542 views

COVID-19 in international commercial contracts. CISG and UNIDROIT perspective

Iris Cristofor
Iris Cristofor
Casiana Dusa
Casiana Dusa

The outbreak of COVID-19 (“coronavirus”) has undoubtedly impacted the business relations at global level, leading to important consequences caused by the nonperformance of international commercial contracts. The contractual partners often invoke the outbreak to excuse their non-performance, either as force majeure or using another legal basis.

The most common legal instruments governing international commercial contracts are the 1980 United Nations Convention on Contract for the International Sale of Goods (“the CISG”) and the 2016 UNIDROIT Principles on International Commercial Contracts (“the UNDIROIT Principles”). Our below analysis will focus on these instruments.

To begin with, it is useful to clearly state the scope of the CISG and the UNIDROIT Principles.

Hence, the CISG is a binding instrument which 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.

On the other side, the UNIDROIT Principles are a soft-law instrument aimed at harmonizing the international commercial contract law by providing rules supplementing international instruments such as the CISG and even domestic laws.

Part of the methods in which the UNIDROIT Principles can be implemented into a contract are (i) to choose them as the rules of law governing the contract or (ii) to incorporate them as terms of the contract. Also, they can be referred to in order to interpret and supplement either the CISG when the latter is chosen by the parties or the applicable domestic law, including any international uniform law instrument incorporated into that law[1].

The CISG’s Perspective

1. Does the CISG provides the force majeure as legal basis to justify the non-performance of the contract?

The CISG does not expressly provide the force majeure as an exemption of liability for the Party that fails to perform any of its obligations. Instead, the Article 79 of the CISG provides for an ”impediment which is beyond his control (the Party’s) that he could not reasonably have been expected to take into account at the time of the conclusion of the contract or to have avoided or overcome it, or its consequences”[2]. Therefore, in order to be an exonerating cause, the impediment shall be unforeseeable and unavoidable.

In case that a contract governed by CISG includes a specific force majeure clause, its scope may be interpreted under the general standard of Article 8 of the CISG, first relying on the parties true intent or if such intent cannot be determined, it must be considered the understanding of a reasonable person of the same kind as the other party in the same circumstances.

2. What is the period during which such exemption of liability operates?

The non-performing Party is exempted from liability on a temporary basis, only during the period when the impediment exists[3].

3. Is there any legal obligation of the non-performing Party to notify the other Party?

Indeed, 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[4].

4. Is the exemption of liability tantamount to the suspension of any other claim?

Neither Party can exercise the right to claim damages, however the exercise of any other right/claim remain unaffected[5].

5. Can the outbreak of coronavirus be considered an “impediment” according to the Article 79 of the CISG?

Even though the CISG does not expressly use the term “force majeure”, it is in principle accepted that Article 79 may apply in case of epidemic disease. Whether the outbreak of coronavirus can be considered an impediment depends on certain aspects such as the duration of impediment, causal link, the allocation of contractual risks and date of signing the contract.

Therefore, it is necessary to answer the following sub-questions:

a) Is coronavirus a temporary or a permanent impediment blocking the performance of the contract?

Coronavirus is a temporary impediment; therefore, the performance of the contractual obligations can only be postponed, not waived.

b) Is there a causal link between the coronavirus outbreak and the non-performance?

It shall be examined whether the outbreak directly caused the non-performance of the contract and its purposes. In order for the causal link to be considered, it is required that the Claiming Party shall not be at fault and shall have used reasonable endeavors to mitigate the effects of the impediment.[6]

c) Has the non-performing Party any alternatives to perform its obligations?

For instance, in the context of a supply contract between an European trader and a factory located in Wuhan, China or in its proximity, which has been shut due to a government order / by the owner decision, the European trader will not be able to deliver the goods to its customers (due to the factory shout down). Will the European trader be held liable for the non-performance of its contractual obligations? No, if the goods could not be obtained elsewhere, thus not having any alternative in this regard.

d) Has the contract been signed before or after the official declaration of coronavirus as pandemic by the World Health Organization?

On the 30th of January 2020, the World Health Organization has announced that coronavirus constitutes a public health emergency of international concern. Therefore, it’s unlikely that the outbreak of coronavirus will be considered an “impediment” if the contract is signed after this date.

It is worth mentioning that in a similar situation, the CIETAC[7] rejected a plea of force majeure according to the Article 79, as the epidemic in that case happened two months before signing the contract, which means that the so-called impediment was foreseeable.

6. Does the CISG provides the hardship as legal basis to justify the non-performance of the contract?

There is no specific rule in the CISG that specifically refers to hardship, however the issue of radically changed circumstances as exonerating cause of non-performance can be considered under the Article 79 of CISG.

The UNIDROIT Principles’ perspective

1. Do the UNIDROIT Principles provide the force majeure as legal basis to justify the non-performance of the contract?

Aiming to harmonize the international commercial contract law, the UNIDROIT Principles came up with the international legal praxis regarding the Force Majeure, by customizing the Article 79 (1) of CISG.

Therefore, the Article 7.1.7 named “Force majeure” provides for an exemption of liability for the Party failing to perform any of his obligations under same conditions as those provided by Article 79(1) of CISG, thus the impediment associated with the force majeure shall be beyond the Party’s control, unforeseeable at the time of conclusion of the contract and unavoidable.

2. What is the period during which such exemption of liability operates?

The non-performing Party is exempted from liability on a temporary basis, only during the period when the impediment exists.[8]

3. Is there any legal obligation of the non-performing Party to notify the other Party?

Indeed, 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.[9]

4. Is the exemption of liability tantamount to the suspension of any other claim?

Neither Party can exercise the right to claim damages, however the exercise of any other right/claim remain unaffected.[10]Moreover, the Article 7.1.7 does not restrict the rights of the party who has not received performance to terminate the contract if the non-performance is material or 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.[11]

5. Can the outbreak of coronavirus be considered “force majeure” according to the Article 7.1.7 of the UNIDROIT Principles?

Applying the same reasoning as for the similar question posted above, the outbreak of coronavirus can be considered force-majeure depending on different factors which are to be analyzed on a case by case basis. For a better interpretation of the force majeure concept, it is useful to observe the position adopted by the Supreme People’s Court in the Republic of China with regard to the hypothesis according to which an epidemic can be considered force majeure. In particular, the Supreme People’s Court does not consider that an epidemic, such as SARS outbreak from 2003, can be necessarily justified as a change of circumstances, but it shall be dealt with the principle of fairness and handled properly as force majeure.[12] Moreover, the force majeure is established if “(i) a failure to perform was directly caused by administrative measures taken by government to prevent the SARS epidemic; or (ii) it is fundamentally impossible for a party to perform its obligations due to the SARS epidemic”. [13]

6. Do the UNIDROIT Principles provide the hardship as legal basis to justify the non-performance of the contract?

According to the Article 6.2.2 of the UNIDROIT Principles, 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 (1) the events occur or become known to the disadvantaged party after the conclusion of the contract; (2) the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract; (3) the events are beyond the control of the disadvantaged party; and (4) the risk of the events was not assumed by the disadvantaged party.[14]

Under the UNIDROIT Principles, the concept of hardship is relevant with regard to performances which are going to be rendered. For instance, the coronavirus can be invoked as an exonerating cause invoking the hardship, subject to the following conditions:
– The contract whose execution is likely to be affected by the spread of COVID-19 was concluded before the establishment of the pandemic state;
– The pandemic could not be foreseen at the time of the conclusion of the contract;
– The debtor of the obligation that became excessively burdensome did not take the risk in this regard, and
– The debtor of the obligation becoming excessively burdensome tried to negotiate the adaptation of the contract.

When observing the various intricacies of the force majeure and the hardship which may be associated with coronavirus, it is interesting to look back at the jurisprudence following the SARS outbreak in 2003 which had adverse effects comparable with coronavirus. Hence, in the Notice issued by the Supreme People’s Court in the Republic of China, it has been stated that the contracts affected by SARS shall be dealt with on the ground of either hardship or force majeure.

Conclusion

In case of non-performance of international commercial contracts, including the international sale of goods, the coronavirus outbreak can be invoked as an exonerating cause by the faulting Party (either as force majeure or hardship) subject to certain conditions explained above. Even though the CISG does not expressly provide the force majeure, we consider that it can be assimilated to the impediment provided by the Article 79 of CISG which is defined in a way that mirrors the definition provided by the Article 7.1.7 of the UNIDROIT Principles with regard to the force majeure.

In our view, the development of the international jurisprudence in the present context is likely to be underpinned by the judicial practice established during comparable outbreaks from the past, such as SARS, 1918 flu pandemic and Ebola.


[1] Available here.
[2] Article 79 (1) of the United Nations Convention on Contract for the International Sale of Goods (CISG).
[3] Article 79 (3) of the United Nations Convention on Contract for the International Sale of Goods (CISG).
[4] Article 79 (4) of the United Nations Convention on Contract for the International Sale of Goods (CISG).
[5] Article 79 (5) of the United Nations Convention on Contract for the International Sale of Goods (CISG).
[6] Article 77 of the United Nations Convention on Contract for the International Sale of Goods (CISG).
[7] Arbitration Award of 5 March 2005, rendered by China International Economic and Trade Arbitration Commission
[8] Article 7.1.7 (2) of the UNIDROIT Principles on International Commercial Contract 2016.
[9] Article 7.1.7 (3) of the UNIDROIT Principles on International Commercial Contract 2016.
[10] Article 7.1.7 (4) of the UNIDROIT Principles on International Commercial Contract 2016.
[11] See Comment 2 to the Article 7.1 of the UNIDROIT Principles on International Commercial Contracts 2016 – “Effects of force majeure on the rights and duties of the parties”
[12] Available here.
[13] “Notice on Handling the Trial and Enforcement of People’s Courts during the Prevention and Control of Severe Acute Respiratory Syndromes (Fa [2003] No. 72, abolished in 2013, “Notice No. 72”), issued on June 11th, 2003, by the Supreme People’s Court of China.
[14] Article 6.2.2 of the UNIDROIT Principles on International Commercial Contract 2016.


Iris Cristofor, Partner CRISTOFOR VLADU & ASOCIATII SCA
Casiana Dusa, Senior Associate CRISTOFOR VLADU & ASOCIATII SCA

Related posts