27 § (see 3.2.2.1. above). According to Article 79(2), if the promisor's failure to perform is due to a third person whom he has engaged to perform the contract or a part of it, the promisor can only be exempt from liability in damages if he is exempt under Article 79(1) and the third person would be exempt as well if 79(1) would be applied to him. 79(2) requires that there be a sub-contract with an organic link to the main contract. Furthermore, the subcontractor must be legally independent of the party to the main contract. Also, the sub-contractor must at least have been accepted by the promisor, and act under his control.[145]

Article 79(2) applies to such third persons only that directly fulfil the contract or a part of it. If the question is. for example, of an energy supplier whose performance may be a precondition for the performance of the main contract, but not part of it, the liability is settled under 79(1) only.[146] According to Schlechtriem, the seller is not liable for secondary suppliers when they are beyond his control and their failure could neither be taken into account nor cured (the normal requirements under 79(1)). This would apply in cases where the seller could not choose nor control his suppliers and it was not possible to procure, produce or repair the goods in any other manner.[147]

Onus. It should be noted that the burden of proof concerning the preconditions laid down in 79(1) as well as those in 79(2) is on the party seeking exemption. The Russian arbitral award of 16 March 1995 illustrates the difficulties facing the party in breach: Chemical products were to be delivered by a Russian supplier to a German buyer within the fourth quarter of 1992. The seller did not perform and the buyer sued and claimed damages. The seller maintained that he should be exempted since he had been unable to deliver the goods for reasons beyond his control. According to him, the delivery had been prevented by an emergency production stoppage at the plant manufacturing the goods specified in the contract. The Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry held that the seller had been unable to prove the facts that would have discharged him from liability. The manufacturer's refusal to supply the seller with the goods could not be deemed sufficient grounds for such discharge. In addition, the court stated that the seller had been unable to establish that it could not reasonably be expected to have taken the obstacle preventing performance into account or to have avoided the obstacle or its consequences.[148] The tribunal seems to have concluded that the seller could prove none of the preconditions under Article 79.

Time factor. According to Article 79(3) the exemption under 79(1) and 79(2) starts when the impediment occurs and lasts as long as the impediment exists. Article 79(3) does not provide whether or not the performing party is under obligation to perform after the impediment has ceased to exist.[149] This should be clear since 79(5) explicitly limits the application of Article 79 to damages and the promisee's duty to perform remains unchanged in the event of exempting impediments.[150] Under 79(4), a party is liable for damages caused by his failure to notify the other party of the impediment and its effects even if he would otherwise be exempt.[151]

Partial non-performance. Article 79 does not provide for the situation where only part of the performance is prevented. It refers to a failure of any obligation, but does not lay down the consequences of the non-performance of the contract as a whole.[152] Honnold notes that the language of the provision permits exemption to the extent that the impediment applies. This can be supported by Article 51(1) allowing remedies to apply in respect of partial breach. The promisee's rights to other remedies would not be impaired.[153]

3.3.3. Problem of specific performance

The question of impossibility of performance raises three specific problems relating to specific performance that should be discussed. These are, firstly, what is the effect of Article 79 on specific performance, secondly, can the court grant specific performance where it would not do so under its own law, and thirdly, on what grounds can the court deny specific performance in situations where domestic law would grant it.

Article 79 and specific performance. As stated in 79(5), the Article does not prevent the parties from requiring other remedies provided by the Convention. According to the Secretariat Commentary, the obligee may demand performance, reduction of price or avoidance of the contract. In cases where the obligor has attempted to overcome an impediment by furnishing a substitute performance, the obligee may avoid the contract and reject the performance only if the performance was so deficient in comparison to the agreed performance that it constitutes a fundamental breach of contract. Even in cases of impossibility of performance, the receiving party would have the right to require that performance under Articles 46 or 62. The CISG seems to leave this question to be solved by the domestic laws of the court deciding the case (see Article 28).[154] According to Schlechtriem, "it may be hoped that the general belief expressed in Vienna that a judgment for a physically impossible performance would be neither sought nor obtained should lead to a reasonable limitation o[f] Article 79(5)."[155]

Among others, Tallon has expressed discontent with Article 79(5). According to him, the Article leads to unrealistic results, especially in cases of impossibility of performance.[156] Huber seems to have adopted a rather unconventional view. He refers to the spirit of Article 46(1) and states that it would be inconsistent to allow a buyer to require performance in cases where performance is prevented by an impediment that the seller is not required to overcome under Article 79. Huber would apply the criteria laid down in Article 79 to release the party from performing.[157] Stoll, in turn, states that upholding the right to require performance is sensible as a basic rule and acknowledges the fact that the right to require performance is not settled by Article 79. He adds, however, that in a case of impossibility of performance the right to claim performance would be absurd.[158] Honnold notes that the legislators did not intend to allow this kind of absurdity, but most likely dismissed further discussion about the breadth of 79(5) in order to avoid the complications of producing a revised text.[159] It would seem to be clear that Article 79 only concerns exemptions from damages. It has no direct significance in relation to the right to require performance.

Court's power to order specific performance. Under Articles 46(1) and 62 the main rule is that the receiving party has the right to require performance. This right is subject to the limitations in Article 46(2) and 46(3) as well as those of domestic laws in accordance with Article 28. Where the domestic law of the court would not allow or require specific performance the court does not have to allow it either, though it may.[160] E contrario, it would seem that, where the domestic law required specific performance, the court must order it in cases where the party has a right to it under the Convention. The wording "unless the court would do so" would seem to infer this too.[161]

Article 28 was taken into the Convention, on the one hand, because the courts in some countries do not have the authority or the procedural mechanisms to order specific performance, and on the other, to satisfy the common law countries, where the criteria for granting specific performance is very strict. The purpose therefore was to allow, not to compel, the court to follow its own law where specific performance would not be granted by it. The argument that the court is not bound to reject a request to specific performance in cases where it would do so under its own law [162] seems therefore reasonable.

Court's power to deny specific performance. The court has to order specific performance only if, firstly, the CISG and secondly, the domestic law requires it. As noted in 3.3.1.1., the procedure therefore should be first to examine whether the party has the right to require specific performance under the CISG. If the answer to this question were positive, but the court would not be happy with this decision, then the court would have the possibility to examine whether it could reject the requirement under the safety valve of its own law.[163] The important question in cases where the domestic law does not provide for limitations for ordering specific performance or where the court does not even look into its domestic rules is, does the CISG provide for any limitations on or exemptions from specific performance,[164 for example, in cases of impossibility of performance?

Mitigation of damages. Articles 46(2) and (3) have already been mentioned as directly limiting the right to cure in the form of new delivery or repair. A more difficult question is delay of performance. It has been suggested that Article 77 on the duty to mitigate damages would limit the rights to performance under Articles 46 and 62.[165] Opinions on this question vary, however. Kastely, for instance, notes that the language of Article 77, the construction of the Convention and its legislative history prove otherwise.[166] Demands by third parties have also been stated to form a limitation to specific performance.[167] If, however, not even (logical) impossibility is recognised as a limitation, why then would any third party claims be? Anyhow, this is a question of domestic laws and not a question of whether any exemptions could be granted under the Convention.

Interpretation of the Convention. According to Article 7(1), when interpreting the Convention regard should be had to its international character, the need to promote uniformity in its application and the observance of good faith in international trade. It has been argued that the observance of good faith would restrict the parties' rights to require specific performance at least in cases where a party seeks this remedy after a delay that permits him to speculate at the expense of the other party (e.g. after a rise in market prices).[168] Kastely notes that a good faith limitation to Articles 46 and 62 may be especially important in cases of impossibility or impracticability of performance. According to her, it is appropriate to interpret Articles 46 and 62 consistently with a general obligation of good faith. In her opinion, where a party would inflict "undue pain or punishment" to the other party, the court can prevent this under Article 7.[169]

However, Article 7(1) is directed towards the courts interpreting the Convention. Therefore, it does not directly oblige the parties to the contract, although it has been argued that it lays down a principle of good faith that the parties should obey.[170] The wording of Articles 46 and 62 is very precise and leaves little room for interpretation. It is submitted that these Articles cannot be interpreted in such a manner that would allow the court to refrain from ordering specific performance merely on the basis that requiring performance would be a violation of good faith. This would be equivalent to introducing a new rule allowing for exemption, which Article 7(1) would not seem to allow. This brings us to the question of Article 7(2).

Supplementing the Convention. Article 7(2) provides that questions concerning matters governed by the CISG which are not expressly settled by it are to be settled in conformity with the principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law. This provides for means of gap filling in cases of lacuna. It could be argued that the question of, for example, the influence of impossibility of performance is a question not expressly settled by the Convention. On the other hand, both the right to require performance and exemptions have been dealt with in the CISG and it could be thought that the non-existence of the question means that impossibility should not be taken into consideration.[171] However, the Convention is a result of numerous compromises between different legal systems. The question of specific performance resulted to the less-than-perfect results apparent in Articles 79(5) and 28 (see above). It may be that the issue was left open, not intentionally, but perhaps due to practical difficulties in the legislatory process.[172] This would leave open the possibility to supplement the rules of the Convention in accordance with Article 7(2).

The first source of gap-filling rules would be the principles on which the Convention is based. It might be difficult to establish that the Convention is based on "impossibilium nulla est obligatio" or other such principle.[173] However, at least the principle of good faith has been argued to be a principle on which the Convention is based on (as perhaps also Article 7(1) implies), and could be used to limit ordering specific performance in some cases pursuant to Article 7(2). Furthermore, Article 7 promotes an international approach, domestic laws should only be applied as a last resort [174] Municipal laws should be avoided to promote uniformity in application.[175] The fact that many jurisdictions as well as usages in international trade and international legal instruments, such as the UNIDROIT Principles [176] or the Principles of European Contract Law, contain rules that excuse the party from performance in cases of impossibility, force majeure or the like makes it reasonable to assume that the Convention would be based on such ideas as well.

Trade usage. Article 9(1) provides that the parties are bound by any usage to which they have agreed to or which they have established by themselves. Though it has been stated that a usage adopted by the parties could lead to an exemption from specific performance,[177] it may be that such usages seldom occur. According to Article 9(2), unless otherwise agreed, the parties are bound by a trade usage of which they knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned. It is submitted that judging by, for example, contract practices, taking into consideration especially standard terms prepared through collaboration of representatives of both sellers and buyers, it could in some cases be established that an international trade usage providing for release from the duty to perform exists.

On the basis of the arguments presented above, it is submitted that a party should be able to successfully reject a demand for specific performance in accordance with the CISG at least in cases of impossibility of performance even in countries that do not give effect to such events. The risk of the court interpreting the Convention in another manner, however, remains.

3.4. Contracts Act

It has been stated that the majority of the countries in the European Community have introduced into their law some mechanism to correct injustices resulting from an imbalance in the contract caused by supervening events, that is, situations of the type of hardship.[178] The Sale of Goods Act or the CISG do not contain such provisions. However, though the described sales laws applicable in Finland are silent on the matter, a rule that encompasses also situations of changed circumstances of the said type can be found in the Contracts Act 36 §, sometimes called the big general clause.[179] Contracts Act 36 § came into force 1 January 1983 and it is applicable retrospectively.

However, according to the Government Bill on the Sale of Goods Act, it is this act that sets the primary criteria for the analysis of what kind of effects changed circumstances may have on the contractual relationship, and that adjustment of the contract under Contracts Act 36 § should only come into question if there are special reasons for it.[180] Though this was stated in relation to the Sale of Goods Act, it should apply in relation to the CISG as well. Because of this and in attempt to restrict the scope of this study, 36 § shall be introduced only briefly.

According to 36 § subsections (1), (2) and (3):

36 §    

"(1) If a term of a contract [181] is unconscionable or its application would lead to unconscionability, the term may be adjusted or it may be set aside. In determining unconscionability one must take into consideration the contents of the contract as a whole, the position of the parties, circumstances prevailing at the time of the conclusion of the contract and after it, as well as other relevant facts.

(2) If the term described in subsection (1) is such that because of the adjustment of the said term it would be unconscionable if the rest of the contract stayed in force unchanged, other parts of the contract may be adjusted as well or the contract may be declared discharged.

(3) A commitment concerning the price is also considered to be a term of the contract."

Under Contracts Act 36 §, a contract term or even the whole contract may be adjusted if it is considered to be unconscionable, either originally or due to supervening circumstances.[182] Adjustment is only possible where a valid contract has been concluded. Even though it may lead to the whole contract being declared discharged (frustrated), the contract has been in force and binding for some time before the adjustment. 36 § cannot lead to nullity ab initio.[183] In this sense, the effect is similar to that of the doctrine of frustration (see 5. below).

For example, in the case KKO 1990:138, the question was of a contract for the supply of electricity. The contract was concluded in 1963 for 99 years providing that the company would continue to produce electricity. The contract stipulated that for electricity in excess of 5000 kWh/year (up to which amount the buyer would receive free in exchange for real property sold) the buyer was to pay according to the tariffs for occasional users, a tariff higher than that for regular users. In short, a considerable time after the conclusion of the contract increased consumption led to a situation where electricity became more expensive to the buyer than it would have been if the tariff for regular users had been applied to the whole amount consumed. The Supreme Court adjusted the price term by replacing the tariff on electricity in excess of 5000 kWh per year with the tariff for regular users. Lower instances would not have adjusted the contract. The case is actually less dramatic than it seems since the reduction made by the court was equal to what the supplier had already offered to the buyer. However, the buyer had rejected the offer and thus this was not a case of the court confirming a settlement by the parties.[184]

Another example of a hardship type of situation is the case KKO 1991:182, which concerned a contract for supplying energy. The contract was concluded for five years at a time, and could be terminated by a year's notice before the said five years. During the contract period, the law on value added tax changed and made the contract more onerous for the supplier who then informed the buyer of a 9.6% rise in prices. The buyer sued the supplier requiring it to keep to the original contract. The Court of Appeal (HHO 13.1.1990) stated that, on the one hand, the costs of the supplier had increased and this had occurred unexpectedly and concerned only a specific branch of industry. On the other hand, the contract was for a fixed time and it had not been shown that the change in the tax laws had led to higher total costs and thus disturbed the balance of the obligations of the parties to such a significant extent that applying the agreed term on the price would have led to apparent unconsionability. Contracts Act 36 § was therefore not applied. The rise in prices was declared ineffective and the supplier was ordered to return the amounts received in excess of the contract price. The Supreme Court upheld the decision.

It should be noted that the court may also adjust the damages, not only the primary obligations under the contract. As has been noted above in 3.2.2., the Sale of Goods Act 70.2 § provides for this explicitly in cases of sales contracts. In the case KKO 1982 II 141, which was decided before the (new) Contracts Act 36 § or the Sale of Goods Act had entered into force, the seller was to supply milk powder for the price of 3.50 marks per kilogram. Unexpectedly, due to governmental activities, the production costs of milk powder rose from 1.81 to 4.17 marks. The seller refused to deliver part of the agreed quantity. The Court held that applying the price term in the contract would have led to apparent unconscionability, and the buyer's claim for damages for losses caused by a substitute purchase was therefore adjusted by decreasing the sum by one third.

3.5. Conclusions

Both of the discussed sales laws applicable in Finland contain provisions on exemptions from contractual obligations in situations where the circumstances have so changed as to make performance more difficult. Specific performance rules under the CISG refer to the domestic laws of the deciding court as a limiting factor. Therefore the decisions may differ considerably from country to country. The risks attached to this feature of the CISG can be controlled by choice of law clauses as well as clauses providing for the effects of changed circumstances in the contract.

The CISG does not distinguish between monetary and non-monetary obligations in relation to exemptions from damages. When the question is of non-monetary obligations, the CISG may be stricter than the Sale of Goods Act. According to many commentators, impossibility of performance is required, whereas under the Sale of Goods Act this would not appear to be the case. This is, however, a question to be settled in the courts, and the differences may be only superficial. The "double force majeure" rule is stricter in the Sale of Goods Act. Also in relation to monetary obligations, the Sale of Goods Act would seem to be stricter. To make comparing the individual rules easier, the main exempting rules in the Sale of Goods Act and the CISG are presented in Appendix 1. Where the appendix refers to the court's own law, the exempting event in the column for the Sale of Goods Act applies as well.

Neither the Sale of Goods Act nor the CISG contain express rules on hardship. The kind of events usually associated with the term hardship, for example, an increase in prices, would not normally exempt the obligor under these rules. However, in exceptional cases the obligor might be entitled to adjustment of an unconscionable contract term or the whole contract under Contracts Act 36 § and thereby to an exemption from liability. Applying this section may also lead to discharge (frustration) of the contract. Also KL 23 § may apply in some hardship type of circumstances ("sacrifices that are unreasonable in comparison to the benefit to the buyer from the fulfilment of the contract by the seller"). However, the aim of this section is in releasing the obligor from performance, not in preserving the contract. Rather than referring to hardship, KL 23 § seems to refer to unconscionability as does Contracts Act 36 §. On the basis of the discussion in this chapter, it is submitted that the law applicable in Finland provides for exemptions from obligations in three types of changed circumstances: impossibility, force majeure, and unconscionability.

Table 2 presents a rough illustration of the rules leading to a possible exemption from liability under the law applicable in Finland. If we compare these rules with the definitions proposed in chapter 2, it can be said that the concepts of impossibility, force majeure or hardship do not appear as such in them. As stated above, hardship as defined in chapter 2 does not appear to be a relevant factor in the Finnish law though some of the hardship-type of circumstances may be. There are no stipulations whose aim could be said to be saving the contractual relationship. Impossibility and force majeure in turn do have significance but it is submitted that the law provides for more room for consideration of fairness or unconscionability. From the viewpoint of the definitions proposed in chapter 2, these have been modified to allow exemption more often than in the pure cases of impossibility or force majeure as described.

Table 2. Exemptions under the law applicable in Finland

Changed circumstances that affect the contract

Impediment to performance or unreasonableness Cause irrelevant ®
Exemption from performance
=  
Impossibility amended by reasonableness
Impediment to performance Cause
1. Reasonably irresistible
2. Reasonably unforeseeable
3. Beyond control (external)
®
Exemption from damages as well
=  
Force majeure amended by reasonableness
Any change that affects the contract All the relevant factors considering unconscionable ®
Adjustment or termination
=  
Unconscionability
Situation not unconscionable ®
No effect
=  
Mere inconvenience

4. IMPOSSIBILITY IN INTERNATIONAL INSTRUMENTS

4.1. UNIDROIT Principles of International Commercial Contracts

The UNIDROIT Principles were published in 1994. The Principles were drafted taking into consideration a number of different national legal systems as well as the CISG and other international instruments prepared by UNCITRAL.[185] According to the preamble to the UNIDROIT Principles, the Principles shall be applied when the parties have agreed that their contract be governed by them and they may also be applied when the parties have agreed that their contract be governed by "general principles of law," the "lex mercatoria" or the like. Furthermore, they may (among others) provide a solution to an issue raised when it proves impossible to establish the relevant rule of the applicable law. In addition, they may be used to interpret or supplement international uniform law and they may serve as a model for national and international legislators. It has been discussed in the literature whether UNIDROIT Principles could be used to supplement the CISG, for example, whether the hardship provisions could be applied when the CISG is the governing law. The answer in most cases would appear to be negative.[186]

Article 6.2.1 establishes the principle of pacta sunt servanda as the main rule to be followed. This Article provides that if the performance of a contract becomes more onerous for one of the parties, he is nevertheless bound to perform his obligations subject to the following provisions on hardship. Article 6.2.2 then defines hardship and 6.2.3 provides for the effects of it as has been discussed above in 2.4. Where the equilibrium of the contract has been fundamentally [187] altered, the disadvantaged party is entitled to request renegotiations.[188] Where such negotiations fail to lead to an agreement within a reasonable time either party may resort to the court, which may, if reasonable, terminate the contract or adapt it with a view to restoring its equilibrium. It should be noted that hardship does not automatically lead to an exemption from performance. The disadvantaged party is still under obligation to perform even if renegotiations have commenced. Only an agreement or a court order may release the party from this obligation (Article 6.2.3(2)). Sometimes a situation may qualify as both hardship and force majeure (see below). In such occasions the party affected by these events may decide which remedy to pursue.[189]

Article 7.1.7 concerns force majeure situations. It reads as follows:

"Article 7.1.7 Force majeure

(1) 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 it or its consequences.

(2) When the impediment is only temporary, the excuse shall have effect for such period as is reasonable taking into account the effect of the impediment on performance of the contract.

(3) The party who fails to perform must give notice to the other party of the impediment and its effect on its ability to perform. If the notice is not received by the other party within a reasonable time the party who fails to perform knew or ought to have known of the impediment, it is liable for damages resulting from such non-receipt;

(4) Nothing in this article prevents a party from exercising a right to terminate the contract or withhold performance or request interest on money due."

According to Article 7.1.1, the term non-performance refers to a failure by a party to perform any of its obligations under the contract, including defective performance or late performance. Article 7.1.7 thereby applies to all such events. According to the commentary, this Article concerns the area covered in common law systems by doctrines of frustration or impossibility and in civil law systems by doctrines such as force majeure, Unmöglichkeit, and the like.[190] The prerequisites for an exemption in paragraph (1) are almost identical to those in KL 27.1 § and CISG Article 79(1). However, Article 7.1.7 contains no provisions on third persons such as the "double force majeure" rules in KL 27.2 § and CISG Article 79(2), and is therefore more lenient than these. Unlike in CISG Article 79(5), Article 7.1.7(4) does not limit the scope of the Article to damages only. Article 7.1.7 exempts the non-performing party both from performance and damages (at least for the time performance is affected by the impediment), though its primary aim is in releasing the obligor from liability in damages.[191]

Article 7.2.2 provides for grounds of exemption in cases of non-performance of non-monetary obligations. Article 7.2.1, which gives the obligee the right to require payment, does not contain any such grounds, so the party may only be exempted under the force majeure rule. If the less strict criteria of Article 7.2.2 are met, the obligor is exempt from performing specifically, but he may still be liable in damages if he cannot prove an impediment in accordance with 7.1.7. Article 7.2.2 reads as follows:

"Article 7.2.2 Performance of a non-monetary obligation

If a party who owes an obligation other than one to pay money does not do so, the other party may require performance, unless

(a) performance is impossible in law or in fact;

(b) performance or, when relevant, enforcement is unreasonably burdensome or expensive;

(c) the party entitled to performance may reasonably obtain performance from another source;

(d) performance is of an exclusively personal character; or

(e) the party entitled to performance does not require performance within a reasonable time after he has, or ought to have, become aware of the non-performance."

According to Article 7.2.3, the right to performance includes the right to repair or replacement of non-conforming goods. The exemptions under Article 7.1.7 are fairly numerous. Precondition (c) requires that the obligee has a legitimate interest to demand performance. This rule could be seen as an expression of the principle of good faith or loyalty. It can also be seen to be directed towards a fair choice of remedies: where performance may reasonably be obtained elsewhere, the obligor's liability in damages is adequate to protect the obligee's interests. Precondition (d) can be understood in conjunction with the laws, principles and international treaties on human rights: in many countries a person cannot be forced to work involuntarily (cf. slavery). It should also be noted that this rule concerns other contracts than contracts for the sale of goods.

The UNIDROIT Principles do not contain any references to municipal laws such as in CISG Article 28. Where the contract is governed by the Principles, the court is bound to order specific performance if the preconditions for an exemption have not been met with.

4.2. Principles of European Contract Law

The Principles of European Contract Law were drafted by the Commission on European Contract Law (the "Lando Commission") with financial support mainly from the EEC. Both European and other legal systems were considered in the drafting process. The EU Principles were also influenced by the UNIDROIT Principles and vice-versa.[192] The complete and final version of the EU Principles was concluded in 1998.[193] According to Article 1.101, the Principles are intended for use in the European Communities only. They are applicable in similar types of situations as the UNIDROIT Principles.

Article 6.111 (2.117 in the previous version) addresses the issue of a change of circumstances:

"Article 6.111 – Change of Circumstances

(1) A party is bound to fulfil his obligations even if performance has become more onerous, whether because of the cost of performance has increased or because the value of the performance he receives has diminished.

(2) If, however, performance of the contract becomes excessively onerous because of a change of circumstances, the parties are bound to enter into negotiations with a view to adapting the contract or terminating it, provided that:
(a) the change of circumstances occurred after the time of conclusion of the contract, and
(b) the possibility of a change of circumstances is not one which could reasonably have been taken into account at the time of conclusion of the contract, and
(c) the risk of the change of circumstances is not one which, according to the contract, the party affected should be required to bear.

(3) If the parties fail to reach agreement within a reasonable period, the court may:
(a) terminate the contract at a date and on terms to be determined by the court; or
(b) adapt the contract in order to distribute between the parties in a just and equitable manner the losses and gains resulting from the change of circumstances; and
(c) in either case, award damages for the loss suffered through the other party refusing to negotiate or breaking off negotiations contrary to good faith and fair dealing."

Article 6.111 can clearly be classified as a hardship type of rule. It bears resemblance to the Article 6.2.2 of the UNIDROIT Principles. There is no express requirement for a fundamental disturbance of balance though, but a reference to excessive onerousness. However, this difference may be superficial. The commentary to this Article explains that the contract has to be completely overturned by events.[194] Another difference is that the change of circumstances has to have occurred after the conclusion of the contract. Furthermore, 6.111 does not state whether or not the obligor is still under a duty to perform. The most interesting difference perhaps is the rule in 6.111(3)(c) which gives the court the power to award damages to compensate losses caused by the other party's refusal to negotiate or his breaking off negotiations contrary to good faith and fair dealing. It should be noted that both of the parties are under the duty to negotiate in good faith, the purpose of the provision is to allow the contractual relationship to continue, not for example to give the party suffering hardship time to resist the other party's demands.[195]

Article 8.108 (ex 3.108) provides for an excuse due to an impediment:

"Article 8.108 – Excuse Due to an Impediment

(1) A party's performance is excused if he proves that it is due to an impediment beyond his control and that he could not reasonably have been expected to take the impediment into account at the time of the conclusion of the contract, or to have avoided or overcome the impediment or its consequences.

(2) Where the impediment is only temporary the excuse provided by this article has effect for the period during which the impediment exists. However, if the delay amounts to a fundamental non-performance, the obligee may treat it as such.

(3) The non-performing party must ensure that notice of the impediment and of its effect on his ability to perform is received by the other party within a reasonable time after the non-performing party knew or ought to have known of these circumstances. The other party is entitled to damages for any loss resulting from the non-receipt of such notice."

Article 8.101(2) (ex 3.101(2)) states that where a party's non-performance is excused under Article 8.108, the aggrieved party may resort to any of the remedies set out in Chapter 4 except claiming performance and damages. According to the commentary on the EU Principles, under 8.108 the performance has to have become totally impossible,[196] and furthermore, that the preconditions are those traditionally required for force majeure. The Article applies to any obligation, including monetary.[197] The Article has been modelled after CISG Article 79(1), but according to some commentators resembles also the common law frustration in that both parties are automatically discharged.[198] Article 8.108 read in conjunction with 8.101(2) is almost identical to the UNIDROIT Principles Article 7.1.7, and reference can be made to the discussion above in 4.1.

Articles 9.101 (ex 4.101) and 9.102 (ex 4.102) refer to monetary and non-monetary obligations. Once again, it is more difficult for the obligor to be released from non-monetary than monetary obligations. However, an exception is provided for cases where the creditor is yet to perform and it is clear that the debtor is unwilling to receive performance. In such circumstances, the creditor may not proceed with his performance and recover the payments due if he could have made a reasonable cover transaction without significant effort or expense, or if performance would be unreasonable in the circumstances. In other words, the creditor must have a legitimate interest in the performance in cases where the debtor no longer is willing to accept the performance.[199] This Article bears a resemblance with KL 52.2 § which concerns performance of an order the buyer has cancelled (see 3.2.1.4. above). Article 9.102 in turn reads:

"Article 9.102 – Non-monetary obligations

(1) The aggrieved party is entitled to specific performance of an obligation other than one to pay money, including the remedying of a defective performance.

(2) Specific performance cannot, however, be obtained where:
(a) performance would be unlawful or impossible; or
(b) performance would cause the obligor unreasonable effort or expense; or
(c) the performance consists of services or work of a personal character or depends upon a personal relationship, or
(d) the aggrieved party may reasonably obtain performance from another source.

(3) The aggrieved party will lose the right to specific performance if he fails to seek it within a reasonable time after he has or ought to have become aware of non-performance."

Again, Article 9.102 is very similar to 7.2.2 of the UNIDROIT Principles. Article 9.103 explicitly states that an exemption from performing under 9.102 does not lead to an exemption from damages. This question is to be decided under 8.108.

4.3. Conclusions

Both the UNIDROIT and the EU Principles apply the same structure. Hardship may be invoked in cases of serious contractual imbalance. There are separate rules concerning monetary and non-monetary obligations. It is easier to be exempted from performing specifically a non-monetary obligation than from performing a monetary one. Furthermore, it is easier to get an exemption from specific performance of a non-monetary obligation than from liability in damages.

The discussed Principles contain what we could call the "full set" of juristic tools for coping with changed circumstances. They encompass rules exempting from specific performance and from liability in damages and they provide for renegotiations and adjustment. Events of impossibility, force majeure, and hardship have been taken into consideration. Furthermore, the Principles widen the applicability of the exemptions outside pure instances of impossibility or force majeure by references to unreasonableness or unconscionability as well as to loyalty or the observance of good faith (cf. Articles 7.2.2(c) and 9.102(d) which require that the seller have a legitimate interest to demand performance – this might also be seen as a sign of Anglo-American influence in the Principles). Table 3 presents a rough illustration of the structure of exemption under the studied Principles.

Table 3. Exemptions under the UNIDROIT and EU Principles

Changed circumstances that affect the contract

Performance or unreasonableness Cause irrelevant ®
Exemption from performance of non-monetary obligation
=  
Impossibility amended by reasonableness and loyalty
Impediment to performance Cause
1. Reasonably irresistible
2. Reasonably unforeseeable
3. Beyond control (external)
®
Exemption from performance of any obligation and damages
=  
Force majeure amended by reasonableness
Balance of the contract disturbed, not necessarily an impediment to performance A qualified change in contractual balance ®
Renegotiations, adjustment or termination
=  
Hardship
Qualifications in the contract / rule not met ®
No effect
=  
Mere inconvenience

Both the examined instruments differ from the Finnish Sale of Goods Act, the CISG and the English frustration as well. They seem to be based on a slightly different conception of contract. Though pacta sunt servanda still is the main rule, exemptions from obligations are granted on a more lenient basis and the contract can be more freely modified by the court. Furthermore, both instruments contain express references to the obligation of observing good faith (Articles 1.7 and 1.201 most importantly) and for example the hardship provisions seem to promote a more co-operative, loyalty based notion of contract.

It should also be noted that both sets of principles were completed in the 1990's. Therefore they represent the modem developments in the field of contract law. There can, however be many views on, for example, EU Principles Article 6.1 11(3)(c). It is submitted that it may in many situations be artificial to require renegotiations from the parties. This may also cause unnecessary uncertainty. Furthermore, this may cause additional costs and take time, which may be against both of the parties' interests. Moreover, the possibility to compel a party to negotiate by the risk of liability in damages might easily be abused despite of the obligations of good faith and co-operation. On the other hand, the provision may have positive effects as well. When the parties know from the beginning of their contractual relationship that changed circumstances may lead to renegotiations they may, for example, assume an attitude towards their relationship that emphasizes co-operation which may in turn make it easier to cope with changed circumstances and other such problems.

5. IMPOSSIBILITY IN ENGLISH LAW

5.1. Introduction

The doctrine of frustration may be applied in cases where the circumstances have significantly changed after the conclusion of the contract. When a contract is frustrated it becomes void and the parties to it are released from their obligations. Not only does the contract become avoided, but also the parties are released from any liability in damages for non-performance. The first and most obvious cause of frustration is impossibility of performance. When performance has been impossible already at the time the contract was concluded, frustration is not applicable but instead the doctrine of mistake comes into question.[200] From impossibility, the law has evolved to the direction that any event that would make the performance of the contract a significantly different thing from that contracted for causes frustration.[201]

The doctrine of frustration provides a different kind of solution to the problem of impossibility of performance and changed circumstances than has been discussed above. Frustration affects the contract as a whole, rendering it discharged, whereas the force majeure types of solutions only affect the obligations of the parties under the contract, but leave the contract itself intact. Solutions of the kind of frustration are not, however, the sole property of common law systems. For example in German law both impossibility (Unmöglichkeit) and the destruction of the basis of the contract (Wegfall der Geschäftsgrundlage), which would seem to be typical cases frustration, have their places in contract law (see 1.2. above).[202] However, on the whole, the two systems differ considerably. Nevertheless, there seem to be analogies in the historical development of law in the continental Europe in comparison to that in England.[203] These issues, however, are beyond the scope of this study.

It should also be noted that the doctrine of frustration applies to all kinds of contracts and the cases discussed mostly are other than sales contracts. The cases are, however, essential for understanding the doctrine even though they may not represent the focus area of this study: international sales. Special legislation on sales contracts will be discussed in 5.3.1.1.

5.2. Development of the doctrine of frustration

The doctrine of frustration started to develop as late as in the nineteenth century. Before this most contractual obligations were regarded as absolute. Supervening events were not regarded as excuses for non-performance. This rule was laid down in the seventeenth century in Paradine v. Jane, where a tenant was sued for rent and pleaded that the King's enemies had possessed the land for about two years and that he therefore could not be liable for the rent.[204] The court held him liable, and stated: "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 his contract."[205]

The rule or doctrine of absolute contracts did provide that if performance were or had become illegal, the performing party was relieved from his obligations (cf. "bound to make it good, if he may").[206] Another exception to the rule probably were contracts for personal performance in cases where the performing party died or became permanently incapacitated.[207] Otherwise, a party who was bound by a contract to perform did not become free of his obligation even if performance was impossible or futile and he himself was not the cause of this. He would still be under obligation to perform or to pay damages for non-performance. The alleged justification for this rule was that the parties could always guard themselves against unforeseen events by express stipulations in the contract.[208] In modern times, however, this approach seems unsatisfactory whenever it would seem unreasonable, regarding the contract and the circumstances in which it was made, to expect the parties to have provided for such events.[209]

The law gradually changed, starting from the already mentioned case Taylor v. Caldwell in 1863 and the doctrine of frustration evolved. In the said case the defendants had contracted to allow the plaintiffs to use the Surrey Gardens and Music Hall for four concerts on four designated days in the summer of 1861, and to provide various side-shows and other entertainment in the gardens. Only six days before the first concerts the hall was destroyed in an accidental fire. The court held that the defendants were not liable for damages for the plaintiff's wasted expenses because the contract had been discharged. The reasoning was that the parties must have known that the contract could not be fulfilled unless a certain thing (the hall) continued to exist and that the contract "was not to be construed as a positive contract, but as subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing without the fault of the contractor."[210]

After Taylor v. Caldwell the doctrine of frustration was extended to cases in which performance became impossible in some other manner than through the perishing of a particular thing. Finally its applicability reached cases where performance did not become impossible but the commercial object or purpose of the contract was frustrated (frustration of the common venture). In Krell v. Henry in 1903 the defendant had hired a flat for the days on which the coronation of King Edward VII was to take place in the purpose of watching the proceedings. This purpose was not, however, stated in the contract. The court held the contract frustrated when the proceedings were postponed due to the illness of the King.[211] In this case, the owner of the flat most probably knew of the reasons why the defendant needed the flat and the price was substantially higher than the normal rent would have been. According to Atiyah,[212] the fact that the owner is aware of the hirer's motives does not necessarily lead to the frustration of the contract. Neither is the fact that the contract suddenly becomes more disadvantageous to one of the parties, due to, for example, a heavy change in prices, enough to frustrate the contract.[213]

One could interpret Krell v. Henry so that the subject matter of the contract in fact was to provide the hirer a place where he could observe the coronation proceedings from on a given date. This has also been the view of some authors.[214] When the coronation did not take place it was actually impossible for the flat owner to perform the contract. He was not in possession of a flat where the coronation could be observed from. No one was. The subject matter of the contract did not exist at the time the contract was to be executed and the contract could have been frustrated because of impossibility to perform. The authors, however, speak of frustration of the common venture and not of impossibility.

5.3. Operation of the doctrine

Events that may lead to frustration can be divided into groups, for example, into impossibility and frustration of a common venture [215] (or purpose). Some authors see illegality as an independent category separate from other causes.[216] These categories can be further divided into subcategories. For example Treitel [217] separates impossibility from frustration of purpose and illegality and describes six sources of impossibility: (1) destruction of a particular thing, (2) death or incapacity, (3) unavailability, (4) failure of a particular source, (5) method of performance and (6) statute. In the following text this structure is loosely followed, except that the last source of impossibility, statute, [218] is omitted altogether.

Bayles distinguishes impossibility from frustration.[219] He even refers to a separate doctrine of impossibility,[220] but does not reveal how it functions. According to Bayles, in cases of frustration performance is in fact possible.[221] By the doctrine of impossibility, he seems to be referring to discharge of the contract because of impossibility of performance, while the doctrine of frustration would cover the frustration of purpose (or common venture).[222] Other authors do not seem to make such distinction. For them impossibility forms a part of the doctrine of frustration, not a separate doctrine. Impossibility was the first cause acknowledged to frustrate a contract in Taylor v. Caldwell as discussed above.[223] For example Atiyah writes: "… there has been a tendency to separate off questions of subsequent impossibility and to put them in a doctrine of their own, called the doctrine of 'frustration'" (as opposed to other changes in circumstances).[224]

5.3.1. Frustration by impossibility

Impossibility of performance was the first acknowledged cause of frustration. If the performance of a contract becomes substantially impossible without any fault on either side, the contract is prima facie frustrated.[225] Like in the first frustration case, Taylor v. Caldwell, a clear application of the doctrine is when a particular thing (which forms the subject matter of the contract) is destroyed. Similarly, in a sale of specific goods, if the goods perish, the sales contract might become frustrated.[226] The destruction does not have to be complete. For example in Asfar & Co. v. Blundell (1896) [227] a cargo of dates became exposed to seawater and was therefore considered by the court to be "for business purposes something else."[228]

5.3.1.1. Sale of goods

The remedies of the buyer under the Sale of Goods Act 1979 are damages for non-delivery (s. 51), damages for breach of condition or warranty (s. 53), which refers to, for example, late delivery or defective quality of the goods, and specific performance (s. 52). Section 52 allows the court considerable powers of discretion; under no circumstances is the court under an obligation to order the contract to be performed specifically.[229] There are no express excuses from specific performance, nor are they needed since specific performance of a non-monetary obligation in the common law traditionally is an exception, not the main rule as it is, for example, in the CISG.[230] Section 52 reads as follows:

S. 52    

"(1) In any action for breach of contract to deliver specific goods or ascertained goods the court may, if it thinks fit, on the plaintiff's application, by its judgement or decree direct that the contract shall be performed specifically, without giving the defendant the option of retaining the goods on payment of damages.

(2) The plaintiff's application may be made at any time before judgement or decree.

(3) The judgement or decree may be unconditional, or on such terms and conditions as to damages, payment of the price, and otherwise, as seems just to the court."

The principal remedies of the seller are an action for the price (s. 49(1)) and an action for damages for non-acceptance (s. 50(1)). The Sale of Goods Act 1979 does not provide for any force majeure type of exemptions as do the Finnish Sale of Goods Act and the CISG. The only section having a similar effect is section 7, which provides for frustration in the case of destruction of the goods. Section 7 reads:

S. 7     "Where there is an agreement to sell specific goods, and subsequently the goods, without any fault on the part of the seller or buyer, perish before the risk passes to the buyer, the agreement is thereby avoided."

According to Atiyah, s. 7 only applies to a contract for the sale of specific goods [231] in which neither the property nor the risk has passed.[232] If only a part of the goods perish, then the law may be that if the contract is unseverable, it is frustrated, whereas if it is severable it is frustrated only as to the part which has perished. There is, however, a case (H R & Sainsbury v. Street (1972) W.L.R. 834) suggesting that even if the contract were unseverable the seller might be obliged to offer the remaining goods to the buyer, but the buyer might have the option whether or not to accept the goods.[233]

S. 7 of the Sale of Goods Act 1979 does not automatically apply in all situations that would seem to come within its wording. According to Atiyah there may be at least three possibilities that will have to be taken into consideration: (1) the contract may be frustrated because of an implied condition that if the goods perish the contract will be discharged and neither party shall be held liable; (2) the seller may have contracted that the goods will not perish, in which case he will have to bear the losses and possibly pay damages for non-performance; (3) the buyer may have contracted to bear the risk of the goods perishing, in which case he is liable for the price and possibly damages as well.[234]

Atiyah formulates the common law doctrine of frustration in cases of sales of goods so that "a contract for the sale of specific goods may be frustrated by any event [235] which destroys the basis of the contract and radically alters the obligations of the parties, provided that the event occurs before the property and risk have passed to the buyer."[236] In the case of unascertained goods, the possibility of frustration is questionable and depends on the type of the unascertained goods.[237] It would seem that frustration through perishing of purely generic goods is impossible because a whole species of goods cannot perish. However, in re Badishe Co Ltd [238] it was held that a contract to supply unascertained goods which both parties knew could only be obtained from Germany was frustrated by the outbreak of war.[239] The goods in this case did not perish, but became impossible to obtain. One could say that in the commercial sense they did perish as they disappeared from the market. It would also seem that contracts for the sale of unascertained goods can be frustrated if they are to be taken from a particular source, and this source is destroyed.[240]

5.3.1.2. Death or incapacity

It seems quite natural that certain contracts of personal character are discharged if one of the parties dies or becomes incapacitated and the contract thereby impossible to perform. As mentioned in 5.2., this was probably the law already before the doctrine of frustration started to develop. Some types of contract may be frustrated if either of the parties becomes incapacitated, e.g. contracts for apprenticeship or agency.[241] A contract that requires some special skill from one of the parties may be frustrated if this party becomes incapacitated (but not if the other one becomes). If there is, for instance, a contract to write a book, this contract would be frustrated by the supervening insanity of the author.[242]

An example of a case where the receiving party becomes incapacitated and this causes frustration is a case where a person who booked a course of dancing lessons was seriously injured and could not dance anymore.[243] A contract could also be frustrated by the death or incapacity of a third party, for example if A contracted B to paint a portrait of C, and C died.[244]

5.3.1.3. Unavailability of an essential factor

Performance can become impossible also when the subject matter, or a thing or person essential for it becomes unavailable for that purpose though it continues to exist or retains capacity. Contracts for charterparties have been frustrated for example when a ship was seized, detained or requisitioned and when cargo was impossible because of a strike at the port. Sales contracts have been frustrated for instance when the goods were requisitioned and contracts for personal services when one of the parties fell ill or was interned in an institution or conscripted into the armed forces.[245]

If unavailability is temporary, it will still frustrate the contract most likely if the contract was to be performed at or within a given time (there is an express term on this in the contract or it is clear from the nature of the contract) and the time of performance was of the essence [246] of the contract. Temporary unavailability may frustrate a contract in other types of situations as well. A reason for allowing discharge of the contract may be, for instance, that after a delay the performance would be of no use to the receiver. In some cases, the justification has been that the performance would be significantly more burdensome for the rendering party. In these cases, the actual or expected length of the delay has played an important part. As well as in other causes of frustration, unavailability may affect only part of the performance. As in other cases, the contract might therefore become partially frustrated.[247]

5.3.1.4. Failure of a particular source

If the subject matter of the contract was to be obtained from a specific source, the contract may become frustrated should this source become unavailable without the fault of either party.[248] If the contract expressly stipulates that the goods are to be from a specified source, the contract is frustrated if this source fails. For example, in Howell v. Coupland [249] a farmer sold potatoes that were to be grown on a specified piece of land. The crop largely failed and the court held the contract frustrated thus relieving the farmer from liability in damages.[250]

Were the source intended by one of the parties only, there is no frustration. Thus in the case of "Finland birch timber" the contract was not frustrated though the seller had expected to get timber from Finland and this proved impossible because of the outbreak of war.[251] In this case, the buyer was not interested in the origin of the goods.[252] A contract is not frustrated even if the source that failed was the only possible source as long as the buyer was not aware of this. The same applies to the buyer whose source of funding fails and who therefore is incapable of paying the price.[253]

In cases where the contract expressly stipulates no specific source but both of the parties intended a specific one to be used, the law is not clear. An implied term may perhaps be construed into the contract. Re Badishe Co Ltd has sometimes been referred to to support the view that a total failure of a mutually contemplated source frustrates the contract but, for example, Treitel is of the opinion that this case was a special one and its authority perhaps does not reach to cases where the causes of the failure of the source are less serious than a war. He sees that, on the one hand, the fact that the courts have in some cases emphasised that only one of the parties contemplated the use of a specific source would support allowing frustration where both parties agreed on this matter, but on the other, the fact that in some such cases the commercial reality nowadays may be that the seller usually protects himself against such failures would speak against frustration.[254]

The failure of the source can also be partial. This would normally have three consequences: (1) the seller is excused from delivering the missing goods, (2) he is under obligation to deliver the goods that he has been able to obtain, and (3) the buyer is obliged to accept delivery of the goods obtained.[255] If the seller has entered into a number of contracts to deliver goods from a specific source and the source partially fails, there are in principle four possibilities of how to solve the situation: (1) frustrate all the contracts, (2) frustrate none of the contracts, (3) frustrate part of the contracts and (4) divide what has been obtained from the source pro rata. None of these alternatives is without difficulties. If all the contracts are frustrated, the seller would be free to try to make extra profit by renegotiating prices in the changed-market situation. Frustrating none of the contracts would mean that the seller would have to answer for his non-performance to those buyers who were left without their goods. Frustrating only part of the contracts, of course, leads to problems in how to choose which contracts to discharge. And finally pro rata division would mean modifying the contract, which has traditionally been thought beyond the power of the courts unless there are express provisions allowing it in the contracts.[256] Treitel states that the common law doctrine of frustration appears to apply to the contract as a whole only, so it would be impossible to discharge the contracts partially.[257]

5.3.1.5. Method of performance impossible

If the contract stipulates that a specified method be used, and this method becomes impossible to perform, the contract may be discharged. For example, a contract to ship some cargo on a specified vessel during a specified time period was held to be frustrated after the ship went aground and could therefore not be used for the shipment as agreed.[258] The rules as to the method of performance seem to be derived from shipping cases solely, i.e. from cases where the problem has been which route to use.

The closing of the Suez Canal in 1956 and again in 1967 caused a number of cases where the contract had been to ship cargo to places most conveniently reached via Suez. Because this route became unavailable, the only option would have been to ship the goods via the Cape of Good Hope, which had meant significant extra costs to the person responsible for the shipping if the price was fixed, or in some cases to the charterer, if the price depended on the time spent on the voyage. The holdings in these cases seem to have focused on two questions: (1) was there an express term stipulating that a certain route be used (or was a certain route clearly contemplated by both parties), and (2) was the difference in the obligations of the suffering party sufficiently fundamental to frustrate the contract.[259]

In cases where the performance of one of the parties was fundamentally altered by the impossibility to use the specified method, the contract would likely be frustrated if the method was at least contemplated by both of the parties. On the other hand, not even an express provision to use a certain route would seem to suffice to frustrate the contract if the performance did not become fundamentally more onerous to one of the parties. Thus the answer to both of the above posed questions should be yes in order for frustration to be granted.[260]

These decisions would interestingly seem to differ from the failure-of-a-particular-source cases, where an express provision to use a certain source sufficed as a ground for frustration. What makes impossibility to use a specific source and impossibility to use an agreed route so different that this allows varying handling of the cases? Furthermore, in Krell v. Henry the decision was based on the assumption that the owner of the flat knew that the hirer intended to use it to watch the coronation proceedings, so the fact that the purpose of the contract was mutually contemplated by the parties was sufficient for a decision to discharge the contract even though there was no express provision in the contract itself.

The interpretation of the rules on when to discharge a contract seem to have been stricter in cases of shipments via alternative routes. So: why does it sometimes suffice that some aspect of the contract is mutually contemplated by both of the parties, sometimes an express term is required, and sometimes not even this is enough but a fundamental change in the significance of the obligations has to occur? Is it just that some types of contract are to be treated differently, or is it so that there actually are no uniform rules as to when to discharge a contract? Or maybe the cases have been distinguished on some other basis, perhaps not even mentioned in the decisions?

According to Atiyah, a change of circumstances which only affects the way in which the performance is to be carried out does not normally frustrate the contract (Atiyah 1995a, p. 240). In this sense, Krell v. Henry differs from the method and source cases, as the question was not of the way of the performance, but how do the other two cases differ from each other? Furthermore, in all of these cases one could have asked what is the subject matter of the contract and has it become impossible to perform it?

5.3.1.6. Impossibility versus impracticability

The concept of impossibility has already been discussed above in chapter 2. As was noticed, the question of especially practical impossibility is problematic. As mentioned, a trend in the United States has been to use the term impracticability instead of impossibility. In Britain, however, this trend has not been accepted. Also the term "commercial impossibility" has been rejected [261] and the House of Lords has stated that "a wholly abnormal rise or fall in prices" would not affect the bargain.[262] What is required is a fundamental change in the circumstances. In Davis Contractors Ltd. v. Fareham U.D.C.[263] it was stated that "It is not hardship or inconvenience or material loss itself which calls the principle of frustration into play. There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for."[264]

Treitel [265] lists four possible exceptions to the general rule that impracticability is not sufficient to frustrate a contract. Firstly, there have been some cases where performance was delayed for a long time due to wartime conditions and the contracts were held frustrated after the war, though they could have been fulfilled. Secondly, express contractual provisions can lead to discharge (under this condition, and not under the doctrine of frustration). If the contract is of an indefinite duration, impracticability could bring them to discharge. In Staffordshire Area Health Authority v. South Staffordshire Waterwoks Co., there was a manyfold increase in the costs (of supplying water) over a fifty-year period. However, though frustration was said to have caused the discharge, in this case the court actually decided only that the indefinite contract was terminable on reasonable notice, which can be said to be another general principle not connected with frustration at all.[266] The fourth possible exception would be where there is a cross-border sales contract and a breakdown of diplomatic and commercial relations between the two countries in question occurs. This would only, however, frustrate the contract if the parties to the contract were controlled by the governments in question.[267]

5.3.2. Frustration of the common venture

As has already been mentioned, the doctrine of frustration eventually expanded to cover some situations other than impossibility as well. In frustration of the common venture, the actual performance has not become impossible, but the ultimate purpose pursued by both of the contracting parties.[268] Instead of common venture, many authors just speak of frustration of purpose or common purpose.

The decision most often referred to in association with frustration of purpose is Krell v. Henry ,[269] which has already been mentioned. As has been stated above in 5.2., one could see this decision as a case of impossibility as well. Another example of frustration of purpose is Denny, Mott & Dickson v. James B. Fraser & Co. Ltd.[270] where an agreement for the lease of a timber yard was made for the purpose of enabling the parties to carry out a contract between them for the sale of timber. The performance of the sales contract was prevented by wartime regulations and this was held to be sufficient to frustrate the lease as well. Once again, one might say that the subject matter of the contract included both the lease and the purpose. When the sales contract was discharged the performance of the lease contract became impossible. Through construction of the contract the case could have been decided on the basis of impossibility (see also 5.5. below). One could also perhaps say that as the agreement in the two referred cases was to render something for a certain purpose, it impliedly included a rescinding term in case the purpose became impossible to attain.

The courts have been reluctant to grant frustration on the basis of frustration of purpose. To illustrate this, Treitel, for example, quotes a decision saying that "the frustrated expectations and intentions of one party to a contract do not necessarily, or indeed usually, lead to the frustration of that contract."[271] This, however, seems natural as the question essentially is of a common venture, not the goals of one of the parties. As has been stated "it is the common object that has to be frustrated, not merely the individual advantage that one party or the other might have gained from the contract."[272] In this sense, the doctrine of frustration would clearly seem to differ from hardship type of rules. Anyhow, the two above mentioned cases were the only ones representing frustration of purpose that were referred to in the literature reviewed for this study, whereas there seems to be a body of cases where frustration has not been granted on this basis.[273]

The idea of a common purpose is somewhat vague altogether.[274] As has been mentioned earlier, Atiyah has been of the mind that Krell v. Henry was justified partly because the owner was aware of the purpose of the hirer.[275] Do we talk of common purpose whenever one party is aware of the other party's objectives? For instance, a seller may have assumed a duty to see that the goods are fit for the purposes of the buyer or such duty may be imposed upon him by a statute.[276] Then the contract could be avoided if this duty had not been observed (because of breach, not frustration), or frustrated if the circumstances were beyond the parties' control, and performance became impossible. These cases have briefly been addressed in relation to frustration of purpose by, for example, Atiyah.[277] There is a difference, however, between cases where the rendering party assures that goods are fit for a purpose and cases in which it becomes impossible to use the goods for the intended purpose. It is a different thing to guarantee that the goods are fit to be exported than to bear the risk that the goods cannot be exported because of a prohibition of export (see 5.3.3. below).

5.3.3. Illegality

That a contract is discharged after its performance has become illegal would seem natural as a society can hardly give protection to ventures it has announced as illegal. Instead, the party who refuses to perform the illegal acts should be protected. The apportioning of risks can, however, be difficult. Both parties have entered the contract when it was still legal. Who bears the risk of the laws changing, and is this a question different from other types of supervening events beyond the parties' control?

In relation to frustration, illegality has sometimes been seen as a separate ground of discharge, and not as a subcategory of impossibility. According to Treitel, the object of the doctrine of frustration in cases of supervening impossibility or frustration of purpose is to allocate the losses caused by the supervening event in a satisfactory manner, whereas in a case of supervening illegality, the court has to take into account, apart from the parties' interests, also public interests which leads to some extent to special rules of frustration.[278]

Illegality can also bring about frustration of purpose. For example, a sales contract may be frustrated by prohibition of export if it provides that the goods be exported, but not if the buyer only intended to export the goods, not even if the seller was aware of this.[279]

5.3.4. Limitations

There are some limitations to the applicability of the doctrine of frustration. Frustration may be excluded, for instance, in cases where (1) there are express provisions for the occurred event in the contract, (2) the event was foreseen or foreseeable or (3) the event occurred due to the fault of one of the parties.[280] These limitations can also be associated with the sets of rules discussed in previous parts of this study.

According to Treitel, the object of the doctrine of frustration is to allocate the risks of supervening events satisfactorily.[281] There is, however, no reason why the parties could not themselves prepare for the risks in the contract. Even though the doctrine of absolute contracts has been modified by the later developments in law, it still remains the main rule from which there are then some exceptions. When the parties have clearly allocated the risks in the contract, the contract is to be kept and frustration does not come into question.[282] A provision excluding frustration may also be implied, for example, if the contract is essentially a speculative one.[283]

There are some qualifications to the said exception. For example, in cases where the contract has required trading with the enemy at war times, provisions for only suspending the activities in the occasion of war have been set aside on the basis of public policy considerations. Furthermore, if the construction of the provision is narrow, this may lead to the interpretation that it does not cover events that fundamentally change the conditions, but is restricted to, for example, temporary difficulties, like lack of labour, bad weather, or failure of supplies. The provision may also be incomplete so that though it may exclude frustration by some supervening events, the event that has happened is not one of them.[284] The same would apply to, for example, a force majeure clause as well.

If the risk of a potentially frustrating event has been foreseen by the parties or it has been foreseeable, the inference is that the doctrine of frustration is excluded. This is because the parties have, or should have, taken it into consideration when entering into the contract.[285] This is, however, only a prima facie interpretation, and it can be set aside by contrary evidence,[286] unlike in the force majeure type of rules discussed above.

A party cannot call on self-induced frustration, that is, on frustration caused by his own actions or the actions of those he is responsible for. Negligence may also be enough to exclude frustration, depending on the case. If the question is for example of a singer, who has lost her voice, and cannot therefore keep her contract to perform, she could probably plead frustration as long as she had not deliberately tried to get ill and thereby be freed of her obligations.[287] On the other hand, for example, in Taylor v. Caldwell, if the fire had been caused by the hall owner's negligence, this would probably have been enough to exclude the possibility of frustration.[288] In the regulations studied above in chapters 3 and 4, fault typically does not affect the right to be exempted from specific performance. However, fault on the obligor's side usually leads to liability in damages and fault on the obligee's side to the exemption of the performing party.[289]

In cases where there has been more than one contract and it has become impossible to perform all of them, frustration has in the courts been denied on the basis that this would allow the performing party to elect which of the contracts to frustrate and frustration would be caused by this election by one of the parties. Treitel has criticised this view and said that the rationale of the doctrine should lead to the discharge of some of the contracts. Furthermore, the onus of proving that frustration has been self-induced is on the party who alleges this.[290]

One limitation to the doctrine of frustration has also been said to be that it does not apply where the event does not displace the basic obligation of the contract but merely makes it more onerous for one of the parties.[291] A person who undertakes to do something takes the risk that performing the undertaking proves, for instance, more difficult or expensive than expected or even impossible due to changes in circumstances which are "normal or merely slight deviations from the normal."[292] In cases where the parties have made a contract that is to be performed in some distant future, they will generally be held to have assumed the risk of performance whatever the future may be.[293] It should be noted that these cases are to be distinguished from the contacts of perpetual type, where the parties exchange performances on a continuous basis, like in Staffordshire Area Health Authority v. South Staffordshire Waterwoks Co. discussed in 5.3.1.6. above.

Furthermore, a person is thought to have taken the risk of impossibility if the result of impossibility gives him a remedy over some other person. The courts are especially reluctant to grant frustration to a party who does not suffer from the frustrating event but tries to gain some additional advantage through frustrating the contract, if the other party, who is affected by the frustrating event, denies that the contract is frustrated.[294] This could be seen as a reference to the observance of good faith, co-operation, or loyalty as well.

5.4. Effects of frustration

In the common law, the effect of frustration is that the contract is automatically terminated at the time of the frustrating event. Both of the parties are freed from their contractual obligations from that moment on. Initially this caused unjust results as the parties were still held to be liable for any performance fallen due before that date. There was no possibility of recovering advance payments and so forth. Statutory measures to change this and other injustices were then taken.[295]

Section 1(2) of the Law Reform (Frustrated Contracts) Act 1943 contains three rules: (1) all sums payable under the contract before the time of discharge cease to be payable when frustration occurs, (2) all sums paid before the time of discharge are recoverable, and (3) if the party to whom sums were paid or payable to perform the contract has before the time of discharge incurred expenses to perform the contract, the court may allow him to retain or recover all or part of the sums (but not more than actual amount). S. 1(3) contains the rule that where one of the parties has obtained a valuable benefit (other than a payment of money to which s. 1(2) applies), the court can order him to pay a sum that the court considers just, having regard to all the circumstances of the case.[296] The effects are similar to the consequences of avoidance of contract under Finnish law (a question outside the scope of this study).

The referred Act does not apply to (1) voyage charterparties and other contracts for the carriage of goods by sea, (2) contracts of insurance, and (3) certain contracts for the sale of goods: (a) contracts to which s. 7 of the Sale of Goods Act 1979 applies, and (b) "any other contract for the sale, or the sale and delivery, of specific goods, where the contract is frustrated by reason of the fact that the goods have perished," which would seem to refer to any other contract than those governed by s. 7 of the Sale of Goods Act 1979. As earlier mentioned, s. 7 provides that an agreement to sell specific goods is avoided if without any fault on the part of the seller or buyer, the goods perish before the risk has passed to the buyer. The last of the said exceptions (3.b) has caused controversy, because it is hard to imagine how, after the risk has passed to the buyer, in any case the contract could be frustrated by the perishing of the goods.[297]

5.5. Justification of frustration

Five main theories have been presented for the basis of the doctrine of frustration. The narrowest of these theories attempts to explain why both of the parties are discharged even if the frustrating event only affects the performance of one of the parties. The theory says that the other party is discharged as well as there is a total failure of consideration, i.e. the other party receives nothing in exchange for his performance. This is an explanation more usually used in the U.S. In England, a more often used argument is that the common object of the parties has been frustrated. The problem of the theory of failure of consideration is that the failure should be total whereas in reality the other party often benefits from a partial performance.[298]

The first theory as to why a contract can be frustrated at all is that the contract is discharged because it contains an implied term that it should cease to be binding in certain circumstances. This theory binds the termination to the intention of the parties (as if the court would only state what the parties had wanted). In subjective sense, the theory has some problems. The parties often may not have had any common view on the subject, (or any individual view, for that matter).[299] And as the frustrating event is to be unforeseeable, how could they have had any intentions concerning it?[300] The objective version of the theory is that it is not the intention of the actual parties but of "reasonable men" which should be considered. This version takes the decision further away from the parties and starts to emphasise the role of the court.[301] It is also unclear how even reasonable men could have prepared themselves for an unforeseeable event and reached an agreement on it.[302]

Due to the mentioned and other such difficulties, some judges began to say that it was not the intention of the parties that was decisive, but it was the court who decided what is reasonable in the circumstances.[303] As one judge put it, "The court is exercising powers, when it decides that a contract is frustrated, in order to achieve a result which is just and reasonable."[304]

According to the next theory, when there is a contract which is dependent on the continued availability of a specific thing, and the thing becomes unavailable, the contract is prima facie discharged, because the foundation of the contract has disappeared.[305] It would seem to infer that the possibility of frustration is built in in the type of contracts for the performance of which the availability of some specific thing is essential. The difficulty with this theory is that it appears to apply to limited types of cases only.[306]

In the final theory, the frustration of a contract depends on the construed meaning of the contract. The abovementioned theories of an implied term, just solution and foundation of the contract seem to meet in this one. The true construction of the contract is what the decision is based on. According to Treitel, this would seem the most satisfactory explanation of the doctrine of frustration.[307]

Also Collins refers to construction of the contract as a basis for the application of the doctrine of frustration. According to him, though the courts might seem to be applying objective criteria to see whether or not the contract was frustrated, in practice, the decision depends upon the construction of the terms of the contract to discover what performance is required.[308] In Davis Contractors Ltd. v. Fareham U.D.C., Lord Radcliffe stated that "frustration occurs whenever the law recognises that, without default of either party, a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do."[309] If we accept this as the definition of the doctrine of frustration, we may conclude that interpretation and construction of the contract, to discover what was really required under it, would seem to be in a key position in defining whether or not performance has become impossible (or fundamentally altered).

5.6. Conclusions

The main difference between the doctrine of frustration and the force-majeure type of solutions to changed circumstances is that it directly affects the validity or the existence of the contract. Where performance as described by the contract has become impossible the contract may cease to exist. Force-majeure type of regulations would leave the contract in force, though it might be nothing but an empty shell, since the parties have become free from the obligations under it. The advantage of the force-majeure type of approach is that it makes it possible to address partial non-performance separately. Frustration terminates the contract as a whole and cases of partial impossibility may therefore prove difficult to solve (see for example 5.3.1.1. above).[310]

The Finnish Sale of Goods Act or the CISG do not affect the existence of the contract. However, in exceptional cases applying Contracts Act 36 § may lead to the discharge of the contract as a whole. In the UNIDROIT and EU Principles the hardship provisions may lead to the termination of the contract. In these cases, the court would seem to have more discretion than under the English law, where the court has to declare the contract frustrated whenever the doctrine of frustration applies.

There would seem to be some inconsistencies in the rules concerning frustration in cases of failure of a particular source and impossibility of the method of performance (see discussion in 5.3.1.5. above) though the commentators seem to ignore this, perhaps due to the different legal culture. Under Finnish law, the obligor would be under an obligation to try to overcome such difficulties by finding alternative sources or methods. However, the parties could restrict this obligation by defining the source or method more precisely in the contract. This may apply also cases of destruction of the goods. Under the Finnish Sale of Goods Act and the CISG the obligor might be under obligation to fulfil the contract through a substitute performance, and this would most likely apply to the studied Principles as well, while under English law, section 7 of the Sale of Goods Act 1979 (where applicable) and the general reluctance to order specific performance would probably lead to frustration or liability in damages instead.

Hardship would appear to have no effect in the English system. However, as has been noted in 5.3.1.3., in cases of temporary impossibility, the fact that performance has become significantly more difficult has sometimes been acknowledged. The important question would seem to be the question of what constitutes a fundamental change of circumstances (see 5.3.1.6. above). In the Finnish Sale of Goods Act, a hardship type of situation may be relevant where it leads to unreasonableness or unconscionability (cf. KL 23 and Contracts Act 36 §).

6. CONCLUSION

The Roman law maxim of pacta sunt servanda is the primary rule in all the rules discussed in this paper. There are two ways in which to obey the contract, which can also be perceived as the criteria of a binding contract: A party to a contract must either specifically perform his primary obligations, which can be monetary or non-monetary, or to pay damages for the breach of these obligations. The civil law systems have traditionally emphasised performing the primary obligations, while in the common law damages are preferred.[311] Exemptions from these obligations modify the rule of pacta sunt servanda.

On the basis of the studied literature and as also witnessed by the reviewed legal instruments, there would seem to be two main options in use on how to ease up the strictness of the contract in cases of changed circumstances. Both of these provide for exemptions from the contractual obligations. These approaches seem to have evolved mainly in the 19th and 20th centuries. The first method consists of rules referring to (1) impediments that exempt from performance, and the second of (2) judicial review. Judicial review would appear to have developed from simply discharging the contract towards adjustment, which would seem to be a fairly modern feature in contract law and to emphasise conscionability or fairness.

In addition to the two approaches mentioned above, it is suggested on the basis of the less than comprehensive material studied that a third option has started to evolve in the 20th century: (3) mandatory renegotiations backed up by judicial review. This approach would seem to emphasise the co-operation based nature of the contract and the obligations of loyalty and good faith of the contracting parties. The ultima ratio of this approach would not seem to be to apportion the risks in the event of changed circumstances as may often be the case with exempting impediments, but to allow the parties to continue their contractual relationship. The approach could also be seen as an attempt to guide commercial contract practices into a more self-regulatory direction.

The Finnish Sale of Goods Act and the CISG apply exempting impediments. Moreover, the Sale of Goods Act adds elements of reasonableness and conscionability into the discretion on remedies for breach (cf. e.g. KL 23 – no obligation to perform if would require unreasonable sacrifices, KL 70.2 - damages may be adjusted if they are unconscionable). Under the general contract law in Finland, judicial review is allowed under Contracts Act 36 § in cases of unconscionability. Contracts Act 36 § allows both adjusting and rescinding the contract.

The UNIDROIT and the EU Principles apply exempting impediments as well. They too contain references to reasonableness (cf. e.g. UNIDROIT Principles Article 7.2.2, EU Principles Article 9.102). In addition, these Principles allow judicial review in events of hardship. This can, however, only occur in cases where the parties have failed to renegotiate the terms of their contract. The Principles therefore seem to apply and promote the new third approach as suggested above. This feature in the Principles is not as such present in any other of the rules discussed in this paper. As mentioned, it can be seen as an expression of the principle of good faith, loyalty or co-operation in contract law.

The English system employs judicial review in managing changed circumstances. Where performance has become impossible or where the party's obligations under the contract have been radically transformed by the changed circumstances, the contract may be discharged under the doctrine of frustration. Traditionally, the court cannot, however, adjust the contract, though this may perhaps be done in cases of long term contracts calling for successive performances.[312] It should also be noted that the English law is continuously evolving through common law as presented in the court decisions and through statutory instruments.

A complete range of juristic tools to manage changed circumstances would seem to consist of at least the impossibility and force majeure type of rules representing exempting impediments and the possibility of judicial review representing the second main option as discussed above. These tools already encompass one of the modern features of contract law also apparent in the material discussed in this paper: conscionability or fairness. The new third method presented above would seem to be more controversial. It could be questioned whether the law should compel the parties to renegotiate or whether this would be better left to the parties to decide. It is submitted that the law may in this matter follow contract practices already in use in international trade and that eventually in the future, as the concept of contract evolves, such an approach may seem only natural.[313] However, without more specific definition in the individual contract, an obligation to renegotiate (or co-operate in general) may provide for uncertainty: when has one performed such an obligation? The co-operation approach in legislation is, in any case, an interesting development and further studies would be warranted.

 

APPENDIX 1: Exempting events under the Sale of Goods Act (SGA) and the CISG

 

SGA: exempting circumstances - seller's obligations SGA: - buyer's obligations CISG: - seller's / buyer's Exemption
23 §
1. impediment - insurmountable
2. imbalance - sacrifices unreasonable in relation to buyer's benefit
52 §
1. cancellation
- goods procured or
produced especially
for the buyer
- unless harm or danger
of noncompensation to
the seller
Arts. 46/62 + 28
1. court's own law
from performance in cases of delay
34.1 §
1. unreasonable costs or unreasonable trouble
  Arts. 46 + 28
1. unreasonable - regard to all the circumstances
2. court's own law
from the duty to repair
34.2 §
1. impediment or imbalance such as described in 23§
+ significant importance to buyer
+ seller understood or ought to have understood this
2. existing, nonsubstitutable goods
  Arts. 46 + 28
1. not a fundamental breach of contract
2. court's own law
from new delivery
  53 § (cf. 23 §)
1. impediment
- insurmountable
2. imbalance
- sacrifices unreasonable in comparison to buyer's benefit
Arts. 62 + 28
1. court's own law
from contribution
27 § (cf. Art. 79)
1. impediment
- beyond control
- reasonably unforeseeable 
- reasonably unavoidable and insurmountable
57.1 §
1. impediment
- a provision of law, an interruption in public traffic or payment transactions or other such event
- reasonably unforeseeable 
- reasonably unavoidable and insurmountable
Art. 79 (cf. 27 §)
1. impediment
- beyond control
- reasonably unforeseeable 
- reasonably unavoidable and insurmountable
from damages for late performance
  57.2 § (refers to 27 §) Art. 79 from damages for non-contribution
40 § (refers to 27 §)   Art. 79 From damages for non-conformity of goods


FOOTNOTES

1. On classifying legal systems, see e.g. Husa, p. 123 onwards.

2. Another important country is Japan. Japan has adopted a German solution to impossibility. In short, foreseeable (this term has been used by the author, perceptible might be more accurate) initial impossibility renders the contract void whereas supervening impossibility leads to an exemption from the primary obligations and the remedies available to the other party are avoidance and damages. Kagayama, under Remedies for Breach Contract under the Civil Code.

3. English law here includes Wales as well. The Irish law also acknowledges the doctrine of frustration. Scottish law in turn broadly follows the common law. Lando & Beale, p. 146.

4. See e.g. Tallon, p. 573.

5. Tallon, p. 573-574.

6. Nystén-Haarala, p. 175-176. Hellner, p. 61. Ramberg (1989), p. 207. BGB 306-308 § (initial impossibility), 275, 279-282 § (supervening impossibility).

7. Hellner, p. 62.

8. Hellner, p. 62; Nystén-Haarala, p. 185. See also Ramberg (1989), p. 210.

9. Hellner, p. 63-64. See also Ramberg (1989), p. 214-215; Nystén-Haarala, p. 179. In Finnish law an example of termination for an important reason can be found in the law concerning partnerships (laki avoimesta yhtiöstä ja kommandiittiyhtiöstä 389/1988) 2:5.

10. Hellner, p. 65. See also Nystén-Haarala, p. 186-196; Ramberg (1989), p. 210-212.

11. Tallon, p. 574.

12. Vihma, p. 49-51. See also Godenhielm p. 38-40.

13. Vihma, p. 51 and 289.

14. Ibid., p. 289.

15. E.g. Treitel, p. 778-779.

16. As has also been speculated by Fuller & Eisenberg, Basic Contract Law, 3rd ed., p. 801, as cited by Treitel, p. 793.

17. Treitel, p. 793.

18. Vihma, p. 45-48.

19. The grounds of the Scandinavian views on impossibility would seem to be in the German doctrine of impossibility which emerged in the 19th century. Rules on impossibility still remain in the BGB though they have been criticised. According to Hellner for example, this doctrine should not have any effect on Swedish law any more. The same would seem to apply to Finland as well. See Hellner, p. 61.

20. There is also a rule of equity which provides that "the court does not compel a person to do what is impossible." Treitel (1994), p. 3, who refers to Forrer v. Nash (1865) 35 Beav. 167, 171.

21. Hellner, p. 64. Important here is also that the focus is not on the individual parties but the contract.

22. E.g. Vihma, p. 321; Godenhielm, p. 40.

23. See e.g. Atiyah (1995a), p. 229; Vihma, p. 322. Vihma (p. 60) states that English law usually does not distinguish initial impossibility from subsequent. This would seem to be incorrect at least judging by the materials used in this study (see e.g. Atiyah cited above).

24. E.g. Vihma, p. 322-325; Godenhielm, p. 40-44.

25. Vihma, p. 61-62 and 322.

26. See also 2.5. below

27. Godenhielm, p. 42.

28. Aurejärvi, p. 85.

29. See e.g. Hemmo II, p. 233; Nystén-Haarala, p. 184.

30. Vihma, p. 157.

31. Treitel (1994), p. 2.

32. Nicholas, p. 21, who uses the term strict liability.

33. Schmitthoff, p. 164. However, other preconditions are often required, such as unforeseeability.

34. Saarnilehto, p. 145.

35. Hellner, p. 59.

36. Mestad, p. 4-5 and 276.

37. Nicholas, p. 21.

38. Kozlow, under 9.1.

39. The wording in UNIDROIT Principles Art. 7.1.7(1) is almost identical to the wordings in the Finnish Sale of Goods Act 27.1 § and CISG Art. 79(1).

40. Lando & Beale, p. 115 and 141.

41. Case 266/84 (1987) 3 CMLR 202, p. 223 ((1986) ECR 149).E.g., C-335/87, ECR 1990, p. I-2875; Case 266/84, ECR 1986, p. 149.

42. E.g., Joined cases 98/83 and 230/83, ECR 1984, p. 3763; Joined cases 154, 205, 206, 226 to 228, 263 and 264/78, 39, 31, 83 and 85/79. ECR 1980, p. 907; Case 154/78, ECR 1980, p. 907.

43. E.g., Case 20/84, ECR 1985, p. 2061.

44. E.g., C-124/92, ECR 1993, p. I-5061; Case 296/86, ECR 1988, p. 1491; Case 70/86, ECR 1987, p. 3545; Case 224/83, ECR 1984, p. 2349; Case 284/82, ECR 1984, p. 557.

45. E.g., Case 158-73, ECR 1974, p. 101; Case 4-68, ECR 1968, p. 549.

46. See also Vihma, p. 290-293.

47. Nystén-Haarala, p. 184.

48. Adlercreutz, p. 139.

49. Swadling, p. 7.

50. E.g. Berg, p. 106.

51. E.g. Perillo. This is also a typical case of the Finnish "liikavaikeus," see 2.2. and 2.3. above and Hemmo I, p. 44.

52. Perillo.

53. Hellner, p. 73.

54. Tillotsson, p. 228. See also Furmston, p. 62.

55. Schmitthoff, p. 648. See also Hemmo II, p. 107.

56. Perillo. He also submits that it may be that the common law in the U.S. is also developing into that direction by using the term impracticability instead of impossibility.

57. These matters can usually be agreed upon by the parties. They may, for instance, assume the risk of some events or agree on the consequences of even minor changes in circumstances affecting their contract. They may also define e.g. the term force majeure in another way.

58. See e.g. Taxell (1972), p. 306; Taxell (1993), p. 210.

59. Though the Commentary to the UNIDROIT Principles, p. 146, states that hardship has been acknowledged by various legal systems under the guise of concepts such as frustration of purpose, Wegfall der Geschäftsgrundlage, imprévision, the Italian eccessiva onerosità sopravvenuta and so on. In broad terms, hardship could be defined simply by referring to a fundamental change in equilibrium of the contract.

60. See e.g. Ferrari. The Sale of Goods Act can be made applicable by an express reference. See also Ramberg, p. 53-56.

61. Routamo & Ramberg, p. 48.

62. E.g. Ramberg, p. 55.

63. On tensions between validity and excuses for non-performance under the CISG, see Weitzmann.

64. Routamo, p. 70.

65. HE 93/1986, p. 67-68.

66. Sevón, Wilhelmsson & Koskelo, p. 68-69.

67. Wilhelmsson, Sevón & Koskelo, p. 52.

68. HE 93/1086, p. 68.

69. Sevón, Wilhelmsson & Koskelo, p. 69 (Wilhelmsson, Sevón & Koskelo, p. 52).

70. E.g. Routamo, p. 69.

71. HE 93/1986, p. 68.

72. HE 93/1986, p. 69.

73. Wilhelmsson, Sevón & Koskelo, p. 52.

74. Sevón, Wilhelmsson & Koskelo, p. 71.

75. Ibid.

76. Routamo, p. 69.

77. HE 93/1986, p. 69-70.

78. HE 93/1986, p. 69. Sevón, Wilhelmsson & Koskelo, p. 72.

79. HE 93/1986, p. 85-86.

80. E.g. Sevón, Wilhelmsson & Koskelo, p. 120-121.

81. HE 93/1986, p. 86. Cf. Routamo's example, p. 69.

82. Sevón, Wilhelmsson & Koskelo, p. 122 (Wilhelmsson, Sevón & Koskelo, p. 101).

83. HE 93/1987, p. 87. Sevón, Wilhelmsson & Koskelo, p. 122-123.

84. See also Rudanko, p. 42; Sevón, Wilhelmsson & Koskelo, p. 169.

85. HE 93/1986, p. 104. See also Sevón, Wilhelmsson & Koskelo, p. 167.

86. Sevón, Wilhelmsson & Koskelo, p. 174.

87. Sevón, Wilhelmsson & Koskelo, p. 173 (Wilhelmsson, Sevón & Koskelo, p. 148-149).

88. HE 93/1986, p. 108.

89. This is also a factor that generally distinguishes liability in damages from liability for specific performance. Only events beyond the performing party's control can release him from liability in damages. E.g. Ämmälä (1999), p. 6.

90. E.g. Taxell 1993, p. 59, 77 and 90.

91. Wilhelmsson, Sevón & Koskelo, p. 77.

92. Sevón, Wilhelmsson & Koskelo, p. 82; HE 93/1986, p. 67; Routamo, p. 82-83.

93. See HE 93/1986, p. 76: KL 27 § refers only to the consequences of the impediment but avoiding or overcoming the impediment itself naturally prevents the consequences as well. Cf. CISG Art. 79(1).

94. HE 93/1986, p. 73 and 77.

95. HE 93/1986, p. 73-74.

96. Sevón, Wilhelmsson & Koskelo, p. 83; HE 93/1986, p. 74.

97. Sevón, Wilhelmsson & Koskelo, p. 82-83 (Wilhelmsson, Sevón & Koskelo, p. 63-64).

98. Routamo, p. 82.

99. Sevón, Wilhelmsson & Koskelo, p. 84-85; HE 93/1986, p. 74.

100. HE 93/1986, p. 75.

101. HE 93/1986, p. 76.

102. Sevón, Wilhelmsson & Koskelo, p. 86.

103. Sevón, Wilhelmsson & Koskelo, p. 86-87; HE 93/1986, p. 76-77.

104. Sevón, Wilhelmsson & Koskelo, p. 86-87; HE 93/1986, p. 76-77.

105. Koskelo, p. 300.

106. HE 93/1986, p. 77.

107. HE 93/1986, p. 77-78.

108. Sevón, p. 24; Koskelo, p. 305-306; Routamo & Ramberg, p. 223-225.

109. HE 93/1986, p. 77.

110. Routamo & Ramberg, p. 229.

111. Sevón, Wilhelmsson & Koskelo, p. 133-134; HE 93/1986, p. 91-92.

112. HE 93/86, p. 87.

113. Rudanko, p. 259.

114. Rudanko, p. 40; Sevón, Wilhelmsson & Koskelo, p. 164-165; HE 93/1986, p. 112.

115. HE 93/1986, p. 112.

116. E.g. Wilhelmsson, Sevón & Koskelo, p. 140.

117. HE 93/1986, p. 113.

118. E.g. HE 198/1986, p. 25.

119. The term Own law has caused controversy, which is here left aside. For an example of this controversy and further references, see e.g. Carlsen, under V.B.2.

120. HE 198/1986, p. 15 and 25; see also Honnold, p. 365-366.

121. E.g. Schlechtriem, p. 63.

122. Schlechtriem, p. 32.

123. E.g., Routamo, p. 82.

124. Sevón, p. 14.

125. According to HE 198/1986, p. 39, the prerequisites for exemption from damages are less strict than if the question was of "ylivoimainen este." This Finnish term has quite often been used as a synonym for force majeure. However, Tallon, p. 578, states that the four preconditions constitute the traditional components of force majeure.

126. HE 198/1986, p. 39-41 and HE 93/1986, p. 73-81 and 91-93, respectively.

127. See e.g. Honnold, p. 537.

128. Honnold, p. 535.

129. Stoll, p. 608.

130. Tallon, p. 575.

131. Italy 29.3.1993.

132. Though the Tribunal erred on the law applicable to the case, see Ferrari. The case has also been cited by Weitzman.

133. Secretariat Commentary, guide to CISG Art. 79(4); Schlechtriem, p. 101.

134. E.g. Honnold, p. 543.

135. Schlechtriem, p. 102.

136. Huber, p. 379.

137. Stoll, p. 610.

138. Schlechtriem, p. 101.

139. Russia 16 February 1998. High Arbitration Court: Information Letter 29 <http://cisgw3.law.pace.edu/cases/980216r1.html> The citations found on this case do not reveal all the facts of the case. For example, it is not known whether the bank in question had been chosen by the seller or the buyer. If the bank had acted as a representative for the seller, presumably the holding would have been different.

140. Stoll, p. 611.

141. Secretariat Commentary, guide to CISG Art. 79(6).

142. Russia 17 October 1995. Arbitration proceeding 123/1992 <http://cisgw3.law.pace.edu/cases/951017r1.html>. The tribunal also cited CISG Art. 54 which explicitly provides that the obligation to pay the price includes taking such measures and complying with such formalities as might be required to enable the payment to be made.

143. Stoll, p. 612.

144. Secretariat Commentary, guide to CISG Art. 79(7).

145. Tallon, p. 585.

146. E.g. HE 198/1986, p. 40.

147. Schlechtriem, p. 104. See also Honnold, p. 544-547.

148. Russia 16 March 1995. Arbitration proceeding 155/1994 <http://cisgw3.law.pace.edu/cases/950316r1.html>.

149. HE 198/1986, p. 40.

150. Schlechtriem, p. 104. See, however, Honnold, p. 547.

151. Schlechtriem, p. 104.

152. Tallon, p. 588.

153. Honnold, p. 548-550.

154. Secretariat Commentary, guide to CISG Art. 79, paragraph 9.

155. Schlechtriem, p. 103.

156. Tallon, p. 588.

157. Huber, p. 378-379.

158. Stoll, p. 623.

159. Honnold, p. 551.

160. E.g., Kastely, under C.2.c.

161. HE 198/1986, p. 25 as well as e.g. Kastely, under C.2.c.

162. E.g. Kastely, under C.1; see also comments in Kritzer, p. 219-227, and Lookofsky, p. 82.

163. See e.g. Lookofsky, p. 83.

164. Other than the requesting party having resorted to an inconsistent remedy, or the criteria in Art. 46(2) or 46(3).

165. E.g. Honnold, p. 364-365 and 518-522.

166. Kastely, under B.

167. E.g. Flechtner, under I.A., and the literature mentioned therein.

168. Honnold, p. 365.

169. Kastely, under B. See also Kritzer, p. 383.

170. E.g. Hillman, under 7(1). Notice also that, contrary to the CISG, both the UNIDROIT Principles and the Principles of European Contract Law explicitly lay down such an obligation.

171. Though the consensus of the legislators perhaps was that impossibility should lead to exemption. See Schlechtriem, p. 103, as quoted above.

172. Honnold, p. 551 as quoted above.

173. Though e.g. Huber quite sensibly thinks such a principle underlies Article 79(1). Huber, p. 379. But can it be applied to requiring performance as well as to claiming damages? It is submitted that this would at least be sensible. It should even be easier to receive an exemption from primary obligations (performance) than it is to receive one from secondary obligations (damages). Firstly, as has been noted, in events of impossibility of performance it would be absurd to require performance. Other more elegant juristic measures should be developed for such situations than ordering penalties for continuous refusal to oblige with a specific performance order. Secondly, in any case it would be economically more sensible to allow the obligor to take his business elsewhere if he should find a more profitable object for his resources in cases where the obligee's rights can adequately be protected by granting him damages: see e.g. Farnsworth.

174. See e.g. Koneru, preface and chapter I.

175. See also Fitzgerald, under I.

176. The use of which has been contemplated but eventually denied as a direct limitation to ordering specific performance under the CISG. Carlsen, under V.

177. See Kritzer, p. 383 and the references made.

178. Lando & Beale, p. 113.

179. E.g. Pöyhönen (1993a), p. 75-79.

180. HE 93/1986, p. 69.

181. The original Finnish text uses the concept of legal or juristic act so the scope of application is wider than merely contracts.

182. E.g. Ämmälä 1993, p.85.

183. Ibid., p. 92.

184. See also Nystén-Haarala, p. 188 (who refers to the case under the false number 1990:171 – this was a case of supply of electricity where a term in the articles of association was not adjusted because it didn't lead to unconscionability).

185. Bonell, under 1.1.

186. E.g. Carlsen.

187. According to the Commentary, when the performances can be measured in monetary terms, an alteration amounting to 50% or more of the cost or the value of the performance is likely to amount to being fundamental. Otherwise the fundamentality will depend on the circumstances of the case. UNIDROIT Principles, p. 147.

188. The change in the balance has to occur before performance. If, for example, a party has delivered the goods and after this the value of the performance he expects to receive in return significantly decreases, the party is no longer entitled to the remedies under 6.2.2. UNIDROIT Principles, p. 149-150.

189. UNIDROIT Principles, p. 150.

190. UNIDROIT Principles, p. 169.

191. Ibid., p. 170.

192. Bonell, under Introduction and I.2.

193. EU Principles.

194. Lando & Beale, p. 115.

195. See Lando & Beale, p. 116.

196. Lando & Beale, p. 115 and 141.

197. Ibid., p. 141.

198. Ibid., p. 146. Though it appears that the court is to take frustrating events into consideration ex officio while exemption due to an impediment would have to be requested by the affected party.

199. Lando & Beale, p. 155.

200. E.g. Atiyah (1995a), p. 229; Treitel, p. 836-837. Critical note: Collins, e.g. p. 278.

201. E.g. Cheshire, Fifoot & Furmston, p. 570.

202. E.g. Nysten-Haarala, p. 175; Hellner, p. 61-62.

203. Ibid., p. 175-176.

204. E.g. Treitel, p. 778; Cheshire, Fifoot & Furmston, p. 569.

205. (1647) Aleyn 26, p. 27, cited in Treitel, p. 778.

206. Treitel, p. 778 referring to Brewster v. Kitchell (1691) Salk. 198.

207. Ibid., p. 778 referring to Taylor v. Caldwell (1863) 3 B. & S. 826, p. 836.

208. Cheshire, Fifoot & Furmston, p. 569.

209. Treitel, p. 778.

210. Treitel, p. 778-779; quote from the said case p. 833.

211. Ibid, p. 779 referring to Krell v. Henry (1903) 2 K.B. 740.

212. Atiyah (1995a), p. 234.

213. Treitel, p. 780 referring to British Movietonenews Ltd. v. London and District Cinemas (1952) A.C. 166.

214. Collins writes "… the court's conclusions that performance of the contract was no longer possible depended crucially on the interpretation of the contract that it was not simply for the hire of a room, but for a hire of a room to watch the coronation procession." Collins, p. 277. Treitel states "… the contract was, on its true construction, not merely one for the hire of the flat, but one to provide facilities for viewing the coronation processions." Treitel, p. 798-799.

215. E.g. Atiyah (1995a), 231-236.

216. E.g. Cheshire, Fifoot & Furmston, p. 570; Treitel, p. 799.

217. Treitel, p. 782-804.

218. On which Treitel only comments: "The contract under which a person holds a public office is discharged if the office is abolished by statute." Treitel, p. 792.

219. Bayles, p. 193.

220. Ibid., p. 357.

221. Ibid., p. 193.

222. See Bayles, p. 162.

223. For example Treitel writes: "The doctrine of frustration originated in cases where performance was said to have become 'impossible'." Treitel, p. 792.

224. Atiyah (1995a), p. 230.

225. Ibid., p. 231.

226. Sale of Goods Act 1979, s. 7.

227. 1 Q.B. 123.

228. Treitel, p. 782 quote from the mentioned case p. 128.

229. Before the Sale of Goods Act, first enacted in 1893, the remedy of specific performance was an equitable one. Therefore the courts have used the case law in equity to interpret s. 52. Chitty, p. 1185.

230. According to e.g. Treitel (1994), p. 2, in civil law systems specific performance is considered as a primary remedy while in the common law the primary remedy is a money judgment.

231. The term specific goods can have slightly varying meanings. It refers to goods that have been identified and, in the case of bulk goods, also ascertained. Interpretation can lead to different solutions e.g. where it has to be decided when the goods have been sufficiently identified.

232. Atiyah (1995b), p. 307.

233. Atiyah (1995b), p. 307. Another question is that the buyer may be entitled to reject also the delivered goods because of the failure to perform unless the shortfall is "so slight that it would be unreasonable for him to do so" (Sale of Goods Act 1979 s. 30(2)). See e.g. Treitel, p. 698-699. It would seem that if the contract would be partially frustrated, the buyer would not have this right at all.

234. Atiyah (1995b), p. 308.

235. The Sale of Goods Act 1979 only speaks of perishing of the goods but the contract can also be frustrated by some other event according to the common law. The Act explicitly provides that the common law is applicable to sales contracts as well (s. 62(2)).

236. Atiyah (1995b), p. 308.

237. Unascertained goods can be (1) goods to be manufactured or grown by the seller, (2) purely generic goods, (3) an unidentified portion of a specified bulk or whole. Atiyah (1995b), p. 282.

238. (1921) 2 Ch. 331.

239. Atiyah (1995b), p. 308-310.

240. Treitel, p. 783, see also 5.3.1.4. below.

241. See e.g. Treitel, p. 784.

242. Treitel, p. 784, referring to Jackson v. Union Marine Insurance Co. Ltd. (1874) L.R. 10 C.P. 125, 145.

243. Ibid., referring to Parker v. Arthur Murray Inc. 295 N.E. 2d 487 (1973).

244. Ibid.

245. Treitel , p. 784.

246. If time stipulations are of the essence of the contract this means that any failure to perform them will justify rescission disregarding the degree of harm done to the other party. E.g. Treitel, p. 739. Time is of the essence of the contract if such has been the intention of the parties and this intention has been expressly stated or can be inferred from the nature of the contract or from the relevant circumstances. Cheshire, Fifoot & Furmston, p. 553.

247. Treitel, p. 785-786.

248. See also what has been said of specific and unascertained goods above in 3.1.1.1.

249. (1976) 1 Q.B.D. 258.

250. Treitel, p. 788.

251. Blackburn Bobbin Co. Ltd. v. T. W. Allen Ltd. (1918) 2 K.B. 467.

252. Treitel, p. 788.

253. Treitel, p. 788. Compare to re Badishe Co Ltd described above in 3.1.1.1., where both of the parties knew there was but one source (country).

254. Ibid., p. 788-789.

255. See also discussion under 3.1.1.1.

256. Though this may perhaps be done where the question is of long-term contracts calling for successive performances. Collins, p. 280, citing J. Bell: "The effects of changes in circumstances on long-term contracts," in Harris D. and Tallon D. (1989, eds.): "Contract law today," Oxford, chapter 5.

257. Treitel, p. 789-790, see also p. 781. Notice that this differs from frustration under s. 7 of the Sale of Goods Act 1979. S. 7, however only applies to sales of specific goods. See Atiyah (1995b), p. 307.

258. Treitel, p. 791 referring to Nicholl & Knight v. Ashton Edridge & Co. (1901) 2 K.B. 126.

259. See Treitel, p. 791-792.

260. Treitel, p. 791-792.

261. Treitel, p. 791-792. referring to Tennants (Lancashire) Ltd. v. C. S. Wilson & Co. Ltd. (1917) A.C. 495, 510.

262. Ibid. quoting British Movietonenews Ltd. V. London and District Cinemas (1952) A.C. 166, 185. In this case, it was also stated that inflation was not a cause of frustration.Treitel, p. 796.

263. (1956) A.C. 696.

264. Treitel, p. 793-794, quote from the said case p. 729. If we try to apply this advice to, e.g. Taylor v. Caldwell, it would seem that were the hall owners actually been obliged to perform the contract they would have had to build a hall in order to be able to do so, which would certainly have been something else than what they contracted for. Another thing then is if this is the correct way of apportioning the risks between the parties. One also wonders if in modern days e.g. insurances have altered the need for such decisions. On the changes in law caused by the Law Reform (Frustrated Contracts) Act, see 5.4. below.

265. Treitel, p. 794-796.

266. Atiyah (1995a), p. 230; Treitel, p. 795-796. This feature can also be found in German law, where a long term obligation can be terminated if there is an important cause for it (Kündigung aus wichtigen Grund, see 1.2. above). See e.g. NysténHaarala, p.173; Hellner, p. 64.

267. Treitel, p. 896 referring to The Playa Larga (1983) Lloyd's Rep. 171.

268. Atiyah (1995a), p. 232.

269. (1903) 2 K.B. 740.

270. (1944) A.C. 265 referred to by Treitel, p. 798-799.

271. Treitel, p. 798 quoting Congimex Companhia Geral, etc., S.A.R.L. v. Tradas Export S.A. (1983) 1 Lloyd's Rep. 250, 253.

272. Lord Sumner in Hirji Mulji v. Cheong Yue SS Co (1926) A.C. 497, p. 507 quoted by Atiyah (1995a), p. 232.

273. See Treitel, p. 798-799; Atiyah (1995a), p. 232-236.

274. Many times the only common purpose may be to exchange services for payment (see Treitel, p. 805 806). This interpretation would, however, seem to lead to very wide applicability of frustration.

275. Atiyah (1995a), p. 234.

276. As statutes on the sale of goods in many countries do if the seller was aware of the buyer's intentions on how to use the goods (also in Britain, see e.g. Atiyah (1995a), p. 233).

277. Atiyah (1995a), p. 233.

278. Treitel, p. 799.

279. Treitel, p. 800.

280. Ibid., p. 810.

281. Ibid. Atiyah, however, distinguishes risk and frustration. According to him, frustration covers a wider field than the rules regarding risk. A distinguishing feature in the doctrine of frustration is that it automatically avoids the contract, which discharges both of the parties from their obligations. Atiyah (1995b), p. 300-306. He does not, however, deny the risk allocating elements of the doctrine. Atiyah (1995a), p. 240.

282. See also Atiyah (1995a), p. 240; Tillotsson, p. 226.

283. Treitel, p. 810.

284. Treitel, p. 810-812. Another case is when the provision or the whole contract is void for some other reason, for example, duress or unconscionability. See e.g. Pöyhönen (1993b).

285. Treitel, p. 813-814.

286. Ibid., p. 816-817.

287. Treitel, p. 818 referring to Joseph Constantine SS. Co. v. Imperial Smelting Corp. Ltd. (1942) A.C. 154.

288. Treitel, p. 818.

289. Cf. KL 22, 27, 30, 40, 51, and 57 §; CISG Article 80; UNIDROIT Principles Articles 6.2.2(c) and 7.1.2; EU Principles Article 8.101(3).

290. Ibid., p. 818-820; see also Tillotsson, p. 225-226.

291. Tillotsson, p. 225.

292. Atiyah (1995a), p. 241.

293. Ibid., p. 242.

294. Ibid., p. 242.

295. Treitel, p. 821-823.

296. Treitel, p. 823-825.

297. Ibid., p. 829-831. See also Atiyah (1995b), p. 311-318.

298. Treitel, p. 835.

299. Treitel, p. 832-833.

300. Atiyah (1995a), p. 237.

301. Treitel, p. 833.

302. Atiyah (1995a), p. 237.

303. Ibid., p. 237-238.

304. Joseph Constantine SS. Co. v. Imperial Smelting Corp. Ltd. (1942) A.C. 154, p. 186; referred to by Treitel, p. 833.

305. Treitel, p. 834 referring to Tamplin SS. Co. v. Anglo-Mexican Petroleum Co. (1916) 2 A.C. 397, p. 406. Cf. Wegfall der Geschäftsgrundlage in German law.

306. Treitel, p. 834.

307. Ibid. Though this may seem to give no answers but only more questions. How is the true construction of the contract found? Is it based on the intention of the parties, discretion of the court, or perhaps an ideal construction of contracts of the similar type? It may be that the cases in practice are so varied that there is no alternative but to give the court wide ranging powers of discretion.

308. Collins, p. 277. Collins sees the doctrine of frustration as judicial revision, where the court intervenes in the relationship between the contracting parties in order to restore the balance of fairness in. See p. 274-277, 282.

309. (1956) A.C. 696, p. 729. Cited in: McEndrick, p. 38-39.

310. See e.g. Nicholas (1995), p. 30-31; Nicholas (1979).

311. E.g. Treitel (1994), p. 2.

312. See Collins, p. 280, citing J. Bell: "The effects of changes in circumstances on long-term contracts," in Harris D. and Tallon D. (1989, eds.): "Contract law today," Oxford, chapter 5.

313. For example, Collins has in his critical work stated that the legal framework should provide incentives to the parties to renegotiate their (long-term) contractual relationship. According to him, more flexibility is required to provide for the changed circumstances in long-term relationships. Collins, p. 316-317. Examples of such incentives presently under English law are given in Collins, p. 325-327 (for example the duty to mitigate damages).

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Pace Law School Institute of International Commercial Law - Last updated March 4, 2002
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