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GUIDE TO THIS ARTICLE

Use of the UNIDROIT Principles to help interpret CISG Article 79


Match-up of CISG Article 79 with counterpart provisions of UNIDROIT Principles

UNIDROIT Principles
Article 7.1.1 - Non-Performance Defined

CISG
Article 79

Non-performance is failure by a party to perform any of its obligations under the contract, including defective performance or late performance.

Article 7.1.7 - Force Majeure

(1) Non-performance by a party 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 having regard to the effect of the impediment on the 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 after 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 to withhold performance or request interest on money due.

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 UNIDROIT Principles also contain provisions on hardship (Chapter 6, Section 2, Article 6.2.1, 6.2.2 and 6.2.3), a subject not specifically addressed in the CISG. See below for text of the hardship provisions of the Principles and comments on their use as gap fillers of the CISG.]

[The UNIDROIT articles displayed are to be read in conjunction with the Official Comments on them as "the comments on the articles are to be seen as an integral part of the Principles" (UNIDROIT).]


To examine CISG provisions displayed above in their context, go to the full text of the CISG || To examine UNIDROIT Principles displayed above in their context, go to the full text of the UNIDROIT Principles


Editorial remarks

Comparison between provisions of the CISG regarding exemption of
liability for damages (Art. 79) and the counterpart provisions of the
UNIDROIT Principles (Art. 7.1.7)

Prof. Alejandro M. Garro [*]
2005

  1. Introduction
  2. Exemption of liability for damages when the party claiming impossibility is a third-party supplier of the seller: Why this was omitted from Article 7.1.7 of the UNIDROIT Principles?
  3. Remedies still available to the aggrieved party when the other party's non-performance is excused
  4. Is there any room for an exemption of liability on account of hardship under CISG Article 79?

I. Introduction

1. The similarities between the counterpart provisions of the CISG and the UNIDROIT Principles are made obvious in the preceding comparative chart that, although paying no heed to the order of the paragraphs of Article 79 CISG, places in parallel the individual paragraphs of Article 7.1.7 of the UNIDROIT Principles on International Commercial Contracts.

2. Aside from minor differences in syntax, the most noticeable difference is the absence of a counterpart to CISG Art. 79(2) in the UNIDROIT Principles. This omission reflects the gap between the assumed function that this paragraph was to take in the mind of its drafters and the misunderstandings and complexities inherent in the distinction of excuses based on the failure of a third person to perform. One can also notice the difference in phraseology between the last paragraph included in both instruments: CISG Art. 79(5) is expressed in terms of limiting the exemption to liability for damages, whereas UNDROIT Principles Art. 7.1.7(4) refers to the availability of the non-breaching party, in case the other party's non-performance is excused, to terminate, withhold performance or request interest on money due.

3. Another, less noticeable yet more significant, difference between both instruments is that the UNIDROIT Principles also contain provisions on hardship (Chapter 6, Section 2, Articles 6.2.1, 6.2.2 and 6.2.3), a subject not specifically addressed in the CISG. This absence bears a consequence in the interpretation of both texts, even though both seemingly address the same issue.

II.  Exemption of liability for damages when the party claiming impossibility is a
      third-party supplier of the seller: Why this was omitted from Article 7.1.7 of
      the UNIDROIT Principles?

1. When the failure to deliver conforming goods results from the failure to perform on part of "a third person whom (the seller) has engaged to perform the whole or part of the contract," it seems sensible not to exempt the seller from liability because, except in extreme cases,[1] the seller is the party who is in the best position to avoid or minimize non-compliance by someone whom he himself "has engaged to perform all or part of the contract" [emphasis added]. Those whom the seller "has engaged" include parties providing the seller with raw materials or semi-manufactured parts; namely, those that may fall under the generic rubric of "ancillary suppliers" of the seller. They are deemed to be within the seller's sphere of influence, and the seller is held responsible for the conformity caused by those employed by him to perform the contract. In other words, the seller cannot be exempted of liability vis-à-vis the buyer, even if those ancillary suppliers are in a position to invoke successfully the defense of force majeure.

2. Some delegations, however, pushed for the inclusion of a second paragraph to Article 79 in order to tighten the prerequisites of the excuse in case the seller engages a sub-contractor or a third party who is not deemed to be within his sphere of influence.[2] Thus, CISG Article 79(2) seeks to tighten the conditions under which a seller may claim the defense of impossibility or force majeure whenever the defect in performance is attributed to an "independent" third person within the meaning of Article 79(2), that is, a third person genuinely outside the seller's organizational structure and sphere of control who, though not employed by the seller, is nevertheless "engaged" by the seller.

3. Thus, whereas CISG Article 79(2) is meant to apply whenever the seller claims an exemption of liability for damages due to defects in performance resulting from a failure to perform by a "third person" (i.e., those who are independently engaged to perform the whole or part of the contract), Article 79(1) addresses a situation where the seller claims an exemption of liability due to the misconduct of a general supplier or some other "third person" employed by the seller.

4. The assumed function of CISG Article 79(2) is that the seller's liability stretches to answer for the conduct of such "independent" third person unless the impediment was insuperable for the seller and, additionally, the independent third person would himself qualify for exemption under Article 79(1). Thus, Article 79(2) is meant to increase the seller's liability, because the prerequisites for exemption must be met cumulative by both the seller and the third person. From the buyer's perspective this means, for all practical purposes, that the seller is in principle responsible for defective performance incurred by independent third persons as if it were the seller's own conduct. It appears then that the failure to perform by a third person, supposing such third person is within the meaning of CISG Art. 79(2), will seldom lead to the exemption of he party to the main contract.

5. Although it seems more difficult for the defaulting party to be exempted of liability for the acts of an "independent" third person under Article 79(2), than to be exonerated for the delivery of non-conforming goods procured from or manufactured by a supplier whom the seller has engaged to deliver conforming goods, the fact of the matter is that it is not easy to distinguish between both types of "third persons". More important, under either the first or second paragraph of CISG Article 79 the third person's failure to perform will seldom lead to the exemption of the party to the main contract.

6. In those cases where a supplier chosen by the seller had failed to deliver the promised goods, courts and arbitral tribunals held that the seller was not exempted, even in cases where the failure to deliver was unforeseeable by the seller. Decisions vary, however, as to the method followed by the courts to subsume the seller's exemption of liability under Article 79. Some courts place the analysis of whether the seller qualifies for such an exemption under paragraph (1) of Article 79;[3] other tribunals prefer to examine the seller's exoneration under paragraph (2) of Article 79;[4] and still others opt for deciding the issue on the basis of Article 79 in the abstract.[5] Indeed, the analysis undertaken by the Federal Supreme Court of Germany on March 24, 1999, suggests that those differences are not so great: "From the buyer's point of view, it makes no difference whether the seller produces the goods himself - with the consequence that the non-performance is generally in his actual control so that, as a rule, a dispensation pursuant to CISG Art. 79(1) is generally excluded - or whether the seller obtains the goods from suppliers ...".[6]

7. Therefore, even if a party's excuse due to the failure of an independent "third person" is likely to be more difficult to be established under the "double force majeure" solution provided in CISG Art. 79(2) than if the situation were solely appraised under CISG Art. 79(1), the latter provision should suffice to take care of all possible scenarios of force majeure -- not only when the defaulting party was to perform himself or with the aid of employees or his staff, but also whenever his performance is conditioned upon performance by a third party. Even if that third party's failure to perform may be excused vis à vis the defaulting party, the latter is still bound to avoid or overcome such impediment vis-à-vis the non-defaulting party to the contract, so that dispensation under Article 79(1) is excluded. This is so because the internal relationship between the third party and the defaulting party is irrelevant to the other contracting party.

8. It does not make much of a difference, in other words, whether the excuse is sought to be found under the first or second paragraph of Article 79, and even assuming that a distinction between the different types of third parties were warranted, the difficulty in distinguishing between an excuse grounded on the failure to perform by different types of third parties (e.g., employees, agents, suppliers, sub-contractors, etc) is not worth the candle. In essence, the "impediment" to which CISG Article 79(1) refers suffices to cover the situation where the lack of or defective performance is owed to the act or omission of a third party.

9. It was a wise decision on part of the drafters of the UNIDROIT Principles Article 7.1.7 not to carry over CISG Article 79(2) into the Principles. In principle, if the seller entrusts the manufacture or delivery of conforming goods to another person, or if the buyer entrusts the payment to a bank or an intermediary, both seller and buyer remain responsible with the other party.[7] CISG Article 79(1) suffices to take care of the exceptional circumstances in seller or buyer may be exempted of liability on account of the third person's defaulting performance.

III. Remedies still available to the aggrieved party when the other party's non-
       performance is excused

1. When CISG Article 79(1) says that "a party is not liable ...", it actually means that the defaulting party to be excused is not liable in damages; all the other remedies of the other party remain unaffected according to CISG Article 79(5). Yet, the other remedies remain actually available to the other party depend on the particular circumstances of the case and contractual obligations arising under the contract.

2. Article 7.1.7(4) of the UNIDROIT Principles does not carry over the restriction found in CISG Article 79(5) to the effect that the party who was to receive performance may be entitled to exercise all his rights under the contract except to claim damages. Instead, the counterpart of the UNIDROIT Principles phrases the potentially available remedies in less restrictive terms, stating that the aggrieved party who was to receive performance from the defaulting party that succeeded in establishing an excuse may nevertheless claim "a right to terminate the contract or to withhold performance or request interest on money due". Indeed, remedies other than damages are not limited to those listed in this provision of the UNIDROIT Principles, because the right to reduce the price (CISG Art. 50) and to compel specific performance (CISG Arts. 46 and 62) may remain as available as the right to avoid or terminate (CISG Arts. 49 and 64) and the right to collect interest on money due (CISG Art. 78).[8]

3. Indeed, there are good reasons to include price reduction as a possible available remedy in a situation of a qualified exemption for the seller's failure to delivery conforming goods. This is one of those instances where price reduction may well serve its purpose, which is not to compensate the aggrieved buyer in damages, but to "preserve[e] the bargain between the parties and [...] rebalance[e] the performance required by both sides ...".[9]

4. The exempting impediment clearly should not preclude the disappointed party from putting an end to the contract, provided that the excused failure to perform amounts to a fundamental breach (CISG Art. 25).If the non-performance were to be total and permanent, termination may be an automatic consequence of the impediment, in which case it may not be necessary to require the aggrieved party (which is the only party entitled to avoid the contract) to serve a termination notice by a unilateral declaration.[10] Once avoidance has been declared, however, the effects of avoidance insofar as "restitution" is concerned apply to both parties (CISG Arts. 81-84).

5. CISG Article 79(5) exempts the defaulting party of liability for damages in a negative form, without referring expressly to the question whether the aggrieved party may be nevertheless entitled to interest on the money that is owed to him.[11] The nature of the obligation to pay interest, as expressed in the CISG, leads to the conclusion that an Article 79 exemption does not preclude the aggrieved party from claiming and recovering interest. First, the purpose of the obligation to pay interest under CISG Article 78, in addition to the obligation to pay monetary compensation for damages, is to compensate the obligee for the financial cost experienced for not receiving payment at the time it is due. Second, CISG Article 78 seems to distinguish between the obligation to pay damages and the obligation to pay interest when it fixes the commencement of the obligation to pay interest as of the moment there is delay in payment, even if the obligee has not suffered any damage from such delay and the debtor is not liable. It is on the basis of this conceptual understanding that UNIDROIT Principles Article 7.1.7(4) provides, though expressly, that the aggrieved party is entitled to interest. UNIDROIT Principles Article 7.4.9(1) consistently states that "the aggrieved party is entitled to interest ...whether or not the non-payment is excused."[12]

6. CISG Article 79(5) seems to warrant the right of the aggrieved party to claim specific performance even if, as a result of an impediment, performance is likely to have become impossible (e.g., the goods are destroyed or the transfer of funds has been prohibited). Of course there can be no specific performance if the failure to perform turns on the fact that the total goods have perished or the payment has been rendered impossible or illegal. Yet, where a temporary impediment results in a partial non-performance or a delayed performance, then in such a case the exemption effect is only for the period during which the impediment exists (CISG Art. 79(3); UNIDROIT Principles Article 7.1.7(2)). In such a case, the right to performance continues to exist and may actually encourage the parties to invest in efforts to overcome the impediments. When the temporary impediment disappears and has no effect any longer, the exemption from specific performance is no longer justified.

7. Both CISG Article 79(5) and UNIDROIT Principles Article 7.1.7(4) leave open the possibility for the aggrieved party to demand specific performance, a claim that is not necessarily affected by the impediment excusing the non-performance. To this extent, both texts do not rigidly exclude the possibility of specific performance.[13] Whether the temporary impediment will merely result in delayed performance or is likely to deprive the performance of most of its value is another question concerning the impact of the temporary impediment in the overall performance, this question is certainly not governed by this provision on force majeure and its consequences.

IV.  Is there any room for an exemption of liability on account of hardship under
       CISG Article 79?

1. Another issue of significance in the comparison between both instruments is the absence in CISG Article 79 of any reference to a situation, short of physical or legal impossibility, in which performance by one party becomes extremely and totally unpredictably harsh. UNIDROIT Principles Article 6.2.2 expressly provides for a situation of hardship, in addition to the force majeure or impossibility scenario contemplated in Article 7.1.7, so that the defaulting party may choose claiming one or the other excuse.[14] Did the CISG fail to include a provision on hardship because the "impediment" referred to in its Article 79 may conceivably grant relief to a party who finds himself or herself in a dire situation of excessive and unpredictable hardship to perform? Or should the failure to include such a provision be interpreted as a rejection of the doctrine of hardship under the CISG?

2. Scholarly opinion is divided on this question. Some commentators state that the wording of Article 79 appears sufficiently flexible to include an extreme situation of unexpected hardship within the meaning of "impediment".[15] Others opine that there is no place in the CISG for any relief on account of economic hardship.[16] As to judicial decisions on this subject, there are too few and inconclusive to this date to warrant a stable trend either excluding or including hardship within the purview of CISG Article 79. Moreover, none of the reported decisions have extended the exemption of CISG Article 79 to cases of economic hardship. However, it must be admitted that no real "hard" cases of hardship have been presented so far.

3. The first issue to tackle is whether it is conceivable to find a situation of hardship calling for a legal response of some kind, be it under a stretched interpretation of CISG Article 79 or the CISG underlying general principles via Article 7(2) or under some national law that may eventually be rendered applicable. Once we have found a proper hypothetical covering hardship, the next question is to ascertain whether it is at all possible to deal with a genuine hardship situation via CISG Article 79 or whether we should resign ourselves to the application of some national law admitting relief in a situation of hardship (provided, of course that the applicable rule of private international law would lead to the application of a domestic legal system contemplating relief for hardship, which is not altogether certain).

4. There are not many real cases dealing with genuine situations of hardship in which courts have found it fair to provide relief and well-grounded reasons explaining why the change in circumstances was actually unpredictable and why one type of relief was more appropriate than others. This notwithstanding, most commentators would not go as far as to deny the possibility that in very rare cases, probably during truly exceptional historical periods (e.g., pre-war Germany during the 1920's) and really unstable economies or countries (e.g., hyperinflation in Argentina during the 1970's), judicial relief from a genuine hardship situation may be fairly justified. Admittedly, there are those who think that "a contract always a contract;" and would not admit an inch of an exception to the pacta sunt servanda. For those who share this point of view, it makes no sense to explore any further whether CISG Article 79 could be relied upon to tackle a genuine situation of hardship. This opinion goes on to examine the availability of a response on the assumption that pacta sunt servanda is a principle rather than a rule, though a principle that ought to be respect almost at all costs. It is at least conceivable that a defaulting party may be justified in obtaining some type of relief despite the fact that the "impediment" falls short of a strict case of physical or legal impossibility to perform.

5. Resorting to the type of scenarios designed in the comments accompanying UNIDROIT Principles Article 6.2.2, one may envision a situation where a buyer "A", domiciled in State X, concludes a contract of sale with a seller "B", domiciled in State Y. Payment is agreed to be made in State Z within three months, upon delivery of the goods, in the currency of State Z. Let us imagine that within a month of the conclusion of the contract a totally unpredictable political and economic crisis, which the parties could not have reasonably taken into account, leads to a massive devaluation of 80% of Z's currency, as a result of which the sale turns out extremely burdensome for the buyer "A" and a gross windfall for the seller "B". Admittedly, it is not easy to ascertain whether the change in circumstances could not have been reasonably foreseen. It is not an easier task to distinguish between the risk of loss that every contracting party should be deemed to have assumed and the extraordinary disastrous economic disadvantages amounting to a "limit of sacrifice" (because there is indeed such a limit), beyond which the obligor should not be expected to perform the contract as written. But if there is such a "truly hard hardship problem," i.e., a deal unexpectedly and turned a "nightmare" for one party and a "steal" for the other, well, this is it.[17]

6. Assuming that the CISG applies to this contract, and also assuming that the foregoing hypothetical falls squarely within a factually justified case of hardship, the most relevant question to explore at this point is whether a case of economic hardship as this one should be settled by the CISG, either by reading the word "impediment" in Article 79 to include economic hardship or by concluding that there is a gap within the CISG to be filled by some underlying general principle via the "governed-but-not-settled" gap-filling technique promoted in CISG Art. 7(2). If the CISG applies, then it naturally preempts other potentially applicable domestic rules dealing with hardship. But if the hardship question cannot be thus settled, then there is no alternative other than resorting to domestic legal rules, hoping that the applicable law would provide for some risk-share allocation of remedies. The alternative of resolving the hardship problem within the four corners of the CISG is more palatable, because leaving the question to the conflict of law rules of the forum leads to a great diversity of potentially applicable legal doctrines (impracticability, frustration, Wegfall der Geschäftsgrundlage, eccesiva onerosità sopravvenuta, imprévision, etc.). Thus, the interpreter who takes seriously the CISG's stated purpose of unifying the law of sales will probably exhaust all technically available means to respond to the hardship problem within the "four corners" of the Convention.

7. First, it is necessary to confirm, convincingly, that the hardship situation is not expressly or impliedly excluded from the scope of the CISG. Second, it is important to examine the legislative and drafting history of what is now CISG Article 79, to the extent that they may be considered legitimate and valuable aid in its interpretation.

8. To the extent that termination or adjustment of a contract on grounds of hardship may be regarded in some legal systems as a validity-related issue, it may be argued that the hardship issue is excluded by CISG Article 4.[18] The argument deserves careful consideration, because in some Scandinavian legal systems the issue of hardship appears to be approached as an issue of validity,[19] and also because there is something to be said in favor of giving the defaulting party the benefit of choosing among competing domestic doctrines of hardship. But this approach does not sound convincing or persuasive. Unlike a situation of unconscionability (usury, lésion or gross disparity of the performances at the time the contract is concluded), which clearly falls under the rubric of validity, the hardship problem is associated in most legal systems with force majeure or impossibility of performance, that is, a situation of exoneration or mitigation of liability due to events subsequent to the conclusion of the contract, more than as a case of nullity or avoidance due to infirmities or flaws affecting the contract from its inception.[20] Moreover, every benefit potentially obtained from allowing national doctrines of hardship to compete for its application is more than offset by the high price in terms of uniformity that is to be paid under this approach.

9. It is still necessary to trace the legislative and drafting history of the pertinent CISG provisions to ascertain whether they are indicative of a firm intention to exclude hardship from the scope of Article 79. The legislative history clearly indicates that Article 79 was drafted in response to the criticism of Article 74 of the 1964 Uniform Law on International Sales, to the effect that "a party could be too readily excused from performing his contract." But the criticism that ULIS Article 74 was insufficiently clear and subjective led to the substitution of the word "impediment" for "circumstances," so that the conditions for exemption identified are more narrowly and objectively under the CISG. But this legislative history is inconclusive to warrant the conclusion that CISG Article 79 cannot exempt a party to perform, in whole or in part, when the impediment is represented by a totally unexpected event that makes performance exceedingly difficult.

10. The exclusion (rectius: rejection) of hardship from the CISG would emerge, according to other authors, from its drafting history.[21] Indeed, at the time the draft article that later became CISG Article 79, the Working Group of UNCITRAL considered a proposed provision allowing a party to claim avoidance or adjustment of a contract whenever facing unexpected "excessive damages". After setting out the arguments in support of this proposal the Committee concluded by stating that it was not adopted, not reappearing in subsequent discussions.[22]

11. Others have relied upon another fragment from the drafting history of the Convention, the rejection of a Norwegian proposal linked to CISG Art. 79(3), to infer a rejection of the possibility of extending the application of Article 79 to a situation of genuine hardship. When the issue of temporary impediment came up for discussion, the delegation from Norway suggested the inclusion of an additional provision to the effect that the temporary exemption from performing may turn into a permanent one if, after the impediment ceases to exist, the circumstances had so changed that performance would become manifestly unreasonable. The proposal gained significant support from other delegations, but it as finally turned down after the French delegate raised his concerns that introducing such a provision may be regarded as an acceptance of doctrines such as imprévision, frustration of purpose, and the like.[23] Although the recollection of the discussions among the participant delegates, or what should be made out of those discussions, is far from uniform, there is no dispute that the issue of economic hardship was not specifically discussed in connection with those proposals.

12. Speculation about what the intention of the drafting group might have been with regard to the scope of application of CISG Article 79 is unlikely to be too accurate, especially when we are left to our inferences from fragments in the "travaux préparatoires". Indeed, the dismissal of a proposal which did not even address whether hardship should be given any space within the Convention is no proper foundation upon which to build an argument on the "intention of the legislator". If anything, the drafting history of the Convention evidences that the discussions were not sufficiently conclusive on this question.

13. So, if Article 79(1) neither expressly or implicitly excludes the possibility of economic hardship as an impediment that may exempt a party's failure to perform, and if it is accepted that a situation of genuinely unexpected and radically changed circumstances, in truly exceptional cases, deserves some legal response, then we are inclined to favor a broad interpretation of CISG Article 79 that would preempt the application of a domestic rule on hardship, assuming that the applicable domestic law provides for one. Thus, the next and final step is to ascertain the contours of at least some guidelines as to what is to be understood by a genuine situation of "hardship" and, immediately thereafter, speculate as to what may be the most appropriate remedy or relief after hardship has been found to exist.

14. I do not think it is possible or even convenient to attempt a definition of hardship, beyond accepting that the impediment may entail a situation of "economic impossibility" (wirtschaftliche Unmöglichkeit) that, while short of an absolute bar to perform, imposes what in some legal systems is conceptualized as a "limit of sacrifice" (äusseerste Opfergrenze) beyond which the obligor cannot be reasonably expected to perform. It seems clear that in most cases market fluctuations are not to be considered an "impediment" under CISG Article 79, because such fluctuations are a normal risk of commercial transactions in general. Whether wild and totally unexpected market fluctuations in goods or currency could ever become an "impediment" is another matter. Indeed, the theoretical possibility of such radical and unexpected changes admits the application of Article 79 in those rare instances as the one exemplified above.

15. As to the possible remedies following a finding of hardship, the analysis of this problem should start by acknowledging that this is another "governed-but-not-settled" gap that needs to be filled within the Convention. There are no "general principles underlying the Convention" from where to extract the obligation of the parties to renegotiate the terms of the contract, as it would be most likely the case if the parties had incorporated a hardship clause. Neither can one find such a widely accepted general principle pointing to the possibility, in case negotiations fail, to "adjust," or "revise" the terms of the contract so as to restore the balance of the performances.

16. For those who are not willing to resort to the principle of good faith buried in CISG Article 7(1) in order to find a balance of the performances,[24] CISG Article 79(5) may be relied upon to open up the possibility for a court or arbitral tribunal to determine what is owed to each other, thus "adapting" the terms of the contract to the changed circumstances. Other than the payment of damages, a court or arbitral tribunal may order, if justified under the CISG, the termination of the contract as of a certain date. Of course, it is impossible to require specific performance as called by the contract, but a flexible method for the purposes of adjusting the terms of the contract may be obtained by resorting to price reduction under CISG Article 50.[25]

[See also commentary by the author on this subject in John Felemegas ed., An International Approach to the Interpretation of the United Nations Convention on Contracts for the International Sale of Goods (1980) as Uniform Sales Law, Cambridge University Press (2006) 236-246.]


FOOTNOTES

* Professor of Law, Parker School of Foreign and Comparative Law, Columbia Law School, New York.

1. For instance, if the supplier of the goods is the only available source to supply the goods, or when supplies are unavailable to unforeseeable and extraordinary events that are not related to the typical procurement risks assumed by a seller.

2. According to UNCITRAL's official records, tightening the conditions under which a seller could claim exemption who sought to avoid a contract includes, among other consequences, "that a party should be exempted from liability because he had chosen an unreliable supplier...". Commentary on the Draft Convention on Contracts for the International Sale of Goods prepared by UNCITRAL's Secretariat, Official Records, United Nations, New York, 1981 [hereinafter "Commentary on the 1978 Draft Convention"] § 23 at 379 par. 23 (motion by Denmark) and § 35 at 380 (comment by Norwegian delegate).

3. Germany 28 February 1997 Oberlandesgericht [Appellate Court] Hamburg, case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/970228g1.html>; Germany 21 March 1996 Schiedsgericht der Handelskammer [Arbitral Tribunal] Hamburg [partial award], case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/960321g1.html>.

4. ICC Arbitration Case No. 8128 of 1995, International Chamber of Commerce, case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/958128i1.html>.

5. Russia 16 March 1995 Arbitration proceeding 155/1994, case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/950316r1.html>.

6. Germany 24 March 1999 Bundesgerichtshof [Supreme Court], translation available at <http://cisgw3.law.pace.edu/cases/990324g1.html> with comment by Peter Schechtriem, 15/16 Juristen Zeitung (13 Aug. 1999) 794-97.

7. Compare European Principles of Contract Law ("PECL") Article 8:107 ("A party which entrusts performance of the contract to another person remains responsible for performance"). See also Comments and Notes on PECL Art. 8:107, Comment C, available at <http://cisg.law.pace.edu/cisg/text/peclcomp79.html>.

8. Compare with PECL Art. 8:101, allowing for the aggrieved party's possibility of exercising any other remedy with the exception of damages and performance (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 9 except claiming performance and damages).

9. See generally, Erika Sondahl, "Understanding the Remedy of Price Reduction - A Means to Fostering a More Uniform Application of the United Nations Convention on Contracts for the International Sale of Goods", 7 Vindobona Journal of International Commercial Law and Arbitration (2003) 255-276, at fn. 38, also available at <http://cisgw3.law.pace.edu/cisg/biblio/sondahl.html>.

10. Compare with PECL Art. 9:303(4) (If a party is excused under Article 8:108 through an impediment which is total or permanent, the contract is terminated automatically and without notice at the time the impediment arises).

11. See, e.g., Dennis Tallon in Commentary on the International Sales Law: The 1980 Vienna Sales Convention (ed. by M. Bianca and M.J. Bonnell, Milan, 1987) at 589, also available at <http://cisgw3.law.pace.edu/cisg/biblio/tallon-bb79.html>, in favor of exempting the excused defaulting party from the payment of interest on the ground that the payment of interests should be considered as part of an award of damages).

12. Compare with PECL Arts. 8:101(2) and 9:508 (Delay in payment of Money) (Interest is owed whether or not non-payment is excused under Article 8:108).

13. Compare with PECL Art. 8:108(1) , providing that the aggrieved party may resort to any of the remedies set by PECL Chapter 9, except claiming performance and damages.

14. See Comment 6 to UNIDROIT Principles Article 6.2.2.

15. See, e.g., Dennis Tallon in Commentary on the International Sales Law Article 79 at § 3.2 (1987) ("[T]he judge will have a natural tendency to refer to similar concepts in his own law. Thus, the judge of a socialist country will have a restrictive approach to force majeure ... On the contrary a common lawyer will feel inclined to refer to the more flexible notions of frustration and impracticability. In the Roman-German system, the judge will reason in terms of force majeure ..."). See also M. J. Bonell, Force majeure e hardship nel diritto uniforme della vendita internazionale, in Diritto del commercio internazionale 590 (1990) (observing that by requiring that the obligor "could not reasonably be expected ... to have avoided or overcome [the impediment] or its consequences" suggests that, at least in principle, the possibility should be entertained that performance has become so onerous that it would be unreasonable to enforce it).

16. See, e.g., Barry Nicholas, who observed that exemption of liability on account of unexpected and excessive economic hardship was "out of place" in a sales law. Progress Report of the Working Group on the International Sale of Goods on the Work of its Fifth Session (A/CN.9/87, Annex III, reprinted in UNCITRAL Yearbook V: 1974 (1975) at 66).

17. See Joseph Lookofsky, Walking the Article 7(2) Tightrope Between CISG and Domestic Law, unpublished manuscript submitted to the symposium on "25 Years United Nations Convention on Contracts for the International Sale of Goods (CISG)", Vienna, March 15-16, 2005 (on file with the author).

18. See J. Lookofsky, Understanding the CISG in the USA (2d ed., 2004) § 2.6 and Joseph Lookofsky, "The Limits of Commercial Contract Freedom Under the UNIDROIT 'Restatement' and Danish Law", 46 Am.J.Comp.Law 485, 496 (1998), also available at <http://cisgw3.law.pace.edu/cisg/biglio/lookofsky6.html>, referring to the hardship provisions in the General Clause of the Danish Contracts Act, authorizing a court to refuse enforcement or to adjust "any unreasonable contract or term, and that includes a term which becomes unreasonable after the contract is made". Professor Lookofsky also refers to Dutch Civil Code Article 6.258(1) as an illustration of a provision that appears to question the "validity" of a contract ("Upon the demand of one of the parties, the court may modify the effects of a contract or it may set it aside; in whole or in part, on the basis of unforeseen circumstances of such a nature that the other party, according to standards of reasonableness and fairness, may not expect the contract to be maintained in unmodified form. The modification or setting aside may be given retroactive effect.").

19. See, e.g., Tom Southerington, Impossibility of Performance and Other Excuses in International Trade, Publication of the Faculty of Law of the University of Turku, Private law publication series B:55, also available at <http://cisgw3.law.pace.edu/cisg/biblio/southerington.html>. Southerington refers to Section 36(1) of the Finnish Contracts Act, which the author considers as a rule of validity akin to unconscionability.

20. This seems to be the case of Italian law, whose Article 1467 of the Codice Civile and the scholarly doctrine surrounding it has been taken as a model in several Latin American legal systems. A much criticized 1993 decision by the Tribunale Civile di Monza entered (unnecessarily for the purposes of the case before the court) to examine the legal nature of hardship under Italian law and its relationship with the CISG. The Italian court stated that "... hardship is not a matter expressly excluded in Article 4 of the CISG ... Dissolution of the contract for supervening excessive onerousness affects neither the validity of the contract nor ownership over the goods ..."). Italy 14 January 1993 Tribunale Civile [District Court] Monza, Nuova Fucinati v. Fondmetall International, case presentation including English translation available at <http://cisgw3.law.pace.edu/cases/930114i3.html>.

21. See, e.g., Barry Nicholas, who observed that exemption of liability on account of unexpected and excessive economic hardship was "out of place" in a sales law. Progress Report of the Working Group on the International Sale of Goods on the Work of its Fifth Session (A/CN.9/87, Annex III, reprinted in UNCITRAL Yearbook V: 1974 (1975) at 66).

22. Report of Committee of the Whole I Relating to the Draft Convention on the International Sale of Goods (A/32/17, annex I, paras. 458-60), reprinted in UNCITRAL Yearbook VIII: 1977 (1978), 57). See also John Honnold, Documentary History of the Uniform Law for International Sales 350 (1989).

23. See A/Conf.97/C.1/SR.27 at 10. The Norwegian proposal led to the deletion of the word "only" in Article 79(3), so that even if the initial and temporary impediment vanishes, the resulting change of circumstances, which may well be of an economic nature, may turn into another impediment leading to that party's exemption of liability.

24. A suggestion by Peter Schlechtriem to this effect may be found in Transcript of a Workshop on the Sales Convention, in 18 Journal of Law and Commerce 191-258 (1999), also available at <http://cisgw3.law.pace.edu/cisg/biblio/workshop-79.html>.

25. See Schlechtriem, "Art. 79", in Kommentar zum Einheitlichen UN-Kaufrecht- CISG (4th ed., Munich 2004).


Official Comments on articles of the UNIDROIT Principles cited

[See also Joseph M. Perillo, "Force Majeure and Hardship under the UNIDROIT Principles of International Commercial Contracts", in: Contratación internacional. Comentarios a los Principios sobre los Contratos Comerciales Internacionales del Unidroit, Universidad Nacional Autónoma de México - Universidad Panamericana (1998) 111-113]

Official comments reprinted with permission from UNIDROIT

 

ARTICLE 7.1.1

(Non-performance defined)

Non-performance is failure by a party to perform any of its obligations under the contract, including defective performance or late performance.

COMMENT

This article defines "non-performance" for the purpose of the Principles. Particular attention should be drawn to two features of the definition.

The first is that "non-performance" is defined so as to include all forms of defective performance as well as complete failure to perform. So it is non-performance for a builder to erect a building which is partly in accordance with the contract and partly defective or to complete the building late.

The second feature is that for the purposes of the Principles the concept of "non-performance" includes both non-excused and excused non-performance.

Non-performance may be excused by reason of the conduct of the other party to the contract (see Arts. 7.1.2 (Interference by the other party) and 7.1.3 (Withholding performance and comments) or because of unexpected external events (Art. 7.1.7 (Force majeure and comment). A party is not entitled to claim damages or specific performance for an excused non-performance of the other party but a party who has not received performance will as a rule be entitled to terminate the contract whether or not the non-performance is excused. See Art. 7.3.1 et seq. and comment.

There is no general provision dealing with cumulation of remedies. The assumption underlying the Principles is that all remedies which are not logically inconsistent may be cumulated. So, in general, a party who successfully insists on performance will not be entitled to damages but there is no reason why a party may not terminate a contract for non-excused non-performance and simultaneously claim damages. See Arts. 7.2.5 (Change of remedy), 7.3.5 (Effects of termination in general) and 7.4.1 (Right to damages).

 

ARTICLE 7.1.7

(Force majeure)

(1) Non-performance by a party 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 having regard to the effect of the impediment on the 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 after 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 to withhold performance or request interest on money due.

COMMENT

1. The notion of force majeure

This article covers the ground covered in common law systems by the doctrines of frustration and impossibility of performance and in civil law systems by doctrines such as force majeure, Unmöglichkeit, etc. but it is identical with none of these doctrines. The term "force majeure" was chosen because it is widely known in international trade practice, as confirmed by the inclusion in many international contracts of so-called "force majeure" clauses.

Illustration

1. A, a manufacturer in country X, sells a nuclear power station to B a utility company in country Y. Under the terms of the contract A undertakes to supply all the power station's requirements of uranium for ten years at a price fixed for that period, expressed in United States dollars and payable in New York. The following separate events occur:

(1) After five years the currency of country Y collapses to 1% of its value against the dollar at the time of the contract. B is not discharged from liability as the parties have allocated this risk by the payment provisions.

(2) After five years the government of country Y imposes foreign exchange controls which prevent B paying in any currency other than that of country Y. B is excused from paying in United States dollars. A is entitled to terminate the contract to supply uranium.

(3) After five years the world uranium market is cornered by a group of Texan speculators. The price of uranium on the world market rises to ten times the contract figure. A is not excused from delivering uranium as this is a risk which was foreseeable at the time of making the contract.

2. Effects of force majeure on the rights and duties of the parties

The article does not restrict the rights of the party who has not received performance to terminate if the non-performance is fundamental. What it does do, where it applies, is to excuse the non-performing party from liability in damages.

In some cases the impediment will prevent any performance at all but in many others it will simply delay performance and the effect of the article will be to give extra time for performance. It should be noted that in this event the extra time may be greater (or less) than the length of the interruption because the crucial question will be what is the effect of the interruption on the progress of the contract.

Illustration

2. A contracts to lay a natural gas pipeline across country X. Climatic conditions are such that it is normally impossible to work between 1 November and 31 March. The contract is timed to finish on 31 October but the start of work is delayed for a month by a civil war in a neighbouring country which makes it impossible to bring in all the piping on time. If the consequence is reasonably to prevent the completion of the work until its resumption in the following spring, A may be entitled to an extension of five months even though the delay was itself of one month only.

3. Force majeure and hardship

The article must be read together with Chapter 6, section 2 of the Principles dealing with hardship. See comment 6 on Art. 6.2.2.

4. Force majeure and contract practice

The definition of force majeure in para. (1) of this article is necessarily of a rather general character. International commercial contracts often contain much more precise and elaborate provisions in this regard. The parties may therefore find it appropriate to adapt the content of this article so as to take account of the particular features of the specific transaction.

 

CHAPTER 6: PERFORMANCE

SECTION 2: HARDSHIP

ARTICLE 6.2.1

(Contract to be observed)

Where the performance of a contract becomes more onerous for one of the parties, that party is nevertheless bound to perform its obligations subject to the following provisions on hardship.

COMMENT

1. Binding character of the contract the general rule

The purpose of this article is to make it clear that as a consequence of the general principle of the binding character of the contract (see Art. 1.3) performance must be rendered as long as it is possible and regardless of the burden it may impose on the performing party. In other words, even if a party experiences heavy losses instead of the expected profits or the performance has become meaningless for that party the terms of the contract must nevertheless be respected.

Illustration

In January 1990 A, a forwarding agent, enters into a two-year shipping contract with B, a carrier. Under the contract B is bound to ship certain goods from Hamburg to New York at a fixed price, on a monthly basis throughout the two-year period. Alleging a substantial increase in the price of fuel in the aftermath of the 1990 Gulf crisis, B requests a five per cent increase in the rate for August 1990. B is not entitled to such an increase because B bears the risk of its performance becoming more onerous.

2. Change in circumstances relevant only in exceptional cases

The principle of the binding character of the contract is not however an absolute one. When supervening circumstances are such that they lead to a fundamental alteration of the equilibrium of the contract, they create an exceptional situation referred to in these Principles as "hardship" and dealt with in the following articles of this section.

The phenomenon of hardship has been acknowledged by various legal systems under the guise of other concepts such as frustration of purpose, Wegfall der Geschäftsgrundlage, imprévision, eccessiva onerosità sopravvenuta, etc. The term "hardship" was chosen because it is widely known in international trade practice as confirmed by the inclusion in many international contracts of so-called "hardship clauses".

ARTICLE 6.2.2

(Definition of hardship)

There is hardship where the occurrence of events fundamentally alters the equilibrium of the contract either 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.

COMMENT

1. Hardship defined

This article defines hardship as a situation where the occurrence of events fundamentally alters the equilibrium of the contract, provided that those events meet the requirements which are laid down in sub-paras. (a) to (d).

2. Fundamental alteration of equilibrium of the contract

Since the general principle is that a change in circumstances does not affect the obligation to perform (see Art. 6.2.1), it follows that hardship may not be invoked unless the alteration of the equilibrium of the contract is fundamental. Whether an alteration is "fundamental" in a given case will of course depend upon the circumstances. If, however, the performances are capable of precise measurement in monetary terms, an alteration amounting to 50% or more of the cost or the value of the performance is likely to amount to a "fundamental" alteration.

Illustration

1. In September 1989 A, a dealer in electronic goods situated in the former German Democratic Republic, purchases stocks from B, situated in country X, also a former socialist country. The goods are to be delivered by B in December 1990. In November 1990, A informs B that the goods are no longer of any use to it, claiming that after the unification of the German Democratic Republic and the Federal Republic of Germany there is no longer any market for such goods imported from country X. Unless the circumstances indicate otherwise, A is entitled to invoke hardship.

a. Increase in cost of performance

In practice a fundamental alteration in the equilibrium of the contract may manifest itself in two different but related ways. The first is characterized by a substantial increase in the cost for one party of performing its obligation. This party will normally be the one who is to perform the non-monetary obligation. The substantial increase in the cost may, for instance, be due to a dramatic rise in the price of the raw materials necessary for the production of the goods or the rendering of the services, or to the introduction of new safety regulations requiring far more expensive production procedures.

b. Decrease in value of the performance received by one party

The second manifestation of hardship is characterized by a substantial decrease in the value of the performance received by one party, including cases where the performance no longer has any value at all for the receiving party. The performance may be that either of a monetary or of a non-monetary obligation. The substantial decrease in the value or the total loss of any value of the performance may be due either to drastic changes in market conditions (e.g. the effect of a dramatic increase in inflation on a contractually agreed price) or the frustration of the purpose for which the performance was required (e.g. the effect of a prohibition to build on a plot of land acquired for building purposes or the effect of an export embargo on goods acquired with a view to their subsequent export).

Naturally the decrease in value of the performance must be capable of objective measurement: a mere change in the personal opinion of the receiving party as to the value of the performance is of no relevance. As to the frustration of the purpose of the performance, this can only be taken into account when the purpose in question was known or at least ought to have been known to both parties.

3. Additional requirements for hardship to arise

a. Events occur or become known after conclusion of the contract

According to sub-para. (a) of this article, the events causing hardship must take place or become known to the disadvantaged party after the conclusion of the contract. If that party had known of those events when entering into the contract, it would have been able to take them into account at that time and may not subsequently rely on hardship.

b. Events could not reasonably have been taken into account by disadvantaged party

Even if the change in circumstances occurs after the conclusion of the contract, sub-para. (b) of this article makes it clear that such circumstances cannot cause hardship if they could reasonably have been taken into account by the disadvantaged party at the time the contract was concluded.

Illustration

2. A agrees to supply B with crude oil from country X at a fixed price for the next five years, notwithstanding the acute political tensions in the region. Two years after the conclusion of the contract, a war erupts between contending factions in neighbouring countries. The war results in a world energy crisis and oil prices increase drastically. A is not entitled to invoke hardship because such a rise in the price of crude oil was not unforeseeable.

Sometimes the change in circumstances is gradual, but the final result of those gradual changes may constitute a case of hardship. If the change began before the contract was concluded, hardship will not arise unless the pace of change increases dramatically during the life of the contract.

Illustration

3. In a sales contract between A and B the price is expressed in the currency of country X, a currency whose value was already depreciating slowly against other major currencies before the conclusion of the contract. One month afterwards a political crisis in country X leads to a massive devaluation of the order of 80% of its currency. Unless the circumstances indicate otherwise, this constitutes a case of hardship, since such a dramatic acceleration of the loss of value of the currency of country X was not foreseeable.

c. Events beyond the control of disadvantaged party

Under sub-para. (c) of this article a case of hardship can only arise if the events causing the hardship are beyond the control of the disadvantaged party.

d. Risks must not have been assumed by disadvantaged party

Under sub-para. (d) there can be no hardship if the disadvantaged party had assumed the risk of the change in circumstances. The word"assumption" makes it clear that the risks need not have been taken over expressly, but that this may follow from the very nature of the contract. A party who enters into a speculative transaction is deemed to accept a certain degree of risk, even though it may not have been fully aware of that risk at the time it entered into the contract.

Illustration

4. A, an insurance company specialized in the insurance of shipping risks, requests an additional premium from those of its customers who have contracts which include the risks of war and civil insurrection, so as to meet the substantially greater risk to which it is exposed following upon the simultaneous outbreak of war and civil insurrection in three countries in the same region. A is not entitled to such an adaptation of the contract, since by the war and civil insurrection clause insurance companies assume these risks even if three countries are affected at the same time.

4. Hardship relevant only to performance not yet rendered

By its very nature hardship can only become of relevance with respect to performances still to be rendered: once a party has performed, it is no longer entitled to invoke a substantial increase in the costs of its performance or a substantial decrease in the value of the performance it receives as a consequence of a change in circumstances which occurs after such performance.

If the fundamental alteration in the equilibrium of the contract occurs at a time when performance has been only partially rendered, hardship can be of relevance only to the parts of the performance still to be rendered.

Illustration

5. A enters into a contract with B, a waste disposal company in country X, for the purpose of arranging the storage of its waste. The contract provides for a four-year term and a fixed price per ton of waste. Two years after the conclusion of the contract, the environmental movement in country X gains ground and the Government of country X prescribes prices for storing waste which are ten times higher than before. B may successfully invoke hardship only with respect to the two remaining years of the life of the contract.

5. Hardship normally relevant to long-term contracts

Although this article does not expressly exclude the possibility of hardship being invoked in respect of other kinds of contracts, hardship will normally be of relevance to long-term contracts, i.e. those where the performance of at least one party extends over a certain period of time.

6. Hardship and force majeure

In view of the respective definitions of hardship and force majeure (see Art. 7.1.7) under these Principles there may be factual situations which can at the same time be considered as cases of hardship and of force majeure. If this is the case, it is for the party affected by these events to decide which remedy to pursue. If it invokes force majeure, it is with a view to its non-performance being excused. If, on the other hand, a party invokes hardship, this is in the first instance for the purpose of renegotiating the terms of the contract so as to allow the contract to be kept alive although on revised terms.

7. Hardship and contract practice

The definition of hardship in this article is necessarily of a rather general character. International commercial contracts often contain much more precise and elaborate provisions in this regard. The parties may therefore find it appropriate to adapt the content of this article so as to take account of the particular features of the specific transaction.

ARTICLE 6.2.3

(Effects of hardship)

(1) In case of hardship the disadvantaged party is entitled to request renegotiations. The request shall be made without undue delay and shall indicate the grounds on which it is based.

(2) The request for renegotiation does not in itself entitle the disadvantaged party to withhold performance.

(3) Upon failure to reach agreement within a reasonable time either party may resort to the court.

(4) If the court finds hardship it may, if reasonable,

(a) terminate the contract at a date and on terms to be fixed, or

(b) adapt the contract with a view to restoring its equilibrium.

COMMENT

1. Disadvantaged party entitled to request renegotiations

Since hardship consists in a fundamental alteration of the equilibrium of the contract, para. (1) of this article in the first instance entitles the disadvantaged party to request the other party to enter into renegotiation of the original terms of the contract with a view to adapting them to the changed circumstances.

Illustration

1. A, a construction company situated in country X, enters into a lump sum contract with B, a governmental agency, for the erection of a plant in country Y. Most of the sophisticated machinery has to be imported from abroad. Due to an unexpected devaluation of the currency of country Y, which is the currency of payment, the cost of the machinery increases by more than 50%. A is entitled to request B to renegotiate the original contract price so as to adapt it to the changed circumstances.

A request for renegotiations is not admissible where the contract itself already incorporates a clause providing for the automatic adaptation of the contract (e.g. a clause providing for automatic indexation of the price if certain events occur).

Illustration

2. The facts are the same as in Illustration 1, the difference being that the contract contains a price indexation clause relating to variations in the Cost of materials and labour. A is not entitled to request a renegotiation of the price.

However, even in such a case renegotiation on account of hardship would not be precluded if the adaptation clause incorporated in the contract did not contemplate the events giving rise to hardship.

Illustration

3. The facts are the same as in Illustration 2, the difference being that the substantial increase in A's costs is due to the adoption of new safety regulations in country Y. A is entitled to request B to renegotiate the original contract price so as to adapt it to the changed circumstances.

2. Request for renegotiations without undue delay

The request for renegotiations must be made as quickly as possible after the time at which hardship is alleged to have occurred (para. (1)). The precise time for requesting renegotiations will depend upon the circumstances of the case: it may, for instance, be longer when the change in circumstances takes place gradually (see comment 3(b) on Art. 6.2.2).

The disadvantaged party does not lose its right to request renegotiations simply because it fails to act without undue delay. The delay in making the request may however affect the finding as to whether hardship actually existed and, if so, its consequences for the contract.

3. Grounds for request for renegotiations

Para. (1) of this article also imposes on the disadvantaged party a duty to indicate the grounds on which the request for renegotiations is based so as to permit the other party better to assess whether or not the request for renegotiations is justified. An incomplete request is to be considered as not being raised in time, unless the grounds of the alleged hardship are so obvious that they need not be spelt out in the request.

Failure to set forth the grounds on which the request for renegotiations is based may have similar effects to those resulting from undue delay in making the request (see comment 2 on this article).

4. Request for renegotiations and withholding of performance

Para. (2) of this article provides that the request for renegotiations does not of itself entitle the disadvantaged party to withhold performance. The reason for this lies in the exceptional character of hardship and in the risk of possible abuses of the remedy. Withholding performance may be justified only in extraordinary circumstances.

Illustration

4. A enters into a contract with B for the construction of a plant. The plant is to be built in country X, which adopts new safety regulations after the conclusion of the contract. The new regulations require additional apparatus and thereby fundamentally alter the equilibrium of the contract making A's performance substantially more onerous. A is entitled to request renegotiations and may withhold performance in view of the time it needs to implement the new safety regulations, but it may also withhold the delivery of the additional apparatus, for as long as the corresponding price adaptation is not agreed.

5. Renegotiations in good faith

Although nothing is said in this article to that effect, both the request for renegotiations by the disadvantaged party and the conduct of both parties during the renegotiation process are subject to the general principle of good faith (Art. 1.7) and to the duty of cooperation (Art. 5.3). Thus the disadvantaged party must honestly believe that a case of hardship actually exists and not request renegotiations as a purely tactical manoeuvre. Similarly, once the request has been made, both parties must conduct the renegotiations in a constructive manner, in particular by refraining from any form of obstruction and by providing all the necessary information.

6. Resort to the court upon failure to reach an agreement

If the parties fail to reach agreement on the adaptation of the contract to the changed circumstances within a reasonable time, para.(3) of the present article authorises either party to resort to the court. Such a situation may arise either because the non-disadvantaged party completely ignored the request for renegotiations or because the renegotiations, although conducted by both parties in good faith, did not achieve a positive outcome.

How long a party must wait before resorting to the court will depend on the complexity of the issues to be settled and the particular circumstances of the case.

7. Court measures in case of hardship

According to para. (4) of this article a court which finds that a hardship situation exists may react in a number of different ways.

A first possibility is for it to terminate the contract. However, since termination in this case does not depend on a non-performance by one of the parties, its effects on the performances already rendered might be different from those provided for by the rules governing termination in general (Arts. 7.3.1. et seq.). Accordingly, para. (4)(a) provides that termination shall take place "at a date and on terms to be fixed" by the court.

Another possibility would be for a court to adapt the contract with a view to restoring its equilibrium (para. (4)(b)). In so doing the court will seek to make a fair distribution of the losses between the parties. This may or may not, depending on the nature of the hardship, involve a price adaptation. However, if it does, the adaptation will not necessarily reflect in full the loss entailed by the change in circumstances, since the court will, for instance, have to consider the extent to which one of the parties has taken a risk and the extent to which the party entitled to receive a performance may still benefit from that performance.

Para. (4) of this article expressly states that the court may terminate or adapt the contract only when this is reasonable. The circumstances may even be such that neither termination nor adaptation is appropriate and in consequence the only reasonable solution will be for the court either to direct the parties to resume negotiations with a view to reaching agreement on the adaptation of the contract, or to confirm the terms of the contract as they stand.

Illustration

5. A, an exporter, undertakes to supply B, an importer in country X, with beer for three years. Two years after the conclusion of the contract new legislation is introduced in country X prohibiting the sale and consumption of alcoholic drinks. B immediately invokes hardship and requests A to renegotiate the contract. A recognises that hardship has occurred, but refuses to accept the modifications of the contract proposed by B. After one month of fruitless discussions B resorts to the court.

If B has the possibility to sell the beer in a neighbouring country, although at a substantially lower price, the court may decide to uphold the contract but to reduce the agreed price.

If on the contrary B has no such possibility, it may be reasonable for the court to terminate the contract, at the same time however requiring B to pay A for the last consignment still en route.


Pace Law School Institute of International Commercial Law - Last updated January 11, 2007
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