Covid-19: Impact on commercial contracts – CISG
When are commercial contracts governed by the CISG?
The United Nations Convention on Contracts for the International Sale of Goods (“CISG”) is a multilateral instrument intended to harmonise the legal framework for trade between contracting states. It is designed for contracts for the international sale of goods between private businesses, excluding sales to consumers and sales of services. Unless the parties have excluded the application of the CISG – which they often do – the Convention applies to contracts for the sale of goods between such parties whose places of business are in different contracting states of the CISG (Article 1(1)(a) CISG), or when the applicable rules of private international law lead to the application of the law of a contracting state of the CISG (Article 1(1)(b) CISG). It may also apply by virtue of the parties' choice. Applicability and scope of the CISG is subject to certain limitations in Article 2 et seq. CISG.
As of March 2020, the CISG is in force in 91 countries, including Belgium, the People’s Republic of China, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Poland, Singapore, Spain and the United States. The United Kingdom and Portugal are not parties to the CISG.
What are the consequences of force majeure events under the CISG?
Pursuant to Article 79(1) CISG, “[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.” Pursuant to Article 79(3) CISG, temporary impediments will only temporarily excuse the obligor for the period for which the impediment exists.
Whether circumstances amount to an impediment in terms of Article 79 CISG is determined based on the contractual allocation of risk, trade usages and the typical sphere of control of the party in breach. The impediment must have been unforeseeable, applying the objective standard of a reasonable person in the position of the party in breach at the time the relevant contract was concluded. Finally, the efforts required to avoid or overcome the impediment – e.g. by seeking an alternative source of goods or by procuring alternative means of transport – are, again, determined by reference to the contractual allocation of risk.
While the CISG does not explicitly use the term force majeure, it is well recognised that archetypical instances of force majeure, such as natural disasters, are a typical cause for exemption from liability under Article 79 CISG. Specifically, it is in principle accepted that Article 79 CISG may apply in case of epidemic diseases.
However, even in case of force majeure, the requirements of unforeseeability and unavoidability must be met to be exempted from liability. For example, in respect of a failure to deliver allegedly connected to the 2002/2003 Severe Acute Respiratory Syndrome (“SARS”) epidemic, a tribunal constituted under the rules of the China International Economic and Trade Arbitration Commission (“CIETAC”) rejected a plea of force majeure under Article 79 CISG, finding that because the outbreak of SARS happened two months prior to the signing of that contract, the impediment was foreseeable (cf. CIETAC Arbitration Award of 5 March 2005).
Finally, it is worth noting that Article 79(2) CISG requires the party relying on the exemption of Article 79(1) CISG to give notice to the other party within a reasonable time, otherwise it will be liable for resulting damages. Moreover, according to Article 77 CISG, parties are obligated to take reasonable measures to mitigate damages caused by the other party’s breach of contract. Otherwise, a reduction in damages could be claimed by the party in breach.
How are force majeure clauses in commercial contracts applied and interpreted in practice?
Commercial sales contracts subject to the CISG often include contractual force majeure or hardship clauses. By including such clauses, parties can derogate from Article 79 CISG and agree on both broader and stricter terms and consequences for force majeure incidents. Contractual guarantees also may constrain the degree to which parties can rely on Article 79 CISG.
The scope of contract terms related to force majeure will be interpreted under the general standard of Article 8 CISG, first relying on the parties’ true intent, where the other party knew or could not have been unaware of what that intent was or, if this cannot be determined, the understanding of a reasonable person of the same kind as the other party in the same circumstances.