INTRODUCTION
It is common knowledge that the United Nations Convention on International Sales of Goods (hereinafter CISG) does not contain a provision expressly addressing the issue of hardship. The closest equivalent is Article 79(1)[1], which provides as follows:
“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”
Article 79’s language “heavily resembles provision of other, more recent uniform instruments providing a force majeure exemption i.e., applicable to cases where performance” has become impossible and not simply onerous. Compare with article 7.1.7(1) of the UNIDROIT Principles of International Commercial Contracts[2]. “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”.
For the longest time, Scholars have interpreted the absence of an express provision on hardship as a sign that CISG was not intended to provide a legal effect for situations where the performance of a contract becomes unreasonable onerous[3]. For instance, the term “Impediment” in A.79 can be interpreted to be intended to exclude Hardship theories of changed circumstances[4]. Despite this uncertainty, the CISG advisory council opine that the word impediment does not equate to “impossibility” rather it equates just an obstacle that hinders performance[5].
EXEMPTION VS HARDSHIP: DEBATE
To argue an Exemption under Article 79 of the CISG, two elements must be complied with; First, the event must not be within the sphere of control of the party claiming exemption, and Second, the event must not be foreseeable. Sphere of control “principle comes from the expectation of professional competence in trade and commerce, a diligent trader will guard himself or herself against foreseeable risk” through “Plan-B” or other contractual arrangements. To claim exemption from the sphere of control principal party must prove, that changed circumstances were completely unforeseeable. In the context of Covid-19, the claim of exemption from the sphere of control principal should not be problematic. The pandemic and its effect are well beyond the control of anyone. However, an exemption to this exemption lies in the arguments “sphere of risk” i.e., if parties have allocated their sphere of risk within the contract itself then the incumbent party cannot claim exemption[6]. However, the foreseeability of the pandemic is a matter of timing. Prof. Ignacio Tirado[7], General Secretary UNIDROIT principals, stated that to determine the foreseeability of COVID-19 two things need to be looked at, First, If the contract or part of the contract is concluded after November 2019, and Second, the number of cases in the jurisdiction of any concerned party before finalising the earliest obligation under the contract. In addition, the World health organisation declared Covid-19 a pandemic only on 11th March 2020[8]. So how the foreseeability test will be interpreted by courts and/or tribunal will be interesting to note.
As for the Commercial Hardship threshold, it shall be assessed based on the principle of “fundamental equilibrium of the contract”. The principal as propounded by Prof. Peter Schlechtriem, States that hardship must be assessed on the basis that whether the performance of the contract has become so burdensome that it cannot be reasonably expected of the obligator to maintain his or her end of the bargain[9]. In addition, there are certain numerical approaches to ascertain the change in the fundamental equilibrium of the contract as well, this approach requires a minimum increase of 50% in the cost of performance of the contract[10]. However, one limitation to this approach is that it is not universal and increased cost must be analysed on the factual matrix of each dispute. In the context of Covid-19 Specifically, the hardship threshold will be analysed through the lens of “Hardship trigger” i.e., whether the pandemic itself triggered hardship or whether it was the regulatory consequences such as lockdown and embargo which triggered hardship. If the latter is to be considered hardship then an ordinary assessment of cost and risk is sufficient to address the applicability of hardship. However, the analysis shall change if the event is a pandemic in itself. In the light of pandemic an alternative method of determining hardship is proposed, which puts a question at forefront of the right to health: Hence if the performance of the obligation under the contract threatens human life by exposing either party to COVID-19 Contagion, then hardship is sure to have ensured.
AVAILABLE REMEDIES
CISG’s coverage of hardship and Exemption in the context of Covid-19 is rather clear, however the same cannot be said about the remedies available in case of hardship. The most readily used remedy applicable in hardship situation is the remedy of adaption; the power of parties to renegotiate and adapt the terms of the contract to new circumstances. This duty to renegotiate is also found under Article 47 and 49 of the convention and since the central idea of negotiation and adaption lies in the argument of promotion of trade it is also argued that breaching parties right to cure is unequivocally stronger than the aggrieved party’s power to terminate the contract[11]. Moreover, given that hardship applies in cases where the balance between the exchanged performances has become fundamentally difficult it makes sense that the remedy of adaption shall take place. The remedy for adaption in addition to Article 47 is also found under Article 6.2.3. (4)(b) of the UNIDRIOIT principles, which grants discretion to the court for adaption and restoring the equilibrium. Since CISG is silent on explicit hardship provision it also does not make an explicit adaption remedy in cases of hardship. However, If it is accepted that Article 79 governs hardship then the only remedy available is that of damages under Article 74 to 77 of the convention. Many scholars have proposed importing the remedies provided by UNIDROIT principals, based on the proposition that either the UNIDROIT principle is a general principle on which CISG is based[12] or international trade usages can be used as gap fillers under Article 9(2) of the convention. On the other hand, some scholars have been a little more sceptical about the adaption remedy stating that it is neither necessary nor desirable in the Jurisprudence of contract law as it undermines principles of “party autonomy” or “Pacta Sur survanda”. However, it’s a better view than CISG does not permit adaption as a remedy for hardship since the express language of Article 79 clarify drafters intention for the article to exhaust the issue of exemption from performance. In addition, the issue of modifying the contracts is exhaustively regulated by Article 29 of the CISG, which restricts the right of modification of contract only to parties. Hence, a liberal interpretation of Article 79 might open the floodgates for either party to perform something different or onerous from what was agreed.
As a concluding note, the most feasible and trade-friendly remedy for hardship remains an exemption of liability. Proving a different remedy would create a burden upon the adjudicator to distinguish “excessive onerousness” and “impossibility”, which would be a daunting task due to grey interpretational value. Regulating changed circumstances doctrine with multiple and or different remedy could not be a favourable policy and might create some burden on commerce and trade. More importantly, in the context of COVID-19 adaption as a remedy will be highly ill-suited as we due to a pandemic we are driving through fog and it has robbed us of the possibility of ease of doing business. On the final note, if the contract has to be changed it should be solely up to the parties to do so and the principle of party autonomy in international commercial contracts shall be respected. However, If the parties desire for adaption to be the remedy, then the correct route shall be to contract out Article 79 and agree on a tailored hardship clause for further recourse of trade.
Author(s) Name: Kannu Upadhyaya (SVKM’s NMIMS, School of Law, Mumbai)
[1] The United Nations Convention on Contracts for the International Sale of Goods art 8, 1981 U.N. Doc. A/CONF.97/18
[2] UNIDROIT, Principals of International commercial contracts 2016, official commentary, Article 7.1.7(1),
[3] I Schwenzer, “Force Majeure and Hardship in international Sales contracts, Victoria University of wellington Law Review, 2008, Volume 39 Pg. 717.
[4] Ibid at. 3
[5] CISG Council opinion no. 7, Exemption of Liability from damages under Article 79, http://www.cisgac.com/file/repository/CISG_Advisory_Council_Opinion_No_7.pdf
[6] Larry A. DiMatteo, Contractual Excuse under the CISG: Impediment, Hardship, and the Excuse Doctrines, 27 Pace Int’l L. Review. 258 (2015)
[7]Covid-19 and UNIDROIT principals of International commercial contract solution, International Bar association, Sep 3’ 2020, https://www.ibanet.org/UNIDROIT-Contract-Principles-webinar.aspx
[8]WHO Director-General’s opening remarks at the media briefing on COVID-19 – 11 March 2020, Who.int (2020), https://www.who.int/director-general/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19—11-march-2020
[9] Dennis Tallon, COMMENTARY ON THE INTERNATIONAL SALES LAW, 2.6.4, (1987); Barry Nicholas, The Vienna Convention on International Sales Law, 105 LAW QUATERLY REVIEW, 235 (1989)
[10] UNDROIT, Principals of International commercial contracts 2016, official commentary, P.220 Comment 3(b)
[11] Jonathan Yovel, Buyers right to avoid the contract: Comparison between provisions of the CISG and counterpart provision of PECL, 2005, https://www.cisg.law.pace.edu/cisg/biblio/yovel49.html
[12] C. Burner, B. Gottlieb, Commentary on the UN sales law, Kluwer Law International, 2019 P.580
