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Reproduced with permission of the author.

Third Party Defaults and Exemption from Liability in Damages under the CISG:
Is Article 79(2) Necessary for Modern International Commerce to Function Effectively?

Sophia Berry

Introduction

The principle of pacta sunt servanda is a dominant feature of all contract laws and underpins the normative regime of the United Nations Convention on Contracts for the International Sale of Goods 1980 ('CISG').[1] Equally, all legal systems, including the CISG, provide for the discharge of a promisor when their obligations have become impossible to perform.[2] The CISG provision that establishes the conditions for the grant of such an exemption is Article 79. This article accords with no single domestic conception such as frustration or force majeure; rather the provision's wording creates an autonomous legal standard, which precludes recourse to national legal orders.[3]

In order to gain an exemption from liability in damages under Article 79, the promisor must prove that his failure to perform the contract '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'.[4] In situations where the cause of the promisor's failure to perform is 'the failure [of] a third person whom he has engaged to perform the whole or a part of the contract', the burden of proof which falls on the party in default is twofold.[5] The promisor and the third party whom he has engaged to perform the main contract or some part of it must cumulatively satisfy the requirements of Article 79(1) of the CISG.

This work first considers the purpose and history of Article 79 of the CISG. The meaning of the term third person, on which the application of Article 79(2) rests, is then analysed and applied to the facts of the 19th Willem C. Vis International Commercial Arbitration Moot problem. This exercise illuminates some of the difficulties which arise when interpreting Article 79(2). The business community's need for a provision akin to Article 79(2) is then debated. In considering whether Article 79(2) is essential, comparisons will be drawn between the CISG and the texts of other international sales laws.

The narrow scope for exemption under Article 79

Article 79 is one of the most intricate and lengthy CISG provisions and was the subject of prolonged negotiation.[6] The final text of Article 79 is however, drafted in very general terms. Even the central question of what circumstances constitute an 'impediment' is left unanswered. Article 79 has thus been derided in some quarters for its use of 'vague and malleable concepts and standards'.[7] Such criticism implies that the Article has a broad sphere of potential application.[8] It is argued here that, on the contrary, 'the provision's drafting history, systematic placement and wording imply that . . . [the] exemption should be considered only under very narrow conditions'.[9]

(i) The wording and placement of Article 79

The formulation of Article 79(1) of the CISG itself indicates that the provision should only be applied in limited circumstances. Although the term impediment is loose enough to cover to a wide range of occurrences, it is substantially qualified by the other requirements laid out in Article 79(1). In the modern commercial environment, where all potential impediments to contractual performance 'are foreseeable to one degree or another', the foreseeability bar laid down in Article 79(1) of the CISG is an extremely high threshold for the contracting party to reach.[10] The hindrance to the promisor's performance must also be an event which he could not have avoided or overcome. That standard will only be satisfied if the promisor did everythingwithin his power to carry out his contractual obligations and took all of the measures he could to overcome the impediment as quickly as possible.[11] To fulfil Article 79(1) the impediment must also have been the sole cause of the promisor's failure to perform. Each one of these aspects of Article 79(1) is therefore very stringent. Moreover, if the promisor does not satisfy any one element of the test, the exemption from liability in damages will not be granted.

Spivack states that 'Article 79, if applied consistently with its wording, renders most of the political and economic vicissitudes attendant on trans-border sales unavailable as excuses for non-performance, in fact, it would deny them a forum to be heard'.[12] Only the occurrence of an unmanageable, exceptional event, external to and beyond a promisor's sphere of responsibility will thus qualifya promisor for exemption from liability in damages under Article 79.[13]

The title 'exemption', under which the text of Article 79 sits, further emphasises the fact that parties who are subject to the CISG must, in general, comply with their contractual obligations.[14] Black's Law Dictionary defines an exemption as a freedom from a generally imposed duty. The use of this title also denotes that any possibility of release from one's contractually agreed duties will be strictly limited under the CISG. Only by satisfying the terms of Article 79 or Article 80 may a party in breach with gain an exemption.

(ii) Article 79's drafting history

Article 79's predecessor, Article 74(1) of the Convention relating to a Uniform Law on the International Sale of Goods ('ULIS'), was roundly criticised for allowing too many parties to claim an exemption from liability for non-performance.[15] The lawyers drafting Article 79 reacted to that criticism by replacing the term 'circumstances', used in Article 74 of the ULIS, with the word 'impediment'.[16] The latter term was chosen to signify that Article 79 requires an objectively identifiable barrier to the promisor's performance.[17] This substitution made claiming an exemption under the CISG harder than under ULIS. It also tied in with the 'Anglo-American model of strict liability' adopted in all other parts of the 1980 Convention.[18] Article 79's history therefore supports the conclusion that the provision was meant to have a limited scope of operation.

(iii) Article 79's purpose

Affording a narrow scope to Article 79 chimes with the overarching purpose of the CISG, which was created to 'promote the development of international trade'.[19] Spivack opines that 'the CISG's strict excuse doctrine is not only reasonable in the context of international business transactions but is, in fact, necessary for the flourishing of international trade'.[20] Many obstacles could arise during the course of performing a long-term international sales contract. In interpreting Article 79 restrictively, we ensure that the parties to such contracts are usually held to their original agreements. That approach promotes legal certainty and encourages more businesses to enter into trade transactions.

If recourse to Article 79 is restricted, businesses are more likely to negotiate their own force majeure and hardship clauses. The contracting parties themselves are in the best position to predict what contingencies might arise during the performance of their agreement and to determine which side should bear the risk of those events.[21] Agreeing such tailor made provisions will also substantially reduce the risk of both parties being forced into costly litigation on a default. The law should encourage contracting parties to take such action by giving Article 79 a narrow interpretation.

(iv) Article 79 in practice

The restrictive approach to the availability of Article 79 has largely been adhered to by deciding bodies. Liu concludes that 'court decisions show a universal trend to a comparable restrictive interpretation' of Article 79, despite the frequency with which its application has been argued for.[22] Four CISG cases demonstrate that 'exemption under Article 79 requires satisfaction of something in the nature of an impossibility standard'.[23] One of those cases concerned a seller's failure to deliver tomatoes due to heavy rainfall.[24] The bad weather partially destroyed the seller's tomato crop and led to an increase in the market price for tomatoes. The German court took a strict approach to the interpretation of Article 79 and held that neither the shortage of supply nor the increased price of tomatoes in the market were insurmountable impediments to the seller's performance.

Economic risk

The availability of an exemption under Article 79 of the CISG does not turn on whether the party who has failed to perform was at fault or not.[25]At the heart of Article 79 is the issue of risk allocation. The terms of Article 79(1) require that a court or tribunal determine whether it was the buyer or the seller who assumed the risk of the impediment on concluding their agreement.[26]

This focus on risk allocation stems, in part, from the requirement that the impediment be one which was 'beyond the control' of the party claiming the exemption. Whether this requirement is met or not depends on the degree of risk accepted by the promisor on contracting. No fault that is internal to the promisor's organisation will comprise a qualifying impediment. This is because 'the risk of [the promisor's] own activities it must bear itself'.[27] The impediment must therefore fall squarely outside of the promisor's internal sphere of activity for it to be considered beyond his control under Article 79. Different contracts will be premised on different allocations of risk. Courts and tribunals 'must necessarily take account of the terms of the contract, the whole context in which it was made and the current trade practices in the areas concerned' to determine where the risk falls in the contract in question.[28]

The question of risk distribution is also inherent in the Article 79(1) foreseeability requirement. If the impediment that arose was foreseeable at that time of contracting, the promisor will be deemed to have assumed the risk of that impediment materialising. The promisor could have inserted specific language into the contract regarding the risk and therefore avoided or shared the burden of it, but he did not do so. The promisor cannot thus claim exemption under Article 79.

Courts and arbitral tribunals frequently take an explicitly risk based approach to the application of Article 79.[29] Cases which deal with non-performance due to the failure of a seller's supplier often analyse the issue in these terms.[30]

The facts of the 19th Willem C. Vis International Commercial Arbitration Moot problem

The Moot problem concerns a contract concluded between Mediterraneo Elite Conferences Services Ltd ('Elite') and Equatoriana Control Systems Inc. ('Control Systems'). Control Systems agreed to supply, install and configure a master control system on board the M/S Vis yacht, which Elite had recently purchased. A master control system is an electronic device which is crucial to the operation of a conference venue. Control Systems promised to complete its contractual obligations to Elite by 12 November 2010. Following the conclusion of its contract with Elite, Control Systems directly sub-contracted the design and production of six processing units required by the master control system to Oceania Specialty Devices ('Specialty Devices'). The processing units were designed by Specialty Devices to use the most advanced D-28 computer chip. These computer chips were manufactured by Atlantis High Performance Chips ('High Performance').

On 6 September 2010 an electrical short circuit caused a fire in High Performance's production facility. Manufacturing of the D-28 chips was halted for nearly seven weeks. The amount of D-28 computer chips which survived the fire would have been sufficient to fulfil Specialty Devices' order if High Performance had distributed the said stock on a pro rata or small orders first basis. High Performance, however, chose to sell all of its remaining stock to another firm. Control Systems delayed the completion of its contractual obligations to Elite until 11 March 2011.

Who is a 'third person' for the purposes of Article 79(2) of the CISG?

A 'third person' is defined within Article 79(2) itself as an entity which has been 'engaged' by a promisor 'to perform the whole or part' of the main contract. Numerous authors have elaborated upon this definition and their suggested criteria for identifying a third person under Article 79(2) are set out in the proceeding paragraphs.

One key hallmark, which indicates that an entity constitutes a third person within the meaning of Article 79(2), is his 'separate and distinct' legal personality.[31] Furthermore, a third person will be 'economically and functionally independent'from the relevant contracting party.[32] Such independence is described as being outside of the promisor's 'organisational structure, sphere of control or responsibility'.[33]

The use of the word 'engaged' may suggest that a delegated contractual relationship must exist between the promisor and the third person for Article 79(2) to be satisfied.[34] Furthermore, the promisor should have created that delegated contractual relationship after concluding the main contract. This is a further corollary of the requirement that the third person be 'engaged' to perform the whole or part of the main contract. For the third party to be performing 'part' of the main contract, it has been suggested that an 'organic link' must exist between the sub-contract concluded by the promisor with the third person and the purpose of the main contract.[35] This link is established where the sub-contractor's 'task [is] connected with the main contract' and the third party is aware that its work is a means of performing that overarching contract.[36] Article 79(2) of the CISG does not apply to failures caused by parties who merely assist in or create the preconditions for performance of the main contract by supplying goods to the promisor.[37] Such a party will not be performing the whole or any part of the promisor's contractual obligations, nor will they generally have any knowledge of the main contract.

Commentaries on the CISG typically identify three types of person that might conceivably fall within the definition of a third person used within Article 79(2). The categories of person normally cited are: the promisor's own personnel; entities which supply raw materials or semi-manufactured goods to the promisor; and persons to whom the promisor delegates the performance of all or part of his contractual obligations by way of a direct sub-contract. The status of each of these persons under Article 79(2) is considered in turn.

(i) Personnel

The promisor's workers are legally dependent on the seller and form an intrinsic part of the seller's business. They do not have the legal or economic detachment from the promisor, which would enable them to constitute third persons for the purposes of Article 79(2). A relationship of employment necessarily entails that the employee's work will be supervised and monitored by, or at least performed under the direction of, his employer. The seller will always be in control of his business, finances and production processes. It will not be beyond his control to ensure that the goods are checked for defective qualities before they are sent to the seller. The promisor's personnel cannot thus be said to be beyond the promisor's sphere of control and influence.[38] For this reason an employee's actions should not be classified as a valid impediment to the promisor's performance. This analysis accords with the view of Article 79 as a measure concerned with risk allocation. As stated above, in the absence of a contrary agreement between the parties, the promisor bears the risk of his own activities, which must include the actions of employees who are operating on his behalf.

(ii) Sub-contractors

The text of Article 50[39], as adopted by the Working Group on the International Sale of Goods, made reference to the failure of 'sub-contractors' engaged by the promisor.[40] It did not use the term third person. However, 'the term [sub-contractor] was said to be unknown in some legal systems and in others [referred] primarily to legal relationships in the context of construction contracts' and was therefore replaced.[41] There is thus universal consensus regarding the fact that Article 79(2) applies to the failures of sub-contractors.

(iii) Suppliers

A supplier is usually defined as an entity providing raw materials or semi-manufactured goods to the promisor, for example the electricity or gas company which supplies the promisor's factory. Several courts and arbitral tribunals have held that such persons do not constitute third persons under Article 79.[42] The Secretariat Commentary on Article 79, the closest counterpart to an official commentary on the CISG, also propounds this view.[43] The rationale for excluding suppliers from the definition of third person is that they only create the preconditions to the promisor's performance. Suppliers do not perform the whole or part of their contractual obligations, nor are they 'engaged' for that purpose.[44] Normally an upstream supplier will have a long standing relationship with the promisor, supplying goods that are used to create products for a range of clients. It is unlikely that they will know of the main contract. A further hurdle that suppliers must overcome is the need for a concrete connection to exist between the goods supplied and the main contract. The supplier's goods must be specifically assigned by the seller to the main contract as without this link 'Article 79(2) is inapplicable'.[45]

The division of sub-contractors (whose failure to perform can form a basis for exemption under Article 79(2)) from general suppliers (who will rarely, if ever, qualify as third parties under Article 79(2)) is borne out by the legislative history of the CISG. Proposals made to add 'suppliers' to the remit of Article 79(2) of the CISG were specifically rejected by the CISG Working Group.[46]

Furthermore, it flows from the view of Article 79 as a measure concerned with risk allocation that suppliers should usually receive the same treatment as the promisor's own personnel. The seller can exert control over his supply or production chain and therefore bears the risks attendant on procuring or producing the goods he has agreed to supply. He will therefore be as responsible for his suppliers as he is for his employees under Article 79. Only where the promisor demands a certain component over which a supplier has a monopoly may the procurement risk revert back to the buyer.[47] In that situation, the supplier might be considered to be a third person outside the promisor's sphere of control and influence. Their non-performance may consequently exempt the seller.[48]

It is not always simple to distinguish suppliers from sub-contractors in practice. Their performance often has the same effect of facilitating the promisor's fulfilment of the overall contract. The supplier / sub-contractor dichotomy drawn by Article 79(2) can therefore appear to be rather a superficial one. Zeller gives the example of two companies exporting computers to France.[49] Why should they be treated differently simply because one imports computer parts and assembles them before export, whereas the other imports finished computers and ships them without alteration? 'The important point in the end is whether the contract is fulfilled, and if not, for what reasons'.[50] Zeller therefore argues that courts and tribunals should disregard the 'internal relationship between the contracting party and any person who performs under [its] instruction'.[51] The definition of the term third person should, in his view, extend to all 'parties outside the direct control' of the promisor, including his suppliers.[52]

Specialty Devices, High Performance and the definition of 'third person'

Control Systems directly sub-contracted the design and production of the processing units to Specialty Devices, after it had concluded the main contract with Elite. This chronology indicates that Specialty Devices was not a regular supplier of generic raw materials or semi-manufactured goods to Control Systems. It can also be argued that Specialty Devices did much more than merely assist in, or create the pre-conditions for, Control Systems' performance. Given the fact that the purpose of the main contract was the installation of a master control system on the M/S Vis, Specialty Devices was performing a core element of that contract in producing the processing units. Without three of the units the master control system could not function at all. Specialty Devices' role was certainly organically linked to the main contract, as is required to constitute a third party for the purposes of Article 79(2).

A more complicated set of questions arises in respect of High Performance. Was High Performance merely a general supplier or could it be classified as an additional third person to the main contract under Article 79(2)? High Performance dealt with and supplied goods to Specialty Devices alone; might that preclude a finding that Control Systems engaged it to perform a part of the main contract with Elite?

Control Systems sub-contracted part of its obligation to produce a cutting edge master control system to Specialty Devices. According to the Moot problem, High Performance produced the most innovative computer chips available on the market. It was for this reason that High Performance was engaged, via Specialty Devices, to perform a core element of the main contract. The master control system would not have functioned, nor would Elite's demand to have the best available technology on the M/S Vis have been satisfied, without the D-28 chips. It could therefore be asserted that High Performance's performance was concretely and organically linked to the purpose of the main contract.[53] It may also be contended that High Performance's performance was so 'substantial and integral as to fulfil the role of sub-contractor'.[54]

The lack of a direct contractual nexus between High Performance and Control Systems may not be determinative of whether Article 79(2) of the CISG applies, if we accept Zeller's approach to the definition of the term third party. In addition, High Performance is a separate, distinct and independent legal entity from both Control Systems and Specialty Devices.[55] There may therefore be no barrier to it being classed as a third person under the CISG.

Adjudicatory bodies are not bound by any one scholarly interpretation of the term third person.[56] In fact, some arbitral tribunals and national courts have not dismissed 'supplier-based defences out of hand', but have instead undertaken a 'full analysis' of Article 79 when confronted with such arguments from parties.[57] Nothing should therefore prevent a court or tribunal from taking a different view from that expressed in the Secretariat Commentary and other works regarding the status of suppliers and sub-contractors under Article 79(2).

The counterargument is that High Performance cannot satisfy the CISG's definition of a third person because it was not engaged by Control Systems to perform the whole or any part of the main contract. No contractual or other link exists between Control Systems and High Performance. Specialty Devices took the decision, independently, to use the D-28 chips in its processing units and Specialty Devices alone dealt with High Performance over the order. The word engaged clearly indicates that a tangible link, such as a sub-contract, must exist between the seller and the third party.[58] If the third person entity performs its obligations directly to the ultimate buyer that will indicate that it is performing the whole or part of the main contract pursuant to Article 79(2).[59] High Performance did not supply D-28 chips directly to Elite, but to Specialty Devices. Furthermore, there is no evidence to suggest that High Performance knew of the existence of the contract between Control Systems and Elite or knew that its work was a means of performing it. The chain of correspondence between the various parties regarding the fire indicates that High Performance was not so aware. On the basis of these facts, a court would be unlikely to hold that High Performance was performing a part of the main contract.

Is Article 79(2) necessary for international commerce to function effectively?

Some scepticism over the necessity of Article 79(2) may be fuelled by the fact that the sub-paragraph was a novel addition to the CISG. No equivalent provision existed within ULIS and none exists within the Principles of European Contract Law ('PECL'), the UNIDROIT Principles of International Commercial Contracts ('UNIDROIT Principles') or any domestic legal regime surveyed by Nicholas.[60] The UNIDROIT Principles and the PECL both mirror Articles 79(1), (3) and (4) of the CISG, however neither regime reflects the terms of Article 79(2). This fact might cause one to conclude that Article 79(2) is a provision that could be dispensed with. The absence of a specific provision within the UNIDROIT Principles regarding non-performance by third persons does not prevent promisors from using such an impediment to claim excuse. A sub-contractor's failure to perform may, depending on the particular circumstances of the case, still satisfy the requirements of a force majeure event as laid down in Article 3.108.[61] Similarly, Article 2-615 of the Uniform Commercial Code ('UCC') covers the availability of excuse for instances of non-performance caused by the failures of both suppliers and sub-contractors. If that failure was unforeseeable to the promisor at the time of contracting then he may be excused.[62]

Article 79(2) was created because the practice of sub-contracting was becoming increasingly common.[63] The provision expressly reflected a concern within the international trade community that instances of sellers failing to perform due to sub-contractor error should be dealt with strictly. The provision's aim was not to provide promisors with an exemption in the case of sub-contractor failure, but rather to narrow the availability of exemption in that situation. That concern is still present today, as demonstrated by the wording of the ICC Force Majeure Clause 2003. Inspired by the CISG, the ICC Force Majeure Clause incorporates equivalent language to that used in Article 79(2).[64]

With this concern over sub-contractor error in mind, the UCC and UNIDROIT Principles may be used to illustrate why international commerce does need a provision akin to Article 79(2) of the CISG. Spivack concludes that the different phraseology used in the UCC and the CISG leads to dissimilar results on application.[65] For example, a promisor would not be exempt from liability in damages under Article 79(2) where the impediment which occurred at the level of the sub-contractor was perfectly foreseeable (to the sub-contractor) on contracting. In those circumstances, the CISG promisor could not demonstrate that the third person satisfied the four requirements of Article 79(1). Under the UCC regime however, a promisor in the same circumstances might well be excused. Under the UCC the promisor would only need to demonstrate that the problem that prevented the sub-contractor's performance was unforeseeable to him. Whether or not the sub-contractor himself knew of the difficulty at the time of contracting would be irrelevant. In this case, the application of Article 79(2) appears to provide the more appropriate outcome for parties engaged in international commerce. The promisor is likely to be in a better position than the promisee to carry the risk of damages resulting from a third party error.[66] Only the promisor has any possibility of legal recourse against the sub-contractor. Whilst such litigation may not always be successful, it is surely the promisor who should take the entire procurement risk in most cases. The promisee has usually had no direct dealings with the third party and may not know of his existence until the breach. Insuring against the sub-contractor risk would therefore be impossible for the promisee and he could take no other steps to mitigate it.

Southerington states that the omission of an equivalent provision to Article 79(2) results in the UNIDROIT Principles treating promisors in default more leniently than the CISG.[67] Article 79(2) may therefore be necessary for the correct functioning of the CISG's strict liability regime. Given the frequency with which sub-contractors fail to perform their contractual obligations, the policy behind Article 79(2) of holding promisors to their bargains in most such situations is of clear benefit to the international business community.

The myth of Article 79

The comparisons made by Southerington and Spivack between Article 79(2) and UCC and UNIDROIT Principles rest on the notion that Article 79(2) leads to 'stricter liability' for promisors.The view that Article 79(2) is stricter than Article 79(1) is certainly supported by a large body of academic opinion. Liu however, argues that Article 79(2) has become 'one of the more misunderstood and controversial CISG provisions'.[68] The heated debate over who is a third person within the meaning of Article 79(2) of the CISG might suggest that this sub-paragraph is of a very different nature to Article 79(1). However, a prior section of this work has sought to demonstrate that Article 79(1) has a narrow scope of application too. The hidden truth Liu highlights is that, regardless of whether the failure of the promisor's manufacturer or supplier is dealt with under Article 79(1) or Article 79(2), the end result for the promisor is likely to be exactly the same. In both situations the possibility of exemption from liability in damages will be slight. This is evidenced by the dearth of successful Article 79 defences.[69]

A supplier's failure to perform is unlikely to fulfil the four-limb test of Article 79(1) because the promisor's supply chain falls squarely within its sphere of responsibility and control.[70] Any delay on the part of a supplier is likely to be classed as an impediment that was foreseeable at the time of contracting. Supplier delays are not an unusual occurrence in international trade. Furthermore, it will only be possible to demonstrate that the promisor could not have overcome the impediment if the goods to be supplied were specific rather than generic products.[71] The knowledge of the promisor's suppliers will also be imputed to the promisor, making exemption harder to attain. When viewed in this light, the double burden test of Article 79(2) does not appear to lead to much stricter liability.

Despite his belief that applying Article 79(2) of the CISG does not lead to greater liability for promisors, Liu believes that Article 79(2) does have a role to play in the Convention. The provision is 'to be welcomed' because it 'directly bears on the problem of exemption where a breach of contract is caused by a third party' and is therefore of practical benefit.[72] In the absence of a specific provision regarding third parties, national courts would doubtless be called upon to step in and fill a perceived gap within the CISG by reference to domestic law. That would inevitably result in wildly divergent solutions being implemented and the Convention's stated aim of promoting international uniformity would be damaged.[73] Article 79(2) may not therefore be redundant.

PECL: an alternative to Article 79(2)?

Article 8:107 of the PECL stresses that a seller will be responsible for the actions of any employees, agents, suppliers, manufacturers and sub-contractors whom he entrusts to carry out the performance of the main contract. The Comments to Article 8:107 state that 'the internal relationship between the party and the third person is irrelevant in this context'.[74] As no distinction is drawn between the seller's responsibility for its sub-contractors and suppliers, there is no need for a provision analogous to Article 79(2) of the CISG. If this approach were adopted in the Convention, it would entirely eliminate the need to debate who is a third person. The somewhat arbitrary division of suppliers from sub-contractors could be abandoned and Article 79(1) test would apply to any impediment to performance. The wording of Article 8:107 of the PECL would also ensure that courts and tribunals applying Article 79 did not grant exemptions too readily. A promisor would find it difficult to argue that his third party's failure to perform was beyond his control when the risk of that occurrence was explicitly placed on him by the CISG's text.

The impact of Article 79(2) on Control Systems

In assessing whether Article 79(2) of the CISG is necessary for the correct functioning of international commerce, the effect the provision's existence has on the position of the parties in the Moot problem should be considered. In particular, the consequence of any abolition of Article 79(2) on Control Systems' liability in damages for non-performance must be determined.

The arguments for and against the classification of High Performance as a third person under Article 79(2) are set out above. If High Performance was deemed to be a third person, Control Systems would need to demonstrate that it, Specialty Devices and High Performance all satisfy the cumulative requirements of Article 79(1) of the CISG. Any exemption of Control Systems from liability in damages for non-performance would rest on demonstrating that this tripartite test is fulfilled. It could be argued by Control Systems that the ultimate impediment to the performance of the main contract was the fire at High Performance's production facility. Without the occurrence of that event the contract would have been performed. Control Systems could not have foreseen or controlled the fire itself; neither could Specialty Devices nor could High Performance. However, High Performance may have been able to overcome the consequences of the fire by taking a decision to pro-rate the surviving chips. If High Performance had acted in this manner, Specialty Devices would have been able to supply Control Systems with enough processing units to create a working master control system for Elite. High Performance may not therefore have met the Article 79(1) requirements. Additionally, the facts of the Moot problem suggest that High Performance acted in bad faith when taking the decision to distribute the D-28 chips to Technical Solutions after the fire. A court decision on the application of Article 79 has suggested that those acting in bad faith cannot take advantage of the Article 79 exemption.[75]

In the event that High Performance was not defined as a third person under Article 79(2), it could be classed as a supplier of Specialty Devices (the third person to the main contract). As defaults by suppliers typically fall within the promisor's sphere of risk, High Performance's failure to supply the D-28 chips would be regarded as an impediment within the control of Specialty Devices. Specialty Devices' fulfilment of the foreseeability requirement could also be contested. The four limbs of Article 79(1) would not thus have been satisfied as regards Specialty Devices and the double burden imposed by Article 79(2) on Control Systems could not therefore be discharged.

If Article 79(2) and the division between the treatment of defaulting suppliers and sub-contractors were abolished, Control Systems could argue that Specialty Devices' failure to perform was an impediment fulfilling all four limbs of the Article 79(1) test. Such a claim might be defeated on the grounds that a supplier's non-performance is a foreseeable event. Elite might also rely on the Bundesgerichthof's requirement that the impediment to the promisor's performance result from 'circumstances out of his own control or out of each of his suppliers' control'.[76] Specialty Devices' non-performance was due to the failure of High Performance to supply it with D-28 chips. High Performance's decision to distribute all of the surviving D-28 chips to Technical Solutions arguably lay at the root of its failure to supply Specialty Devices with computer chips. That decision was one that was within High Performance's sphere of control and responsibility. Consequently, Control Systems failure to supply the master control system was not due to circumstances beyond the control of each of the parties within its supply chain. High Performance could have controlled the circumstances which led to its default. It is likely that Control Systems would thus be held liable for its non-performance of the contract even in the absence of a provision akin to Article 79(2) of the CISG. The inclusion within the CISG of an article analogous to Article 8:107 of the PECL would however, assist in guiding any court or tribunal to the conclusion that a promisor such as Control Systems is ultimately responsible for his suppliers' and sub-contractors' defaults. Such occurrences should not be considered to be beyond the control of the promisor except in the most extraordinary circumstances.

Contrary to the conclusion reached in some academic writings, the abolition of Article 79(2) would not necessarily make it easier for promisors to exclude their procurement risk by directly or indirectly sub-contracting their obligations to parties further down the supply chain. Such attempts are likely to fail under both Article 79(1) and Article 79(2) because of the restrictive reading that is and should be given to both of those provisions by national courts and tribunals.

Conclusion

Since its inception, Article 79 has been subject to much scrutiny and comment by scholars. The provision has been described by Honnold as possibly the least successful element of the entire Convention.[77] Article 79(2) in general, and the definition to be attached to the term 'third person' in particular, have been the cause of much confusion. Two schools of thought exist regarding the question of who is a third person under Article 79(2). One view is that the definition of the term third person should be broad enough to include any person outside the direct control of the promisor.[78] The term would thus capture suppliers, manufacturers and sub-contractors alike. The more accepted view is that the definition is intended to cover sub-contractors alone. This approach is supported by the travaux préparatoires to the Convention and commands the support of substantial academic opinion. However, the application of this definition to real life transactions can lead to rather superficial distinctions being drawn. High Performance, for example, performed just as important an element of the overall contract with Elite as Specialty Devices did. Only Specialty Devices clearly fulfils the Article 79(2) definition of a third person though.

The existence of Article 79 of the CISG as a whole serves to promote the development of international trade. We should not lose sight of the fact that Article 79 is a necessary 'safety valve' within the CISG.[79] However, the scope afforded to Article 79 must be kept within tight boundaries so as to accord with international commercial practice. Whether international commerce needs a provision akin to Article 79(2) of the CISG is more debatable. In the event that the alleged third person is found not to possess the requisite qualities of a third person under Article 79(2), the promisor's failure to perform will be dealt with under Article 79(1) of the CISG. This has led some authors to question whether Article 79(2) is a surplus provision.[80] Applying Article 79 to the facts of the Moot problem, it is suggested that Control Systems would be unlikely to qualify for an exemption from liability in damages for non-performance. The categorisation or non-categorisation of High Performance as a third person under Article 79(2) appears to have no impact on this conclusion. Therefore the assumed objective of Article 79(2), which is usually stated as being the need to further restrict the ability of promisors to claim an exemption, is not made out.

Furthermore, the insertion of a term akin to Article 8:107 of the PECL into the CISG presents a sensible alternative to Article 79(2). The PECL text clarifies the fact that a seller is responsible for the actions of any external actors it engages, be they suppliers or sub-contractors. Such wording would remind courts and tribunals of the narrow scope intended for Article 79. It could thus be concluded that the international business community has no need for a provision akin to Article 79(2). The aim of dealing strictly with instances of sub-contractor defaults could still be achieved under the CISG without Article 79(2).


FOOTNOTES

1. This is illustrated by the fact that specific performance is the primary remedy available under the CISG. See Articles 46 and 62 CISG.

2. C Liu, Force Majeure: Perspectives from the CISG, UNIDROIT Principles, PECL and Case Law, 2nd Ed. 2005. Viewed on 1 July 2012. Available at: <http://www.cisg.law.pace.edu/cisg/biblio/liu6.html>.

3. Landgericht Aachen, Germany, 14 May 1993. Viewed on 2 July 2012. Available at: <http://www.unilex.info/case.cfm?id=23>.

4. Article 79(1) CISG.

5. Article 79(2) CISG.

6. B Nicholas, 'The Vienna Convention on International Sales Law', Law Quarterly Review, vol. 105, 1989, pp. 201 – 243.

7. H Fletchner, 'Article 79 of the United Nations Convention on Contracts for the International Sale of Goods (CISG) as Roschach Test: The Homeward Trend and Exception for Delivering Non-Conforming Goods', PACE International Law Review, vol. 19, 2007 at p.31.

8. M Gustin, 'Passing of risk and impossibility of performance under the CISG', International Business Law Journal, vol. 3/4, 2001, pp. 379-400.

9. Schlechtriem & Schwenzer at p.1063.

10. The Secretariat Commentary Guide on Article 65 (the equivalent provision to Article 79 in the 1978 Draft) concurs with this view. Viewed on 1 July 2012. Available at: <http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-79.html>.

11. Ibid.

12. C Spivack, 'Of Shrinking Sweatsuits and Poison Vine Wax: A Comparison of Basis for Excuse under U.C.C. § 2-615 and CISG Article 79', Pennsylvania Journal of International Economic Law, vol. 27, 2006, pp. 757 – 802.

13. Ibid. at p.759.

14. Liu.

15. R Goode, H Kronke and E McKendrick, Transnational Commercial Law: Texts, Cases and Materials, Oxford University Press, New York, 2007 at para. 7.99.

16. Ibid.

17. D Tallon, 'Article 79' in Commentary on the International Sales Law: The 1980 Vienna Sales Convention, C Bianca & M Bonell (eds), Giuffrè, Milan, 1987.

18. H Stoll & G Gruber, 'Article 74' in Schwenzer & Schlechtriem at p. 746.

19. CISG Recitals.

20. Spivack.

21. Spivack.

22. Liu, supported by the UNCITRAL Digest of Case Law on the United Nations Convention on the International Sale of Goods on Article 79. Available at: <http://www.uncitral.org/uncitral/en/case_law/digests/cisg.html>.

23. See Oberlandesgericht Hamburg, Germany, 4 July 1997. Viewed on 2 July 2012. Available at: <http://www.unilex.info/case.cfm?id=438>. Rechtbank van Koophandel, Hasselt, Belgium, 2 May 1995. Viewed on 2 July 2012. Available at: <http://www.unilex.info/case.cfm?id=263>. CLOUT Case No. 277, Oberlandesgericht Hamburg, Germany, 28 February 1997. Viewed on 2 July 2012. Available at: <http://www.unilex.info/case.cfm?id=291>. CLOUT Case No. 54, Tribunale di Monza, Italy, 14 January 1993. Viewed on 2 July 2012. Available at: <http://www.unilex.info/case.cfm?id=21>.

24. Oberlandesgericht Hamburg, Germany, 4 July 1997.

25. Fletchner.

26. Ibid.

27. Liu.

28. Nicholas.

29. UNCITRAL Digest of Case Law at p. 3.

30. See ICC Arbitration Case No. 8128 of 1995. Viewed on 7 July 2012. <http://cisgw3.law.pace.edu/cases/958128i1.html>

31. CISG Advisory Council Opinion No. 7, Exemption of Liability for Damages under Article 79 of the CISG, adopted by the CISG Advisory Council on 12 October 2007 at para. 17. Viewed on 5 July 2012. Available at: <http://www.cisgac.com/default.php?ipkCat=128&ifkCat=148&sid=169>.

32. Ibid. at para. 19.

33. Ibid.

34. S Howard Jenkins, 'Exemption for Nonperformance: UCC, CISG, UNIDROIT Principles – A Comparative Assessment', Tulane Law Review, vol. 72, 1997 – 1998, pp. 2015 – 2030.

35. John Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, Wolters Kluwer Law & Business, Austin, 2009 at p.429.

36. Tallon.

37. Secretariat Commentary Guide; D Flambouras, 'The Doctrines of Impossibility of Performance and Clausula Rebus Sic Stantibus in the 1980 Convention on Contracts for the International Sale of Goods and the Principles of European Contract Law – A Comparative Analysis', PACE International Law Review, vol. 13, 2001, pp. 261 – 293.

38. Shlechtriem & Schwenzer.

39. The draft Article 50 became Article 79 in the final version of the CISG.

40. The Report of Committee of the Whole I relating to the Draft Convention on the International Sale of Goods, reproduced in the UNCITRAL Yearbook VIII, A/32/17, 1977, pp. 25-64.

41. Ibid. at para. 448.

42. See Schiedsgericht der Handelskammer, Hamburg, Germany, 21 March 1996. Viewed on 7 July 2012. Available at: <http://cisgw3.law.pace.edu/cases/960321g1.html>. Oberlandesgericht, Zweibrücken, Germany, 31 March 1998. Viewed on 8 July 2012. Available at: <http://cisgw3.law.pace.edu/cases/980331g1.html>.

43. Secretariat Commentary.

44. Tallon at p. 585; J Lookofsky & H Bernstein, Understanding the CISG in Europe, Kluwer Law International, The Hague, 2002 at p. 154.

45. Tallon at p. 585.

46. P Schlechtriem, Uniform Sales Law: The UN-Convention on Contracts for the International Sale of Goods, Manz, Wien, 1986 at p. 101.

47. Nicholas.

48. Schlechtriem at p. 103.

49. B Zeller, Damages under the Convention of Contracts for the International Sale of Goods, Oxford University Press, New York, 2009.

50. Ibid. at p. 177

51.Ibid. at p. 176.

52. Ibid. at p. 177.

53. Spivack at p. 777; Tallon at p. 585.

54. Spivack at p. 777.

55. CISG Advisory Council Opinion No. 7 at para. 17; Schlechtriem & Schwenzer at p.1077; Tallon at p. 585.

56. Zeller at p. 176.

57. Spivack at pp. 777 and 794-5. Schiedsgericht der Handelskammer, Hamburg, Germany, 21 March 1996. Viewed on 10 July 2012. Available at: <http://www.unilex.info/case.cfm?id=195>. Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce, Russia, 16 March 1995. Viewed on 8 July 2012. Available at: <http://www.unilex.info/case.cfm?id=214>. Oberlandesgericht, Hamburg, Germany, 28 February 1997. Viewed on 9 July 2012. Available at: <http://www.unilex.info/case.cfm?id=291>.

58. J Lookofsky, Understanding the CISG: A Compact Guide to the 1980 United Nations Convention on Contracts for International Sales, Kluwer Law International, Alphen aan den Rijn, 2008 at p. 143.

59. Schlechtriem at p. 104; Secretariat Commentary at para. 12; CISG Advisory Council Opinion No. 7 at para. 19.

60. Nicholas.

61. C Kessedijan, 'Competing Approaches to Force Majeure and Hardship', International Review of Law and Economics, 2005, pp. 415-433.

62. Article 2-615 UCC.

63. Tallon.

64. ICC Publication No. 650, Force Majeure Clause, 2003 at para. 2. Viewed on 12 July 2012. Available at: <http://www.trans-lex.org/700700>.

65. Spivack.

66. Stoll & Gruber.

67. T Southerington, Impossibility of Performance and Other Excuses in International Trade, 2001. Viewed on 3 July 2012 at: <http://www.law.utu.fi/tiedostot/xcisg/southerington.pdf> [also available online at <http://www.cisg.law.pace.edu/cisg/biblio/southerington.html>].

68. Liu.

69. The UNCITRAL Case Digest on Article 79 states that 'in two cases, a seller successfully claimed exemption for a failure to perform, but in at least nine other cases a seller's claim of exemption was denied. Buyers have also twice been granted an exemption under Article 79 but have been rebuffed in at least six other cases' (see para. 7).

70. Liu; CLOUT Case No. 277, Oberlandesgericht Hamburg, Germany, 28 February 1997.

71. Honnold at p. 441.

72. Liu at para. 7.1.

73. Weitzmann.

74. Comments and Notes on Article 8:107 PECL, Comment B. Viewed on 4 July 2012. Available at: <http://www.cisg.law.pace.edu/cisg/text/peclcomp79.html>.

75. District Court Besançon, France, 19 January 1998. Viewed on 5 July 2012. Available at: <http://cisgw3.law.pace.edu/cases/980119f1.html>.

76. Bundesgerichtshof, Germany, 24 March 1999. Viewed on 3 July 2012. Available at: <http://cisgw3.law.pace.edu/cases/990324g1.html>.

77. Honnold at p. 429.

78. Zeller.

79. Liu at para. 5.4.

80. Ibid.


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