[...]

CHAPTER 19. CHANGE OF CIRCUMSTANCES

     The term "change of circumstances" is used here to refer collectively to a host of different doctrines, applied nationally and internationally, that deal with changes in the economic, legal and business realities underlying a contractual agreement. On the national level, these doctrines include the American doctrine of commercial impracticability, the German doctrine of wegfall der geschäftsgrundlage, unmöglichkeit, the French doctrines of force majeure and imprévision, the English doctrine of frustration and the Swiss doctrine of impossibility without fault. On the international level, reference can be made to the Vienna Convention of the Law of Treaties of 1969, where article 61 deals with impossibility of performance, and article 62 defines "fundamental change of circumstances" in terms of rebus sic stantibus. Also, a number of international organizations and institutions have attempted to define instances in which the setting aside of a contract is warranted.[1]

19.1 INTRODUCTION

As to be furthered below, it seems that the law has gradually changed from absolute contractual obligations, the strict pacta sunt servanda, towards more flexible attitudes, especially in relation to changed circumstances.[2]

With regard to whether courts should intervene to provide relief or require an adjustment in the obligation of performance of a contract when an unforeseen frustrating event occurs, the Modernist camp urges, albeit on differing theoretical bases, that intervention by courts to fill a gap in the parties' agreement is required. The occurrence of a contingency or frustrating event that was unforeseeable at the time of contracting creates circumstances that were not within the contemplation of the parties, and therefore performance exceeds the assent induced and given. Consequently, intervention is required. Economic theory and risk sharing based on "fairness" are two prevailing views on the methodology to be employed by the courts in gap-filling.[3]

Generally speaking, this principle of changed circumstances will be a tool providing more equity than the harsh distinction between "possibility" and "impossibility" of performance of an obligation.[4] It is to be noted that not all changes in circumstance may affect the contract. Only changes in circumstances which are known or should have been known by both parties to be an assumption upon which the contract is concluded are relevant. It is only if these circumstances no longer exist that the common Basis for the transaction disappears.[5] Further, an important restriction is to be borne in mind: a change in circumstances will not be taken into account if it occurred during a delay in performance of the person alleging application of the doctrine, this because the principle is based on the "good faith" concept.[6]

At the outset, it is to be clarified that the discussion below will be focused on changed circumstances relating to non-performance rather than invalidity and therefore, for example, initial impossibility will not be studied in this PART.[7] In this chapter, a brief review is firstly made upon the doctrine underlying the principle of changed circumstances, i.e. rebus sic stantibus. Once this doctrine is examined generally, different approaches to changes of circumstances, nationally or internationally, are to be outlined briefly. Then the two major legal concepts, i.e. force majeure and hardship which are exceptions to the basic rule pacta sunt servanda, dealing with the problem of changed circumstances are to be considered on a general and theoretical basis. Finally, a particular regard will be had to the rights or relieves concerning changed circumstances established under the studied international instruments, namely the CISG, UPICC and PECL.

19.2 UNSDERLYING DOCTRINCE; REBUS SIC STANTIBUS

Generally speaking, international commercial contracts impose legally binding obligations and a non-performing party is liable for damages. A basic and it seems universally accepted principle of contract law is "pacta servanda sunt". This principle means that each party to an agreement is responsible for its non-execution, even if the cause of the failure is beyond his power and was not or could not be foreseen at the time of signing the agreement.[8] It reflects natural justice and economic requirements because it binds a person to its promises and protects the interests of the promisee. Since effective economic activity is not possible without reliable promises, the importance of this principle has to be underlined.[9]

The sanctity of contract is, understandably, a paramount feature of the law of contract. As a matter of principle, parties must adhere to the terms of their contract: "It is a fundamental principle of law, which is constantly being proclaimed by international courts, that contractual undertakings must be respected. The rule pacta sunt servanda is the basis of every contractual relationship."[10] No doubt international arbitrators stick, in principle, to pacta. Moreover, Pacta sunt servanda is considered a cornerstone of the lex mercatoria.[11] However, practice has demonstrated that on many occasions this principle may lead to the opposite of its aim. That is to say, the situation existing at the conclusion of the contract may subsequently have changed so completely that the parties, acting as reasonable persons, would not have made the contract, or would have made it differently, had they known what was going to happen.[12] As an exception, therefore, the obligation to perform may be excused if extraordinary circumstances render performance literally or virtually impossible.[13] It is the application of the doctrine of changed circumstances or so-called (clausula) rebus sic stantibus

One trend of thought about the foundations of these excuses stems from one of the principal underpinnings of contractual obligations. Contract liability stems from consent. If an event occurs that is totally outside the contemplation of the parties and the event drastically shifts the nature of foreseen contractual risks, is there truly consent? Under this line of thinking, one can infer that the parties did not intend that performance would have to be rendered if an unexpected event would create a radical change in the nature of performance. If this inference is sound, one can conclude that the contract did not cover the unexpected event that has occurred. Under this reasoning, the court must then supply a term to cover an omitted case. Thus viewed, relief for impossibility or hardship does not interfere with freedom of contract.[14] Therefore, not only lots of judicial or arbitral awards but also the majority of modern writers accept the doctrine of rebus sic stantibus, which "involves the implication of a term that the obligations of an agreement would end [or be adjusted] if there has been a change of circumstances."[15] An important aspect of the doctrine is that it focuses upon changes that would contradict the "parties' shared expectations" and thereby "defeat their apparent objectives".[16] The main issue here is the choice to be made between the strict application of pacta sunt servanda or so-called "sanctity of contracts" and the possible application of the (clausula) rebus sic stantibus. In this respect, Goldman believes that pacta sunt servanda simply means that contracts which have legally come into existence and continue to be in force, must be observed. It means the inviolability, not unchangeability of contracts.[17]

Nonetheless, there are some who seem to believe that the application of the doctrine (clausula) rebus sic stantibus (a contract is binding only as long and as far as (literally) matters remain the same as they were at the time of conclusion of the contract), if broadly interpreted, can be used to erode the binding nature of contractual promises very substantially.[18] Therefore, the principle "Rebus sic stantibus" is universally considered as being of strict and narrow interpretation, as a dangerous exception to the principle of sanctity of contracts. Whatever opinion or interpretation lawyers of different countries may have about the "concept" of changed circumstances as an excuse for nonperformance, they will doubtless agree on the necessity to limit the application of the so-called "doctrine rebus sic stantibus" (sometimes referred to as "frustration", "force majeure", "imprévision", and the like) to cases where compelling reasons justify it, having regard not only to the fundamental character of the changes, but also to the particular type of the contract involved, to the requirements of fairness and equity and to all circumstances of the case. As a general rule, one should be particularly reluctant to accept it when there is no gap or lacuna in the contract and when the intent of the parties has been clearly expressed. Caution is especially called for, moreover, in international transactions where it is generally much less likely that the parties have been unaware of the risk of a remote contingency or unable to formulate it precisely.[19] For example, the parties to a contract may agree that force majeure will have certain specific consequences for their contractual performance or with respect to termination of the contract. They also can decide that their contractual obligations, or some of them, will not be affected by force majeure. It is clear, however, that a limitation on the right to invoke force majeure as an excuse for non-performance cannot be presumed, but requires instead an express contractual provision to that effect.[20]

19.3 DIFFERENT APPROACHES TO CHANGED CIRCUMSTANCES

19.3.1 Historical Review

Historically, the concept clausula rebus sic stantibus was recognized in international law and found its way into eighteenth century codifications of private law, but was subsequently criticized because of its vagueness and lack of certainty; not surprisingly, therefore, the clausula doctrine fell into oblivion in the late 18th and the 19th centuries: the heyday of "classical" contractual doctrine when freedom of contract, economic liberalism and certainty of law reigned supreme.[21] Nineteenth century liberalism, which accorded absolute priority to party autonomy and thus to the literal contents of a contract, either set aside the clausula rebus concept or sharply reduced its influence in most civil law countries. The rule that the will of the parties as freely expressed in their contract is the law of the parties and must not be changed by the courts, became the leading principle of contract law. The clausula rebus sic stantibus principle survived mainly in public international law (the law of nations).[22]

In our times, a backswing in legal thinking can be observed under the influence of the ideas of good faith and equity, contract law abandoned the doctrine of absolute obligations and legal systems started to provide for the discharge of one or both parties when a contract becomes impossible to perform. The results of this backswing differ, however, from country to country. In many systems this was achieved by referring to the concept of force majeure, in England by the doctrine of frustration. In the twentieth century a number of new theories emerged, for example imprévision, frustration of the common venture, impracticability and Wegfall der Geschäftsgrundlage. These extended the existing doctrines beyond the sphere of absolute impossibility to situations where unexpected changes in circumstances made performance far more expensive than anticipated. In some legal systems, like the French, such situations produce no effect. In other systems, like the English, it may be synonymous with impossibility, while in some, like the German or American, it may allow the court to adjust the contract.[23]

Thus, the modern trend is to recognize the established doctrines of impossibility of performance and frustration of the venture and to add to it a doctrine of excessive hardship, where, because of changed circumstances, a contract has become excessively burdensome on one of the parties, the party subjected to that burden may request a discharge of the contract, or, alternatively, its modification to reflect an exchange of values in accordance with market values at the time of the changed circumstances.[24]

19.3.2 National Doctrines

Arguably, under a variety of names, most, if not all, legal systems recognize changed circumstances as an excuse for contractual non-performance. In this respect, it should be observed that national concepts, when applied in the international arena, are modified to suit the needs of international transacting. It therefore, makes little sense to detail the different national practices in this respect. However, in order not to get confused and to dig out - perhaps - some common ground in this difficult area of basic problems of contract law, a brief comparison of these concepts is useful to help one understand the prevailing international definition of change of circumstances. For a full picture, however, the following review will focus on the remedial structure rather than individual provisions of different domestic legal systems.

In general, national legal systems contain a rule that changed circumstances may affect the binding force of a contract. This possibility is known under the maxim rebus sic stantibus: the contract remains binding "provided that things remain as they are". However, the concept that a party's contractual obligations can be excused because of changes in surrounding circumstances takes a different form in each national legal system. For instance, frustration under the common law is not the equivalent of force majeure or Unmöglichkeit nor is force majeure Unmöglichkeit in civil law; even force majeure under Belgian law is not force majeure under French law. As stated by Rimke: "The approach of municipal legal systems to the problem of changed circumstances varies from country to country. Although all these concepts are related to each other, since they share important features, the distinction between them is extremely important in drafting choice of law clauses in international contracts."[25]

In American law, section 2-615 of the UCC excuses contractual performance when presupposed conditions upon which the contract is based have not been met. Also, section 268 (2) of the Restatement (Second) of Contracts deals with the same contingency. Both provisions have departed from the old common law rule of impossibility and have adopted the new test of commercial impracticability. This test evolved from an "all-or-nothing remedy" to a "loss-sharing doctrine". Thus, excuse or partial relief is awarded if the occurrence of a certain contingency has made the performance of a commercial contract impracticable, i.e., unnecessarily burdensome, unprofitable or unfair to one of its parties. The rationale behind this rule is that no one in the business world is expected to work for free, and parties should not be encouraged to take advantage unjustifiably of the misfortunes of their partners; otherwise, the general stability of the institution of contracting would be threatened. It was, thus, thought far better to introduce the "flexible adjustment machinery" of UCC section 2-615 and Restatement section 268 (2), instead of the common law test of impossibility.[26]

In English law, the doctrine of "frustration of purpose" excuses performance when the circumstances have changed so much that the performance required by the contract is radically different from that which was initially undertaken by the parties.[27] However, though less far-reaching or more strictly than its American counterpart, this common law practice on the other side of the Atlantic is not substantially different from that of American courts. More recently, English judges have been generally reluctant to find that a particular contract has been frustrated.[28] English courts have shown a willingness to imply in all contracts a condition to the effect that if the performance of a contract becomes physically or legally impossible, or if possible only in a very different manner from that originally contemplated, then the contract is dischargeable. The frustrating circumstances, however, must have arisen without the fault of either party. Frustration of the contract may be brought on by a variety of situations, including, for example, physical destruction of the subject matter of the contract, or subsequent legal changes, provided the contingency was not within the parties' contemplations. However, mere hardship is not sufficient under English common law to discharge, or even partially discharge, performance. Also, frustration affecting only part of the contract is subject to the normal conditions of frustration, and only arises in connection with severable contracts or where the supervening event is temporary.[29]

In German law, the theory of Wegfall der Geschäftsgrundlage (disappearance of the Basis of the transaction) covers the effect of changed circumstances on the contract. It ensues from German court practice and "unmöglichkeit", as embodied in Art. 275 of the German Civil Code (BGB), and provides relief for cases where the original economic basis of the contract has changed. When the circumstances have unforeseeably and substantially changed, the foundations of the transaction have been destroyed and the parties are no longer bound to their original contractual commitments. Requesting the original performance of the contract would constitute bad faith (Art. 242 BGB requires that the contract be performed in good faith.). The Wegfall der Geschäftsgrundlage was quite easily applied in the years of galoping inflation after both World Wars. However, it has been less easily accepted with regard to commercial contracts concluded between businessmen. At present Wegfall der Geschäftsgrundlage is applied rather restrictively.[30]

French contract law does not provide relief for changed circumstances which make contract performance more onerous but not impossible. The often quoted French doctrine of imprévision is only applied by French administrative courts to contracts concluded with public entities. In commercial contracts, the agreed contract price is not affected by increased costs or currency depreciation.[31] The doctrine of imprévision is developed by the Conseil d'Etat in connection with contracts involving public services, derived from state practice and based only indirectly on Art. 1134 of the French Civil Code (good faith).[32] The Swiss law of contract has much in common with the French law. In addition to drawing on parallel sources, they also provide for very similar solutions. The Swiss Federal Tribunal has admitted that some long-term contracts may be terminated because of an unforeseeable and fundamental change of circumstances on the basis of Art. 2 of the Code civil (good faith). Only changes which would unjustly enrich one of the parties give rise to such relief. Rebus sic stantibus, however, has to be applied restrictively.[33]

The impossibility and foreseeability elements of the frustration doctrine make up the core of the French force majeure and Swiss impossibility doctrines. The French and Swiss doctrines are based on only a few statutory provisions. Both systems enjoy a wealth of court practice from which the details of the doctrines of force majeure and impossibility are drawn. Both permit excusing contractual obligations only in cases of impossibility, unless there is a contractual clause to the contrary. Mere hardship is not sufficient to excuse performance. In addition to demonstrating that performance was rendered impossible, one must show that the occurrence of a force majeure event was unforeseen and not a result of either party's fault. Also, the unforeseen event must have been unavoidable in the sense that the party seeking an excusal of performance could not have prevented it. The harshness of this rule is not as severe as it appears, for it is applied in light of the good faith and equity requirements encompassed in Art. 1134 of the French Civil Code and Art. 2 of the Swiss Civil Code. In fact, international tribunals have awarded relief in cases where the facts far from demonstrated impossibility of performance. This also seems to be the position adopted by the national courts of both states. This brings the definition of force majeure or impossibility very near, if not identical, to that articulated in the doctrines of imprévision and wegfall der geschäftsgrundlage.[34]

Among other systems, in Italian law, Art. 1467 of the Codice civile provides relief when the performance of one party has become excessively onerous as a consequence of extraordinary and unforeseeable events and when the party has not assumed the risk for such changes. In Dutch law, Art. 6.5.3.11 of the Nieuw Burgerlijk Wetboek (New Civil Code) provides for the adaptation of the contract when circumstances have unforeseeably and substantially changed. However, the travaux préparatoires show that this possibility is exceptional and has to be applied with much restraint. Japanese law has a theory of changed circumstances, but applies it quite restrictively. Under Belgian law, even under Belgian administrative law, no general theory of imprévision is recognized.[35]

To sum up, different legal concepts deal with the doctrine of changed circumstances and provide for the discharge of the duty to perform of one or both parties when a contract has become unexpectedly onerous or impossible to perform. This principle is considered by some commentators to be a sort of contrariety to pacta sunt servanda but is really in healthy tension, an attenuation, covering all of the substantial varieties among different national systems of excuse concepts or varieties of relief from an unjust application of pacta sunt servanda. Lumping together related but not identical concepts, this includes impossibility, imprévision, frustration, Wegfall der Geschäftsgrundlage and force majeure.[36] However, it is to be noted that in most laws overlapping legal concepts can be found; for instance, English "frustration" and American "impracticability" contain elements of both impossibility and hardship. Nonetheless, the classic concept of force majeure is primarily directed at settling the problems resulting from non-performance, either by suspension or by termination. Concepts like imprévision or hardship are mainly directed at the adaptation of the contract.[37]

19.3.3 International Perspective

19.3.3.1 Public international law

A comparative look at public international law (the law of nations) is justified by the experience that general problems of contract law are more or less the same in private law and public international law. It is said that the assimilation of international contracts to which states are Parties to treaties is a technique resorted to in many texts.[38]

Under the law of treaties, the question of changed circumstances is quite settled, and the Vienna Convention on the Law of Treaties of 1969 (hereinafter in this Chapter "Vienna Convention"), under Arts. 61 and 62, recognizes two instances where performance can be excused because of extraneous events. Art. 61 deals with situations in which performance has become impossible because the object of the treaty is unavailable. The "unavailability of the object of a treaty" has been widely defined to include instances other than physical destruction. Accordingly, impossibility of performance has extended beyond cases of material impossibility to include those involving legal impossibility. In either case, the impossibility must to be absolute; otherwise, performance is not excused, but merely suspended. Art. 62 provides for instances where, due to a fundamental change in the circumstances in which a treaty was concluded, the parties' obligations have become radically transformed. Such a change warrants withdrawing, terminating or suspending a treaty, and, in some cases, it may also be a sufficient ground for the party disadvantaged by the change to request a revision of the original contract. There is a consensus among jurists that the doctrine of fundamental change of circumstances, kept within defined limits, embodies a general principle of law.[39]

However, it is carefully worded in the Vienna Convention so as not to encourage the over-use of the principle and thus to avoid uncertainties as to the sanctity of international treaties: The wording of Art. 62 demonstrates the exceptional character of rebus sic stantibus. It is subordinate to the more general principle of pacta sunt servanda, as set out in Art. 26 of the Vienna Convention. The change in circumstance has to be fundamental. It has to jeopardize the survival of the State. Simple loss of economic gain or currency reforms are insufficient. As the International Court stated in the Fisheries Jurisdiction case, the changes must be vital: they have to "imperil the existence or vital development of one of the parties". Moreover, the change in circumstances has to be unforeseeable.[40]

It is to be noted that the Vienna Convention is applicable only to treaties between sovereign states on a political level. It is not applicable to contracts between private parties or to contracts with an international institution such as the World Bank. However, several articles of the convention provide a principle for treaty obligations capable of application to private contracts. Several arbitral decisions have cited the principle pacta sunt servanda as a basic principle of international law, often using the Vienna Convention for support.[41] However, the advocates of this view almost always ignore the competing doctrine of international law which implies a clausula rebus sic stantibus in every treaty, making the treaty binding only in situations where the original conditions under which the treaty was made continue to exist.[42] Nonetheless, Horn believes that "article 62 [of the Vienna Convention] is a strong argument for the existence of a general legal principle which might also be relevant to transnational contracts with or between private parties."[43] The Iran-US Claims Tribunal also on the basis, among other things, of Art. 62 of the Vienna Convention rules: The concept of changed circumstances, also referred to as rebus sic stantibus, has in its basic form been incorporated into so many legal systems that it may be regarded as a general principle of law; it has also found a widely recognized expression in Art. 62 of the Vienna Convention.[44]

19.3.3.2 International commercial practice

Does international practice, particularly international commercial arbitration, recognizes the effects of changed circumstances on the performance of contracts? It is said that international commercial practice, whether emanating from the Iran-U.S. Claims Tribunal or other arbitral tribunals, regards rebus sic stantibus (sometimes referred to as "frustration", "force majeure", "imprévision", and the like) as a general principle of law.[45]

On more than one occasion, it is held that under a variety of names, most, if not all, legal systems recognize force majeure as an excuse for contractual non-performance. Force majeure therefore can be considered a general principle of law.[46] The assertion is limited, however. Tribunals have adopted a reservation that the rebus sic stantibus doctrine, though general in the sense that it is applicable regardless of a clause to the effect, still should be regarded as an exception to the sanctity rule. Acting accordingly, tribunals have required parties to plead and prove the condition of rebus sic stantibus. In addition to pleading and proving force majeure, a party invoking it must have notified his contractual partner of the existence of the disruptive event and his intention to terminate or suspend the contractual relationship because of it. In a word, force majeure conditions have to be pleaded, proved, communicated to the other party and narrowly interpreted. Further, questions relating to force majeure are considered ones of fact, and, thus, their legal effects very much depend on the circumstances of each case.[47]

Tribunals accepting the above definition of the scope and role of rebus sic stantibus are inclined to confine the application of the doctrine to its narrowest possible boundaries. This is particularly evident in tribunals' allocations of losses ensuing from the occurrence of a force majeure. Even if performance is excused, arbitrators refrain, in general, from equitably allocating the ensuing losses. The rule is to let the loss lie where it falls, regardless of the equities of the situation. By contrast, other awards articulating a more liberal approach tend to attach to rebus sic stantibus a broader scope, and are more inclined to adapt the parties' relationship to the new status quo that resulted from the force majeure conditions. Thus, the loss does not have to lie where it falls, but is equitably allocated. Each of these two approaches is the product of either the classical or modern contractual models. At this juncture, it should be mentioned that any excuse or suspension of contractual performance because of changed circumstances is, in principle, a departure from the strict application of the classical theory. Nonetheless, modern classical theorists do not adhere to such a strict model, which has been greatly modified to allow for more flexibility towards modem needs of contracting.[48]

Finally, it should be noted that in practice, although "force majeure", "rebus sic stantibus", "frustration" and "changed circumstances" or the like are terms of frequent usage in international arbitral awards, arbitrators do not attach to these terms the same definitions as those articulated in national jurisdictions. A study of international arbitral awards will demonstrate how international tribunals have amalgamated these different national doctrines into what is generally referred to as changed circumstances, or so-called rebus sic stantibus. At the most, it can be claimed that a broad distinction is maintained between, on the one hand, absolute impossibility and, on the other hand, all the other above-stated doctrines that denote a change in the context in which the parties' agreement was concluded.

19.3.4 Conclusion

As in municipal systems, so in international law, public or private, it is recognized that the doctrine of changed circumstances, also referred to as rebus sic stantibus (sometimes referred to as "frustration", "force majeure", "imprévision", hardship and the like) may justify the non-performing party's right to termination or adaptation of the contract. Although the various approaches contain very different responses, the doctrine of changed circumstances may be regarded as a general principle of law. Thus, if a change in the circumstances surrounding an international commercial contract occurs, a party to that contract seeking relief from contractual liability with a modification or termination of the contract, in the absence of any contractual provision on such issues, may have recourse to the objective norms of the law, national or international, applicable to the contract.

19.4 DEFINITIONS OF FORCE MAJEURE AND HARDSHIP

Generally, changes in circumstances may have two different effects on a contract: they can render the contractual performance either impossible or (only) more burdensome for a party so as to create a "hardship" for it.[49] This leads us to the important and crucial question as to the concepts of hardship and force majeure. However, a clear distinction of the meaning of both terms in commercial practice is not always easy. There are indeed borderline cases, which cannot be labelled as falling in one or the other basket exclusively. Practitioners of international arbitration will also agree that there is a great confusion as to the use of these two terms. Even in important international contracts, they are often inserted as synonyms.[50] Nonetheless, the following paragraphs attempt to review the two concepts on a general and theoretical basis.

19.4.1 Force Majeure

The concept of force majeure, providing for the discharge of one or both parties when a contract has become impossible to perform, "has evolved progressively in international trade practice by assuming many original and autonomous features distinct from similar legal concepts."[51] It is said that the roots of force majeure are in the Roman concept of vis maior, which serves as a limit to liability not based on fault.[52] Others submit that the roots of the classic concept lie in the Code Napoléon, from which the words force majeure (an irresistible compulsion or coercion) are taken.[53]

The term force majeure does not have an authoritative definition. As outlined above, the approach of municipal legal systems to situations of force majeure varies from country to country. In the practice of the European Court of Justice, force majeure has been defined to be an event unusual, unforeseeable and beyond the trader's control, the consequences of which could not have been avoided even if all due care had been exercised.[54] On the other hand, the Court has emphasized that the concept of force majeure differs in content in different areas of law and in its various spheres of application and that the precise meaning of the concept therefore has to be decided by reference to the legal context in which it is intended to operate.[55]

Generally, the term may be used as a general term referring to some kind of event that serves as a basis for an exemption from liability, and therefore certain general characteristics of the conception of force majeure can be determined: "The legal elements for the qualification of an event as force majeure (vis maior, act of God, etc.) are essentially the same in most legislations, and court decisions show a universal trend to a comparable restrictive interpretation. These elements are (i) that the event is of an external nature, (ii) that it could not be foreseen or prevented and (iii) that it renders performance of a contractual obligation impossible at all or for a certain time."[56] This is confirmed by Art. 7.1.7 of the UNIDROIT Principles where, under the headline of "Force majeure", it is stated that a party's non-performance 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 the impediment or its consequences.

In most cases the term force majeure refers to an external event that is unforeseeable and irresistible which makes the performance of the contract at least practically impossible. If we accept this definition we can also say that the relation of impossibility to force majeure is that force majeure can be defined as qualified impossibility: it is impossibility restricted by the type of cause and foreseeability.[57] In more general terms, it can be said that force majeure occurs when the performance of a contract is impossible due to unforeseeable events beyond the control of the parties.[58]

19.4.2 Hardship

As discussed above, force majeure, which is aimed to settle the problems resulting from non-performance either by suspension or termination, is a fundamental change in the circumstances beyond the control of the parties that affects the existing contractual obligations and is ground for relief from some or all contractual duties. But in many cases where either or both parties maintain an economic interest in continued contractual cooperation as is typical for long-term contracts interrupted halfway in their execution, there is a sort of consensus that other solutions must be found. Such solutions are usually found in the context of "hardship clauses", which are frequently introduced into contracts in international trade.

Hardship can be understood as a situation, which does not quite amount to being a force majeure. It means that the performance of a contract has become more onerous for the performing party. A typical example of hardship would be a steep rise in the prices of raw materials after the conclusion of the contract.[59] Although most modern legislations have rules to cope with such hardship situations (which roughly fall under the so-called clausula rebus sic stantibus), accepted solutions by national laws as well as court decisions and legal doctrine show a remarkable degree of variation. Nonetheless, the circumstances in which hardship generally exists (as usually set out in hardship clauses) normally incorporate three elements. First, the circumstances must have arisen beyond the control of either party; self-induced hardship is irrelevant. Second, they must be of fundamental character. Third, they must be entirely uncontemplated and unforeseeable.[60]

A clear descriptive definition of hardship is contained in Art. 6.2.2 of the UNIDROIT Principles. 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 laid down therein.[61] According to this definition, hardship can also occur in situations where the value of what the performing party is to receive in return for his performance has diminished, whether or not this has affected his ability to perform. This definition of hardship would seem to include force majeure (qualified impossibility) and some cases of impossibility outside force majeure as well as other types of events that fundamentally affect the balance of the contract. Impossibility of performance is not necessarily required and there is no reference to not being able to avoid or overcome the situation.[62] The concept of hardship contained in the UNIDROIT Principles intends to solve problems of such fundamentally altered circumstances by adapting the contract to the new situation. It appears justifiable to speak today, with respect to complex long-term contracts, of a duty on the parties, to renegotiate in good faith on the needed adjustment.[63]

19.4.3 Comparison

The concepts of hardship and force majeure seem to be related to each other, particularly since they share some features: they both cater to situations of changed circumstances. The concepts of hardship and force majeure constitute exceptions to the principle pacta sunt servanda; they apply in situations where the circumstances existing at the conclusion of the contract have subsequently changed so drastically that the parties would not have made the contract, or would have made it differently had they known what was going to happen. This impression is intensified by the fact that contractual hardship clauses on the one hand and force majeure clauses on the other hand have developed a certain parallelism. To some extent, the concepts of force majeure and hardship overlap.

Nevertheless, these conceptions also differ from each other and no specific overall trend may be traced.[64] They are implemented in different ways. The difference between the two concepts is most aptly described in such a way: hardship is at stake where the performance of the disadvantaged party has become much more burdensome, but not impossible, while force majeure means that the performance has become impossible for the party concerned, at least temporarily. Moreover, there seems to be a functional difference between the two concepts. Hardship constitutes a reason for a change in the contractual program of the parties and has a deeper influence on the implementation of the contract than normal variants which come up in this process, however hardship is nevertheless related to the fulfillment of the contract. The aim of the parties remains to implement the contract. Force majeure, however, is situated in the context of non-performance, and deals with the suspension or termination of the contract.[65] In other words, hardship occurs where the performance of the disadvantaged party has become much more burdensome, but not impossible. On the other hand, force majeure, means that the performance of the party concerned has, at least temporarily, become impossible. The classical concept of force majeure is primarily directed at settling the problems resulting from non-performance, either by suspension or by termination. The concept of hardship, however, is mainly directed at the adaptation of the contract.[66]

The comparison of force majeure and hardship stated above may give a primary insight into the structure and functioning of these concepts in general. With the international contractual practice, measures oriented towards uniform general concepts of force majeure and hardship have been developed. In order to understand the two major concepts, a particular regard will be had below to the deliberations on force majeure and hardship in the three studied instruments, which are useful for the interpretation of force majeure or hardship clauses and even relevant to tackling contracts affected by changed circumstances in the absence of such clauses.

19.5 GENERAL APPROACHES IN THE STUDIED INSTRUMENTS

The doctrine of changed circumstances has found a widely recognized expression in the CISG, UNIDROIT Principles and PECL, inspired by public international law and international commercial practice. They combine the different domestic rules and compromise between various approaches. However, the relevant circumstances and their consequences concerning the two major concepts vary to some extend under the three international instruments. In the following, a brief review will be made, and more details on the relevant provisions will be found in Chapters 20 and 21.

19.5.1 Approach under the CISG

Under the CISG, Art. 79 deals with the circumstances in which the buyer or seller may be excused from performance of his contractual obligations because of an extraneous event that is judged sufficiently important to warrant the excuse--what in the common law is referred to as frustration of the contract and in civilian legal systems under such headings as force majeure, cause étrangère, and Wegfall der Geschaftsgrundlage. The Article is probably one of the most difficult in the whole convention for several reasons.[67] Given the complexities it is focused here mainly on some of the more salient features of Art. 79.

Art. 79 is a compromise between the civil law doctrine, which bases impossibility on the lack of fault of the obligor and bars on award of damages, and the common law approach, which views impossibility as an exception from absolute liability and therefore terminates the contract. Like the ULIS, the CISG in general, and its force majeure provision in particular, have been widely criticized as linguistic compromises lacking in substance. It has been suggested that "the outcome of a dispute governed by this CISG Provision may ultimately turn on whether a court chooses to emphasize the common law or civil law" view, or that of the other legal systems throughout the world. The provision's malleability may undercut its ability to guide the international business person. Nevertheless, its existence demonstrates the universally held view that in certain circumstances, at least, a force majeure event should excuse the non-performance.[68]

It is said that the CISG addresses the changed circumstances issue in Art. 79 in an attempt to create uniformity and tackle the problem of changed circumstances on an international level. Therefore, the solutions adopted in CISG Art. 79 do not follow any of the national laws as such. It does not use the terms force majeure, frustration or the like, and it forms a system of its own autonomic from the national systems. In other words, the CISG avoids reference to existing concepts as it develops a system of its own. However, this concept does not solve the problem entirely. It is likely that Art. 79 will be the Convention's least successful provision. The most discussed problem in the context of Art. 79 is whether radically changed circumstances (hardship), where the performance of one of the parties has become much more onerous and difficult, but not impossible, falls within the scope of this provision. Because of Art. 79's vagueness, however, it cannot be determined with sufficient certainty how this issue can be decided on the basis of the CISG. The adaptation of the contract by the judge is, moreover, not expressly allowed by the Convention, and must therefore be regarded as impossible. For these reasons, contracting parties are urged to include in their contracts a provision dealing with the matter of changed circumstances in the manner desired by the parties.[69] In this respect, the UNIDROIT Principles and the PECL serve once again as a supplementary source of CISG's interpretation and application.

19.5.2 Approach under the UNIDROIT Principles

Generally speaking, the Convention limits exemption to impossibility of performance. Greater leeway and flexibility of exemption and remedial rights are granted in the UNIDROIT Principles. Under the UNIDROIT Principles, hardship is dealt with through Arts. 6.2.1 to 6.2.3. Art. 6.2.1 establishes the principle of pacta sunt servanda as the main rule to be followed. Art. 6.2.2 then defines hardship and 6.2.3 provides for the effects of it. Where the equilibrium of the contract has been fundamentally altered, the disadvantaged party is entitled to request renegotiations. Where such negotiations fail to lead to an agreement within a reasonable time either party may resort to the court, which may, if reasonable, terminate the contract or adapt it with a view to restoring its equilibrium. It should be noted that hardship does not automatically lead to an exemption from performance. The disadvantaged party is still under obligation to perform even if renegotiations have commenced. Only an agreement or a court order may release the party from this obligation.

Art. 7.1.7 concerns force majeure situations. According to Art. 7.1.1, the term non-performance refers to a failure by a party to perform any of its obligations under the contract, including defective performance or late performance. Art. 7.1.7 thereby applies to all such events. According to the Official Comment, this article concerns the area covered in common law systems by doctrines of frustration or impossibility and in civil law systems by doctrines such as force majeure, Unmöglichkeit, and the like, 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.[70] Further, Art. 7.2.2 provides for grounds of exemption in cases of non-performance of non-monetary obligations.[71] If the less strict criteria of Art. 7.2.2 are met, the obligor is exempt from performing specifically, but he may still be liable in damages if he cannot prove an impediment in accordance with 7.1.7.

In view of the respective definitions of hardship and force majeure under the UNIDROIT 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.[72]

19.5.3 Approach under the PECL

Under the PECL, Art. 6:111 addresses the issue of a change of circumstances. Southerington submits in this respect: "Article 6.111 can clearly be classified as a hardship type of rule. It bears resemblance to the Article 6.2.2 of the UNIDROIT Principles. There is no express requirement for a fundamental disturbance of balance though, but a reference to excessive onerousness. However, this difference may be superficial. The commentary to this Article explains that the contract has to be completely overturned by events. Another difference is that the change of circumstances has to have occurred after the conclusion of the contract. Furthermore, 6.111 does not state whether or not the obligor is still under a duty to perform. The most interesting difference perhaps is the rule in 6.111(3)(c) which gives the court the power to award damages to compensate losses caused by the other party's refusal to negotiate or his breaking off negotiations contrary to good faith and fair dealing. It should be noted that both of the parties are under the duty to negotiate in good faith, the purpose of the provision is to allow the contractual relationship to continue, not for example to give the party suffering hardship time to resist the other party's demands."[73]

PECL Art. 8:108 provides for an excuse due to an impediment. "Article 8.101(2) [...] states that 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 4 except claiming performance and damages. According to the commentary on the EU Principles, under 8.108 the performance has to have become totally impossible, and furthermore, that the preconditions are those traditionally required for force majeure. The Article applies to any obligation, including monetary. The Article has been modelled after CISG Article 79(1), but according to some commentators resembles also the common law frustration in that both parties are automatically discharged. Article 8.108 read in conjunction with 8.101(2) is almost identical to the UNIDROIT Principles Article 7.1.7, [...]"[74] Again, Art. 9:102 PECL is very similar to Art. 7.2.2 of the UNIDROIT Principles, according to which an exception is provided for cases where the creditor is yet to perform and it is clear that the debtor is unwilling to receive performance.[75] PECL Art. 9:103 explicitly states that an exemption from performing under Art. 9:102 does not lead to an exemption from damages. This question is to be decided under Art. 8:108.

19.5.4 Concluding Remarks

With respect to situations of changed circumstances, both the UNIDROIT Principles and the PECL could offer sufficiently elaborate and widely accepted rules on hardship and force majeure. By implementing these rules into their contract, parties could supplement the narrow and vague provisions of Art. 79 CISG.

Both the UNIDROIT Principles and the PECL contain what we could call the "full set" of juristic tools for coping with changed circumstances. They encompass rules exempting from specific performance and from liability in damages and they provide for renegotiations and adjustment. Events of impossibility, force majeure, and hardship have been taken into consideration. Furthermore, the two Principles widen the applicability of the exemptions outside pure instances of impossibility or force majeure by references to unreasonableness or unconscionability as well as to loyalty or the observance of good faith.[76]

Both of the two Principles differ from the CISG. Though pacta sunt servanda still is the main rule, under the two Principles exemptions from obligations are granted on a more lenient basis and the contract can be more freely modified by the court. Furthermore, both Principles contain express references to the obligation of observing good faith and for example the hardship provisions seem to promote a more co-operative, loyalty-based notion of contract. It should also be noted that both sets of Principles were completed in the 1990's. Therefore they represent the modern developments in the field of contract law. The provision may have positive effects. When the parties know from the beginning of their contractual relationship that changed circumstances may lead to renegotiations they may, for example, assume an attitude towards their relationship that emphasizes co-operation which may in turn make it easier to cope with changed circumstances and other such problems.[77]

Go to table of contents to full text of Remedies for Non-performance: Perspectives from CISG, UNIDROIT Principles & PECL.

FOOTNOTES: Chapter 19

* Chengwei, Liu. LL.M. of Law School of Renmin University of China, P.O. Box 9-01 No. 1 (International Law), Law School of Renmin University of China, 59 Zhongguancun Street, Beijing 100872, China. E-mail: Genes@263.net.

1. See Nassar, Nagla, Sanctity of Contracts Revisited, Dordrecht, Boston, London (1995); p. 193. Available online at <http://tldb.uni-koeln.de/TLDB.html>; TLDB Document ID: 105700.

2. See Tom Southerington in "Impossibility of Performance and Other Excuses in International Trade": Tuula Ämmälä ed., Publication of the Faculty of Law of the University of Turku, Private law publication series B:55 (2001). Available online at <http://www.cisg.law.pace.edu/cisg/biblio/southerington.html>.

3. See Sarah Howard Jenkins in "Exemption for Nonperformance: UCC, CISG, UNIDROIT Principles -- A Comparative Assessment": 72 Tulane Law Review (1998); pp. 2017-2020. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/jenkins.html>. See also, Joseph M. Perillo: All contracts involve risks. Some contracts are almost purely aleatory. If one sells shares of stock on the stock exchange that one does not have -- the so-called "short sale" -- it is a contract of pure risk and I can conceive no circumstance (absent fraud or the like) in which a court should relieve the seller or buyer from a total loss even if unexpected and unforeseeable events disrupted the market. On the other hand, in the more typical contract involving the sale of goods or services, or the rental of real estate, each party expects to gain from the contract and each party understands that the other party also expects to gain. In such contracts, neither party expects to gain from the other's loss, although both realize that such an imbalance may occur. In the common law, several kinds of events produce an almost automatic excuse for nonperformance: death of a person who is to personally perform, supervening illegality of a performance, and the destruction of the subject matter. When one goes beyond these three categories, relief is most justified if unexpected events inflict a loss on one party and provide a windfall gain for the other or where the excuse would save one party from an unexpected loss while leaving the other party in a position no worse than it would have without the contract. (Infra. note 14, pp. 119-120.)

4. See Katsumoto, M. in "Kigyo no torihikihippaku to jijohenko no gensoku": NBL No. 55 (1974); p. 9. Impossibility is appropriately seen as an extreme example of changed circumstances.

5. See van Houtte, Hans in "Changed Circumstances and Pacta Sunt Servanda": Gaillard ed., Transnational Rules in International Commercial Arbitration, ICC Publ. Nr. 480,4, Paris (1993); p. 116. TLDB Document ID: 117300.

6. See Puelinckx, A.H. in "Frustration, Hardship, Force Majeure, Imprévision, Wegfall der Geschäftsgrundlage, Unmöglichkeit, Changed Circumstances": 3 J.Int'l Arb. No. 2 (1986); p. 64. TLDB Document ID: 128100.

7. Several classifications of impossibility have been introduced in the literature. Their value would seem to be in distinguishing different kinds of situations from another where the legal consequences of impossibility should be different. Often a distinction has been made between initial (pre-existing, original) and subsequent (intervening) impossibility. Initial impossibility refers to a situation where performance has been impossible already at the moment the contract was concluded, whereas subsequent impossibility refers to situations where performance was initially possible but became impossible after the conclusion of the contract. The division of impossibility into initial and subsequent seems to be useful since different kinds of solutions have been introduced to manage some of these situations. Initial impossibility may, for example, lead to the use of rules related to mistake or perhaps fraud and subsequent impossibility to the rules on frustration. (Supra. note 2.) Both the UNIDROIT Principles and the European Principles deal with such initial impossibility, respectively in Arts. 3.3 and 4:102, but such initial impossibility seems to be more appropriately related to the invalidity of contract caused by the defects of content, which is not covered under the CISG, rather than non-performance issue.

8. Supra. note 6, p. 47.

9. See Maskow, Dietrich in "Hardship and Force Majeure": 40 Am.J.Comp.L. (1992); p. 658. TLDB Document ID: 126400.

10. Sapphire v. National Iranian Oil Company award, March 15, 1963, I.L.R. (1967); 136 at 181. See also supra. note 5, p. 107.

11. See e.g., I.C.C. award No. 3383 (1979), Yb. Comm. Arb., 1982, 119 at 129; J.D.I., 1980, 978 at 981; I.C.C. award No. 5485 (1987), Yb. Comm. Arb., 1989, 156 at 168. One could contend that this has nothing to do with lex mercatoria, since this principle is embodied in practically all municipal legislations (however, not without differences as to its strength, and consequently as to its effects). It is to be noted, nevertheless, that very frequently, when they apply pacta sunt servanda arbitrators do not refer to a particular municipal legislation; they see the principle as a general one, which means that it is applied as an element of the lex mercatoria, and therefore, that its actual consequences are not to be taken from any municipal law whatsoever. (See J. Kunz in "The Problem of Revision in International Law": American Journal on International Law, Vol. 33 (1939), p. 42; and "The Meaning and Range of the Norm Pacta Sunt Servanda": American Journal on International Law, Vol. 39 (1945), p. 197. (Cf. Zakariya, Hasan in "Changed Circumstances and the Continued Validity of Mineral Development Contracts": Hossain ed., Legal Aspects of the New International Economic Order, London, New York (1980); at 263 et seq. TLDB Document ID: 118400.))

12. See Clive M. Schmitthoff, Schmitthoff's Export Trade, 8 ed. (1986); p. 146.

13. This situation is unlikely to arise with short-term contracts, which often exhibit a simple structure where non-performances are exchanged for money. In international trade, however, many contracts are of a more complicated structure, and even if they are not long-term contracts, they frequently exist over a substantive period. International trade transactions generally imply a greater element of uncertainty because they are subject to political and economic influences in foreign countries. (See Horn in "Die Anpassung langfristiger Vertrage im internationalen Wirtschaftsverkehr": kotz 9, v. Bieberstein ed. (1984).)

14. See Joseph M. Perillo in "Force Majeure and Hardship under the UNIDROIT Principles of International Commercial Contracts": Contratación internacional. Comentarios a los Principios sobre los Contratos Comerciales Internacionales del Unidroit, Universidad Nacional Autónoma de México - Universidad Panamericana (1998); p. 118. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/perillo3.html>.

15. See Brownlie, Ian, Principles of Public International Law, 4th ed., Oxford (1990); p. 620. TLDB Document ID: 100900. It is to be mentioned that some jurists dislike the doctrine, regarding it as a primary source of insecurity of obligations, more especially in the absence of a system of compulsory jurisdiction.

16. See Lissitzyn, Treaties and Changed Circumstanees, 61 AM. J. INT'L L (1967); pp. 895, 896. (Cf. Dickstein, Michael E. in "Revitalizing the International Law Governing Concession Agreements": 5/6 Int'l Tax & Bus. Lawy. (1987/88), at 75 et seq. TLDB Document ID: 121800.)

17. See Goldman, Berthold in "The Applicable Law: General Principles of Law - the Lex Mercatoria": Lew ed., Contemporary Problems in International Arbitration, London (1986); p. 125. TLDB Document ID: 112400.

18. See Zimmermann, Reinhard, The Law of Obligations: Roman Foundations of the Civilian Tradition, Munich Cape Town (1990); p. 579. TLDB Document ID: 109600.

19. ICC Award No. 1512, YCA (1976); p. 129. TLDB Document ID: 201512.

20. See e.g., Anaconda-Iran, Inc. v. Iran (1986 IV) 13 Iran-U.S.C.T.R. 199, pp. 211-212; INA Corporation v. Iran (1985 I) 8 Iran-U.S.C.T.R. 373, p. 441; QuesTech, Inc. v. Iran (1985 II) 9 Iran-U.S.C.T.R. 107, p. 120; Mobil Oil Iran (1987 III) 16 Iran-U.S.C.T.R. 3, p. 39; ICC award in case no. 5277, French Contractor v. Ministry of Irrigation of African Country X (1988) 13 Yb. Comm. Arb. 80.

21. Supra. note 18.

22. See Horn, Norbert in "Changes in Circumstances and the Revision of Contracts in Some European Laws and in International Law": Horn ed., Adaptation and Renegotiation of Contracts in International Trade and Finance, Antwerp, Boston, London, Frankfurt a.M. (1985); p. 17. TLDB Document ID: 113700.

23. Supra. note 2.

24. Supra. note 14, p. 116.

25. See Joern Rimke in "Force majeure and hardship: Application in international trade practice with specific regard to the CISG and the UNIDROIT Principles of International Commercial Contracts": Pace Review of the Convention on Contracts for the International Sale of Goods, Kluwer (1999-2000); p. 199. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/rimke.html>.

26. Supra. note 1, pp. 194-195.

27. Supra. note 5, p. 113.

28. See. J. Lauritzen A.S. v. Wijsmuller B.V. in "The Super Servant Two": 1 Llovd's Rep. (1990); p. 1. Also see E. McKENDRICK, Force Maieure and Frustration of Contracts, Lloyds London (1991).

29. Supra. note 1, p. 196.

30. Supra. note 27.

31. Supra. note 5, p. 114.

32. Supra. note 1, p. 198.

33. Supra. note 27.

34. Supra. note 1, pp. 196-197.

35. Supra. note 31.

36. See J. Westberg in "Contract Excuse in International Business Transactions: Awards of the Iran-U.S. Claims Tribunal": 4 ICSID Review (1989); p. 215.

37. Supra. note 25, pp. 197-198.

38. See Sornarajah, M., International Commercial Arbitration, Singapore (1990); p. 261. TLDB Document ID: 108700.

39. Supra. note 1, p. 200. The International Court of Justice has, on several occasions, examined the principle of fundamental change of circumstances, but has never outlined its exact scope and definition. In the Free Zones of Upper Savoy and the District of Gex, as well as the Fisheries Jurisdiction Case, the Court recognized the existence of the doctrine of rebus sic stantibus in principle, but held that it did not apply to the facts at hand.

40. Supra. note 5, p. 107.

41. See Rivkin, David R. in "Lex Mercatoria and Force majeure": Gaillard ed., Transnational Rules in International Commercial Arbitration, ICC Publ Nr. 480,4, Paris (1993); p. 165. TLDB Document ID: 116100.

42. Supra. note 38.

43. Supra. note 22, p. 25.

44. See Iran-US Claims Tribunal, Questech Inc. v. Iran, 9 IRAN-U.S. C.T.R. 9 - 122. TLDB Document ID: 231400.

45. Supra. note 1, p. 200. However, the Iran-US Claims Tribunal also comments that, in view of wider and narrower formulations of the clausula in different legal systems and of certain differences in its practical application, it would not be easy to establish a common core of such a General principle of law. (Supra. note 44)

46. Supra. note 20.

47. Supra. note 1, pp. 201-203.

48. Supra. note 1, p. 203.

49. Supra. note 22.

50. See Melis, Werner in "Force Majeure and Hardship Clauses in International Commercial Contracts in View of the Practices of the ICC Court of Arbitration": 1 J.Int'l Arb. (1984); p. 215. TLDB Document ID: 126600.

51. See Ugo Draetta in "Force Majeure Clauses in International Trade Practice": 5 Int'l Bus. L. J. (1996); p. 547.

52. Supra. note 2.

53. See, e.g., The Oxford Companion to Law (1980); p. 478; see also James Stroud's Judicional Dictionary II (1986); p. 1008.

54. See, e.g., Case 266/84 (1987) 3 CMLR 202, p. 223 ((1986) ECR 149).

55. See e.g., Case 158-73, ECR (1974) 101; Case 4-68, ECR (1968) 549.

56. Supra. note 50.

57. Supra. note 2.

58. See Wouter Den Haerynck in "Drafting Hardship Clauses in International Contracts": Structuring International Contracts, Dennis Campbell ed. (1996); pp. 231-232.

59. Supra. note 2.

60. See Clive M. Schmitthoff in "Hardship and Intervener Clauses": J. Bus. L. (1980). 82 at 85.

61. See Comment 1 on Art. 6.2.2 UPICC.

62. Supra. note 2.

63. Supra. note 22, p. 27.

64. Supra. note 25, p. 242.

65. Supra. note 9, pp. 663-664; see also supra. note 24, pp. 201-202.

66. Supra. note 64.

67. See Jacob S. Ziegel in "Report to the Uniform Law Conference of Canada on Convention on Contracts for the International Sale of Goods"(1981). Available online at <http://www.cisg.law.pace.edu/cisg/text/ziegel79.html>.

68. Supra. note 41, pp. 200-201.

69. Supra. note 25, pp. 242-243.

70. See Comment 1 on Art. 7.1.7 UPICC.

71. Paras. (a) and (b) of UPICC Art. 7.2.2 deal with impossibility and unreasonable burden respectively. Para. (c) requires that the obligee has a legitimate interest to demand performance. This rule could be seen as an expression of the principle of good faith or loyalty. It can also be seen to be directed towards a fair choice of remedies: where performance may reasonably be obtained elsewhere, the obligor's liability in damages is adequate to protect the obligee's interests. Para. (d) can be understood in conjunction with the laws, principles and international treaties on human rights: in many countries a person cannot be forced to work involuntarily. By contrast, Art. 7.2.1, which gives the obligee the right to require payment, does not contain any such grounds, so the party may only be exempted under the force majeure rule. (For more details in this regard, see the discussion in Chapter 3.)

72. See Comment 6 on Art. 6.2.2 UPICC.

73. Supra. note 2.

74. Ibid.

75. In such circumstances, the creditor may not proceed with his performance and recover the payments due if he could have made a reasonable cover transaction without significant effort or expense, or if performance would be unreasonable in the circumstances. In other words, the creditor must have a legitimate interest in the performance in cases where the debtor no longer is willing to accept the performance. (For more details in this regard, see the discussion in Chapter 3.)

76. Supra. note 2.

77. On the other hand, it is submitted that it may in many situations be artificial to require renegotiations from the parties. This may also cause unnecessary uncertainty. Furthermore, this may cause additional costs and take time, which may be against both of the parties' interests. Moreover, the possibility to compel a party to negotiate by the risk of liability in damages might easily be abused despite of the obligations of good faith and co-operation. (Supra. note 2.)

CHAPTER 20. FORCE MAJEURE

     It is generally recognized that force majeure is an excuse for non-performance of a contractual obligation which depends on the facts and circumstances. When there is a situation of force majeure, the performance of contractual obligations will, partially or totally, be suspended. Force majeure also can have the effect of terminating a contract if force majeure renders performance of the contract impossible in a definitive way or for a prolonged period of time.[1]

20.1 INTRODUCTION

As discussed previously in Chapter 19, different legal concepts exist in all legal systems dealing with the problem of changed circumstances and excusing a party from performance of its obligations when a contract has become unexpectedly onerous or impossible to perform. Some systems only accept a narrow range of excuses; others are more generous (e.g., the concepts of imprévision or hardship, force majeure or Wegfall der Geschäftsgrundlage).[2]

Generally speaking, the rules dealing with situations of changed or supervening contractual circumstances are oriented on the two basic concepts of hardship and force majeure - they constitute exceptions to the cardinal canon of pacta sunt servanda and ameliorate its strictness.[3] Hardship refers to the performance of the disadvantaged party having become much more burdensome, but not impossible, while force majeure refers to the performance of one party's obligations that has become impossible, even on a temporary basis. This chapter will now proceed with a more detailed review of the relevant provisions on force majeure. This Chapter chooses the term "force majeure", which covers (nevertheless is identical with none of) 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., as its heading because it is widely known in international trade practice, as confirmed by the inclusion in many international contracts of so-called "force majeure" clauses.

20.2 RELEVANT TEXTS

20.2.1 Exemptions: CISG Art. 79

Under the CISG, one of the most important reasons for exemption is force majeure which is described in Art. 79,[4] though not denominated as such. Art. 79 is the provision of the CISG, that deals with situations of changed circumstances, which is like its predecessor, Art. 74 of ULIS,[5] and again placed under the heading of "Exemption".[6] Art. 79 reads as follows:

Art. 79 deals with the circumstances in which the buyer or seller may be excused from performance of his contractual obligations because of an extraneous event that is judged sufficiently important to warrant the excuse--what in the common law is referred to as frustration of the contract and in civilian legal systems under such headings as force majeure, cause étrangère, and Wegfall der Geschaftsgrundlage.[7]

Art. 79, like its predecessor, art. 74 of ULIS, is more civilian than common law in its conception,[8] governing the extent to which a party is exempted from liability for a failure to perform any of his obligations because of an impediment beyond his control.[9] Paras. (2) and (4) fill particular gaps left by the ULIS text, but do not raise any questions of wider interest. It is paras. (1), (3) and (5) which correspond to the ULIS text, and it will be seen that the most obvious changes are in matters of drafting: the new text is very much more economical and elegant in its formulation. So far as matters of substance are concerned, the noticeable changes are (a) the substitution in para. (1) of "impediment" for "circumstances", and (b) the replacement of the old para. 2 by the new, and very brief, para. (3).[10]

Briefly speaking, para. (1) describes the circumstances when a party "is not liable" for a failure to perform any of his obligations. Para. (2) is an extension of the first paragraph and is concerned with the effect of non-performance by a third party whom the contracting party has engaged to perform some of his duties. Para. (3) regulates the period of the exemption and para. (4) imposes a duty of notification on the party failing to perform. Para. (5) deals with the consequences of the non-performance and the remedies available to the parties.

20.2.2 Force Majeure: UNIDROIT Principles Art. 7.1.7

Art. 7.1.7 of the UNIDROIT Principles seems to be very similar to Art. 79 CISG, and reads under the heading "Force Majeure" as follows:

Like the CISG, the UNIDROIT Principles rely on the same exemption principle. But it seems to approach the real problems in a more direct manner, corresponding to the situations in which these problems occur.[11] In both cases the respective article starts with a paragraph saying that a party is not liable for a failure to perform or that a party's nonperformance is excused if the said circumstances occur. In this respect, the prerequisites for an exemption in UPICC Art. 7.1.7 (1) are almost identical to those in CISG Art. 79(1).

However, UPICC Art. 7.1.7 contains no provisions such as CISG Art. 79(2) on third persons, and is therefore more lenient, but it is said that the same rule would follow from the concept of force majeure as defined in Art. 7.1.7(1) UPICC.[12] In the remaining paragraphs of the provisions two differences may be noted. Para. (3) in CISG Art. 79 provides for the case of a temporary non-performance that "the exemption provided by this article has effect for the period during which the impediment exists". In the UNIDROIT Principles (para. (2)) the rule is framed more flexibly: "when the impediment is only temporary, the excuse shall have effect for such a period as is reasonable taking into account the effect of the impediment on performance of the contract." Another difference is that, unlike in CISG Art. 79(5), Art. 7.1.7(4) does not limit the scope of the article to damages only. Art. 7.1.7 exempts the non-performing party both from performance and damages (at least for the time performance is affected by the impediment), though its primary aim is in releasing the obligor from liability in damages. It is said that para. (5) of CISG Art.79, which seems to warrant the right to claim performance even if performance has become permanently impossible, has been replaced by a rule specifying that force majeure does not prevent a party from exercising a right to terminate the contract or withhold performance or request interest on money due (Art. 7.1.7(4)).[13]

Thus, the function of force majeure under the UNIDROIT Principles as an exemption has been enlarged in comparison with the CISG. In Art. 79 CISG the effect of the exemption is reduced to claims for damages only. All other claims are allowed, so that one might even ask whether penalties are allowed, which in someone's view would be absurd. But performance in general can be claimed in spite of the existence of exemptions which has led to a vivid discussion. The UNIDROIT Principles use quite the opposite approach. They adhere to the principle that the excuse is general, but in Art. 7.1.7(4) they make important exceptions in determining certain claims which are not affected by force majeure, namely the right to terminate the contract or withhold delivery or request interest on money due. That means that in case of force majeure, performance cannot be claimed, including, of course, damages and penalties.[14]

20.2.3 Excuse Due to an Impediment: PECL Art. 8:108

Under the PECL, a rule similar to CISG Art. 79 is provided for in Art. 8:108, which reads under the heading "Excuse Due to an Impediment" as follows:

There is an apparent similarity in the wording of the corresponding PECL provisions to Art. 79 CISG, since the conditions laid down in the first paragraph for the operation of Art. 8:108 PECL are analogous to the conditions traditionally required for force majeure: (a) event outside the debtor's sphere of control ("impediment beyond its control"); (b) which could not have been taken into account ("it could not reasonably have been expected to take the impediment into account at the time of the conclusion of the contract"); and (c) of insurmountable nature ("or to have avoided or overcome the impediment or its consequences").

However, the differences in the scope of the two regimes become clear when a regard is had to the PECL commentary, which helps explain its provisions. The scope of application of Art. 8:108 is defined by Comment A to the PECL, which states: "Article 8:108 governs the consequences when an event which is not the fault or responsibility of a party prevents it from performing. The Principles also contain a provision for revision of the contract if unforeseen circumstances supervene and makes performance excessively onerous (Article 6:111). Thus, unlike the equivalent article of CISG [...] Article 8:108 has to apply only in cases where an impediment prevents performance."[15]

Furthermore, according to Art. 8:101(2) PECL, where there is an impediment which fulfils the conditions set by PECL Art. 8:108, the aggrieved party may resort to any of the remedies set out in PECL Chapter 9 except claiming performance and damages. Thus, in contrast with the approach adopted by the UNIDROIT Principles, which adhere to the principle that the excuse is general, but in Art. 7.1.7 (4) make important exceptions in determining certain claims which are not affected by force majeure, the PECL follows a similar approach to the CISG, which specifies the cases where the breaching party is exempted by such impediments; but on the other hand, expressly unlike the CISG, which only provides the breaching party with a defense against an action for damages, Art. 8:101(2) PECL provides that, if the non-performing party is excused under PECL Art. 8:108, he will have a defense against an action for specific performance (PECL Arts. 9:101 and 9:102) and damages (including liquidated damages).

20.2.4 Comparison

Force majeure is one of the two major legal concepts dealing with the problem of changed circumstances. All the three texts mentioned above define it in the term "impediment", although under different heading. The descriptions of events that constitute force majeure for the three texts are exactly the same: they all permit the exoneration of the party who was unable to perform its obligation due to an event beyond its control that was unforeseeable at the time of conclusion of the contract, and that is insurmountable. However, some take the view that the descriptions in the three texts are not exactly the same as force majeure as it is usually understood by international commercial arbitrators: " ... force majeure as defined under anational law is the only possible case of impossibility of performance". What is described in Art. 79 CISG, Art. 8:108 PECL and Art. 7.1.7 UNIDROIT Principles is a similar notion, but more flexible, as they do not require absolute, but rather only relative impossibility in order to be applicable.[16]

However, neither Art. 7.1.7 UPICC nor Art. 8:108 PECL contains provisions such as CISG Art. 79(2) on third persons. Nonetheless, the same rule would follow from the term "impediment" used in Arts. 7.1.7(1) UPICC and 8:108(1) PECL. The term "impediment", covers every sort of event (natural occurrences, restraints of princes, acts of third parties).[17] In matters of temporary non-performance, for the European Principles, like the CISG, the excuse for non-performance is only available during the time that performance is impossible, not more, not less; whereas under the UNIDROIT Principles the excuse is available for "such period as is reasonable, having regard to the effect of the impediment on the performance of the contract". Nonetheless, PECL Art. 8:108(3), similar to both CISG Art. 79(4) and UPICC Art. 7.1.7(3), provides for the non-performing party's duty to notify the aggrieved party. It is apparent that the three texts put risk of non-receipt or delay on receipt of the notice (non-communication or delay in communication) on the sender in case of force majeure. If notice of the impediment and of its effect on its ability to perform is not received by the creditor of the obligation, the non-performing party will be liable for damages resulting from such non-receipt.

The most important thing is to consider the effects of such qualifying impediments or the fate of the contract in cases of force majeure. On the one hand, the UNIDROIT Principles adhere to the principle that the excuse is general, but in Art. 7.1.7(4) they make important exceptions in determining certain claims which are not affected by force majeure, namely the right to terminate the contract or withhold delivery or request interest on money due. By contrast, both the CISG and the PECL generally permit the aggrieved party to resort to any of the remedies in case of force majeure, but specify the remedies which the aggrieved party can't resort to: respectively to claim damages under the CISG (Art. 79(5)), and to claim performance and damages under the PECL (Art. 8:101(2)). On the other hand, in case of temporary impediment (infra. 21.5) the UNIDROIT Principles provide that 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 (Art. 7.1.7(2)), while according to the CISG (Art. 79(3)) or the European Principles (Art. 8:108(2)) the effect of the excuse is limited to the period during which the impediment exists; even in case of total and permanent impediment the CISG (Art. 79(5)) or the UNIDROIT Principles (Art. 7.1.7(4)) make termination dependent on the initiative of the parties, while the European Principles provide for automatic termination of the contract in such cases (Art. 9:303(4)).

Finally, it is of great significance to note that international commercial contracts often contain much more precise and elaborate provisions in this regard, since none of the three texts is mandatory. The rules governing force majeure are expressed in fairly general terms, permitting the parties to provide more concise provisions in their agreement, adapted to their particular situation. The party may therefore find it appropriate to adapt the content of the three texts, and may modify the allocation of the risk of impossibility of performance, either in general or in relation to a particular impediment so as to take account of the particular features of the specific transaction. Usages (especially in carriage by sea) may have the same effect.[18]

20.3 GENERAL RULE

20.3.1 Scope of Excusable Non-performance

Paras. (1) of the three texts, namely Art. 79(1) CISG, Art. 7.1.7(1) UPICC and Art. 8:108(1) PECL, set out the conditions under which a party is not liable for a non-performance or his failure to perform any of his obligations. The expression "failure to perform" does not specify the nature of the non-performance. Thus, the scope of this expression has to be analyzed first.

In this respect, one of the controversial issues is whether the texts may apply, especially under the CISG when the seller delivers defectivegoods as opposed to a situation of non-delivery or late delivery: "The possibilities of exemption in the case of non-conformity are unusual for the common law, so that differences of opinion become visible where interpretation is concerned. The CISG uses the notion 'impediments' [...] and no longer mentions 'circumstances' as in Article 74 ULIS, the discussion of which had been controversial already at that time. Honnold [...] has tried to assess this fact in such a way as to explain that this modification was to exclude exemption in the event of non-conformity. This is doubted even by other common law representatives [...], and this has been rightly contradicted by others [...]. The clear wording of the introductory part of the article cannot be changed by pretending that an impediment could not cause non-conformity [...]. But we, too, are of the opinion that these differences of opinion are of little practical weight, because impediments as defined in Article 79, paragraph 1 will seldom be the cause of non-conformity [...]"[19] Anyway, according to the English text itself, excuse may be brought up by a party for failing to perform "any of his obligations", and conformity of the goods is unquestionably an obligation of the seller. Therefore, the obligation to deliver conforming goods also comes within the scope of Art. 79.

Also, Art. 79 does not provide for the situation where only part of the performance is prevented. It refers to a failure of any obligation, but does not lay down the consequences of the non-performance of the contract as a whole. Honnold notes that the language of the provision permits exemption to the extent that the impediment applies. This can be supported by Art. 51(1) allowing remedies to apply in respect of partial breach. The promisee's rights to other remedies would not be impaired.[20] The PECL also conceives partial impediment when discussing the consequences of force majeure: "It is primarily in the case of a partial impediment, when a divisible part of the main obligation or a secondary obligation becomes impossible, that the creditor has a real choice; it must be permitted to decide whether or not to maintain the contract according to whether partial performance will be of any value to it."[21]

In short, the term "failure to perform" must be considered here in the broadest sense of the word. With regard to excusable non-performance, apart from late performance and non-performance (at all) it includes, in particular, non-conforming performance and partial performance. Accordingly, the excused non-performance may be total or partial, delayed or defective and relates to the obligations of both parties.

20.3.2 Existence of Qualifying Impediment

20.3.2.1 Introduction of a new word

As mentioned above, the CISG Art. 79 uses the notion "impediments" and no longer mentions "circumstances" as in Art. 74 ULIS. Thus, for an exemption to be granted, the non-performance of the contract must be due to an "impediment". The word "impediment" is all that emerged in the end from a lengthy attempt to escape from the elasticity and imprecision of the ULIS requirement that non-performance be "due to circumstances . . ." and to formulate some more certain and objective criterion.[22]

By adopting the word "impediment" the Vienna Conference's aim was at emphasizing the objective nature of the hindrance rather than its personal aspect.[23] The CISG drafters chose the term "impediment" to denote an objective, outside force that interferes with performance. It is important to stress that the Convention has developed a concept of its own in regard to impediments, which cannot be directly traced back to any national law. This saves from borrowing from a domestic law in interpretation, which could be very misleading, especially when it comes to one's own domestic law.[24] Both the UNIDROIT Principles and the PECL follow the CISG approach in using the same term "impediment".

This wording, however, is very general and the actual meaning of the term "impediment" is unclear. None of the three texts specify the meaning of "impediment". This causes problems in determining the scope of the exemption. Presumably it covers physical impediments (notably destruction of specific goods under a contract for the sale of specific goods) and legal impediments such as the outbreak of hostilities or the imposition of foreign exchange controls.[25]

20.3.2.2 Interpretation of the word

In interpreting the concept of "impediment" we should, in the words of Honnold, "purge our minds of presuppositions derived from domestic traditions and, with innocent eyes, read the language of Article 79 in the light of the practices and needs of international trade." Furthermore, performance has to be prevented by the impediment.[26] According to Stoll, who sees Honnold's definition of impediment as too narrow, the term refers to events external to the party in breach which may be "natural, social, or political events or physical or legal difficulties." Purely personal circumstances, such as personal inadequacy or a mistake of law could not amount to an impediment within the meaning of Art. 79.[27]

Among other things, impediments within the scope of CISG Art. 79 should include: Acts of God (e.g. earthquake, lightning, flood, fire, storm, crop failure, etc.); events relating to social and/or political circumstances (e.g. war, revolution, riot, coup, strike, etc.); legal impediments (e.g. seizure of the goods, embargo, prohibition of the transfer of foreign funds, the prohibition or restriction of foreign imports and/or exports, etc.); and other types of impediments (e.g. loss of the carrying vessel, theft, robbery or sabotage during storage or carriage, general strike, general power supply cut). The occurrence of any of the aforesaid events may (1) destroy the seller's premises or factory, (2) prevent the seller, the carrier, or the warehouse operator from delivering the goods to the buyer or his agent, (3) cause damage to or total or partial loss of the goods, or (4) prevent the buyer from paying the price. It is to be stressed that, events within the promisor's personal sphere of responsibilities and risks shall not be considered impediments for purposes of CISG Art. 79. Accordingly, business failures, personal incapability, liquidation or bankruptcy, failure of production or accounting systems, failure of data processing equipment, failure to maintain the necessary personnel,illness, death or arrest of the promisor, incapability of the promisor's supplier to provide him with raw material, strike constituting internal confrontation at a factory (a general strike, however, shall constitute an impediment), or excessive increase in the price of the raw material should not discharge the promisor from his obligation to perform.[28]

It is important to mention, however, that such events shall not per se constitute impediments for the purposes of CISG Art. 79 or the other two texts, since the characterization of an event as an impediment will depend upon the circumstances of each individual case. It must be characterized as beyond control, unforesseable and unavoidable or insurmountable. Furthermore, the existence of a qualifying impediment to non-performance does not "frustrate" or automatically terminate the contract. The contract apparently continues to exist unless and until it is avoided. The only immediate effect is to excuse the non-performing party from certain liability for failure to perform.

20.3.2.3 Problematic situations

Generally speaking, the term "impediment" may cover every sort of event (natural occurrences, restraints of princes, acts of third parties).[29] However, there are some particular situations where controversies exist:

(a) Financial embarrassment

One of the controversial points in the preliminary UNCITRAL discussions was whether economic difficulties - "unaffordability" - constitute a ground for exemption. In the view of Schlechtriem, the general view in the end was probably that both physical and economic impossibility could exempt an obligor. It cannot be concluded, therefore, on the basis of the change in terminology from "circumstances" in ULIS Art. 74(1) to "impediments" that an impediment in the sense of Art. 79(1) of the Convention is only an occurrence that absolutely bars performance, but - under very narrow conditions - impediment also includes "unaffordability". As a rule, however, since the obligor generally guarantees his financial capability to procure and produce the promised goods, increased procurement and production costs do not constitute exempting impediments.[30]

Perillo seems to deal with this situation in a stricter manner when studying Art. 7.1.7 UPICC: "Neither Article 7.1.7 nor the commentary to it refers to this kind of impediment. Under American law, it is quite clear that financial impediments provide no excuse; these are regarded as 'subjective' rather than 'objective' impossibility and there is unanimity in the case law and in doctrine that subjective impossibility provides no excuse, whether or not it was the result of conditions outside the control of the obligor. It is generally believed that the risk of financial ability to perform is such a basic assumption underlying all contracts that it cannot be excused, except by a decree in a bankruptcy proceeding. It is hard to believe that this general belief is suspended in international trade. Consequently, the phrase 'beyond [the party's] control' should be given a broad meaning so that it will be deemed that financial health is always within a contracting party's control."[31]

One should note, however, although it is probably true that the insolvency of the buyer by itself is not an impediment which exempts the buyer from liability for non-payment of the price, the unanticipated imposition of exchange controls, or other regulations of a similar nature may make it impossible for him to fulfill his obligation to pay the price at the time and in the manner agreed.[32] The Official Comment to Art. 8:108 PECL also confirms: "While insolvency would not normally be an impediment within the meaning of the text, as it is not 'beyond the control' of the debtor, a government ban on transferring the sum due might be."[33]

(b) Frustration of purpose

Also, it is not clear to what extent "impediment" may embrace frustration of the purpose of the contract. The CISG drafters chose the term "impediment" to denote an objective, outside force that interferes with performance. According to Honnold, Art. 79 includes a causation element -- the impediment must actually prevent performance. Other commentators, however, have noted that Art. 79 also encompasses the U.S. notion of "frustration of purpose." Thus, Art. 79 may excuse performance where an impediment either renders performance impossible or frustrates the purpose of the contract. Notably, however, Art. 79 does not include the U.C.C. doctrine of "commercial impracticability" (§ 2-615). In addition, it is not entirely clear that frustration of purpose falls within the scope of Art. 79. Indeed, the plain language of Art. 79 suggests that it does not cover frustration of purpose because a frustration "impediment" does not obstruct performance. Instead, frustration merely makes a party not want to perform. Therefore, in order to protect clients engaging in CISG contracts, practitioners should consider including a carefully-drafted and -negotiated force majeure clause (see Chapter 22) that covers frustration of purpose, commercial impracticability, or both.[34]

Although Art. 79 does not use the term impossibility. The requirement that performance be prevented does, however, seem to refer to impossibility instead of impracticability or other less forceful event.[35] According to Schlechtriem, however, it cannot be concluded that an impediment in the sense of Art. 79(1) of the Convention is only an occurrence that absolutely bars performance.[36] The Official Comment to Art. 7.1.7 UPICC makes it clear that, this Article covers the ground covered in common law systems by the doctrines of frustration and impossibility of performance, but it is identical with none of these doctrines.[37] Again, it is to be stressed that the Convention has developed a concept of its own in regard to impediments, which cannot be directly traced back to any national law. This saves from borrowing from a domestic law in interpretation, which could be very misleading, especially when it comes to one's own domestic law.[38]

(c) Pre-contractual impediment

Finally, the three texts are silent on the point of the time of the impediment's occurrence. Therefore, the question arises as to whether they apply in situations where the impediment existed at the time of the conclusion of the contract and was unknown to both parties. The Secretariat Commentary affirms, without justifying its position, that Art. 79 applies to this case: "The impediment may have existed at the time of the conclusion of the contract. For example, goods which were unique and which were the subject of the contract may have already perished at the time of the conclusion of the contract."[39] From this point, Rimke submits that Art. 79, in its general wording, applies to non-performances that may have occurred at any time.[40]

However, the two Principles seems to be more correct in regarding this situation as defects of content causing the invalidity of contracts, which is not covered under the CISG, rather than non-performance. The Official Comment to Art. 8:108 PECL makes it clear: "It is conceivable that an impediment at the time the contract was made existed without the parties knowing it. For example, the parties might sign a charter of a ship which, unknown to them, has just sunk. This situation is not covered by Article 8:108 but the contract might be avoidable under Article 4:103, Mistake as to Facts or Law."[41] Similarly, this situation under the UNIDROIT Principles is not covered by Art. 7.1.7 but the contract affected by such impediments may be avoided under Arts. 3.4 and 3.5, i.e. relevant mistake.[42]

20.3.3 Conditions for Exempting Impediment

The provisions on force majeure are rigid. The exemption becomes effective only when the "failure to perform" or non-performance is based on an impediment which is proved by the non-performing party to cumulatively fulfil the following four conditions:

20.3.3.1 Beyond control

First, the obstacle must be something outside the debtor's sphere of control. According to Art. 79(1) CISG, Art. 7.1.7(1) UPICC or Art. 8:108(1) PECL, an exemption is permitted only when the impediment to performance is beyond the obligor's control.

According to Stoll, this requirement is based on the assumption that there is a typical sphere of control: a sphere within which it is objectively possible for, and can be expected of, the promisor to be in control.[43] Within the control of the seller are all those factors which are connected with an orderly organisation of his manufacturing and/or procurement process, as are the personnel's qualifications, the technical equipment and the disposition of the required financial means to ensure manufacture and procurement. His control also includes that he disposes of the required financial means to ensure manufacture and procurement, timely takes care of needed sub-supplies, and does all that is in his power to obtain authorizations by the State.[44] Accordingly, Schlechtriem submits that the obligor is always responsible for impediments when he could have prevented them but, despite his control over preparation, organization, and execution, failed to do so. In this sense, the obligor "guarantees" his ability to perform. If he wishes to restrict his liability, he must specify the particular impediments for which he will not be liable.[45]

In requiring that the impediment must be beyond the control of the party concerned, the scope of risk of the latter is determined, though only roughly.[46] "The risk of its own activities it must bear itself. Thus the breakdown of a machine, even if unforeseeable and unpreventable, cannot be an impediment within the article and this avoids investigation of whether the breakdown was really unforeseeable and the consequences unpreventable. The same is true of the actions of persons for whom the debtor is responsible, and particularly the acts of the people it puts in charge of the performance. The debtor cannot invoke the default of a subcontractor unless it was outside its control - for instance because there was no other subcontractor which could have been employed to do the work; and the impediment must also be outside the subcontractor's sphere of control."[47]

20.3.3.2 Unforeseeable

Secondly, the impediment must be one that could not have been taken into account at the time the contract was made. The obligor is liable even for impediments beyond his control, as long as they were either reasonably foreseeableor known to him at the conclusion of the contract. In lots of cases, the arbitrators have rejected the existence of force majeure because the element ofunforseeability was lacking.[48] This rule has been adopted by most domestic systems and is consistent with the basic idea that if the event was foreseeable, the defaulting party should, in the absence of any contrary contractual provision(s), be considered as having assumed the risk of its realization.[49] If there is a realistic risk of an impediment to performance and the contract is nevertheless unconditionally entered into, the risk of the impediment has been assumed and exemption cannot be successfully claimed.[50]

However, the question of foreseeability is a difficult one. All potential impediments to the performance of a contract are foreseeable to one degree or another. Such impediments as wars, storms, fires, government embargoes and the closing of international waterways have all occurred in the past and can be expected to occur again in the future.[51] In this respect, it is said that the case law supports the following notion of foreseeability: An event so unlikely to occur that reasonable parties see no need explicitly to allocate the risk of its occurrence, although the impact it might have would be of such magnitude that the parties would have negotiated over it, had the event been more likely.[52] In the end, most of the phenomena that might become impediments are foreseeable. It is, however, not expected that such events are taken into account which, given general foreseeability, are not expected to materialize before the contract is performed and/or if they do nevertheless, they are at least not expected to have an effect on it. These expectations are further qualified in stipulating that they will have to be reasonable, i.e. that it is proceeded in the customary way, like comparable parties would do. Thereby, an objectivization is effected.[53]

It may be relevant whether the parties could have taken into consideration not just the event itself but the date or period of its occurrence. Foreseeability must be appreciated at the time of the conclusion of the contract. Again, the initial impossibility is not to be discussed here. However, it is a question of whether the promisor ought to have reasonably foreseen a realistic possibility that an impediment to performance would occur. In this respect, Tallon submits: "Foreseeability should not only relate to the impediment per se, but also to the time of its occurrence. The closure of the Suez Canal was, for example, foreseeable in the more or less distant future."[54] Nonetheless, according to Stoll, the judge or arbitrator should neither refer to an excessively concerned "pessimist who foresees all sorts of disasters" nor to a "resolute optimist who never anticipates the least misfortune".[55] The Official Comment to the PECL confirms: "A price control for some period may be foreseeable, but it could be an excuse if the period for which it is kept in force was not foreseeable by the parties. Equally it is stated that the test is 'reasonable' foreseeability : that is to say, whether a normal person, placed in the same situation, could have foreseen it without either undue optimism or undue pessimism. Thus in a particular area cyclones may be foreseeable at certain times of year, but not a cyclone at a time of year when they do not normally occur - that would not be reasonably foreseeable by the parties."[56]

Frequently, the parties to the contract have envisaged the possibility of the impediment which did occur. Sometimes they have explicitly stated whether the occurrence of the impending event would exonerate the non-performing party from the consequences of the non-performance. In other cases it is clear from the context of the contract that one party has obligated himself to perform an act even though certain impediments might arise. In either of these two classes of cases, Art. 6 CISG assures the enforceability of such explicit or implicit contractual stipulations. However, where neither the explicit nor the implicit terms of the contract show that the occurrence of the particular impediment was envisaged, it is necessary to determine whether the non-performing party could reasonably have been expected to take it into account at the time of the conclusion of the contract. In the final analysis this determination can only be made by a court or arbitral tribunal on a case-by-case basis.[57]

Everything regarding foreseeability, therefore, is a matter of measure, and it seems difficult to provide more details in a general text.[58] This second condition, which an impediment to cause an exemption will have to fulfill, describes in a very flexible manner the criterion of foreseeability, which may nevertheless be particularly specified from the force majeure clauses.[59] However, it is important to understand that, in the assessment of the foreseeability factor, other circumstances should also be considered, such as the duration of the contract (the longer the duration, the less likely the contracting parties will be able to foresee possible impediments), the fact that the price of the goods sold tends to fluctuate in the international market, or the fact that early signs of the impediment were already obvious at the time of the conclusion of the contract.[60]

20.3.3.3 Unavoidable or insurmountable

Thirdly, even if the non-performing party can prove that he could not reasonably have been expected to take the impediment into account at the time of the conclusion of the contract, he must also prove that he could have neither avoided the impediment nor overcome it or the consequences of the impediment. This rule reflects the policy that a party who is under an obligation to act must do all in his power to carry out his obligation and may not await events which might later justify his non-performance. This rule also indicates that a party may be required to perform by providing what is in all the circumstances of the transaction a commercially reasonable substitute for the performance which was required under the contract.[61]

As it does with regard to foreseeability, reasonableness also qualifies the condition that the impediment must be insurmountable or irresistible. It must be emphasised that both conditions - that the party could not have avoided it and could not have overcome it - must be fulfilled before an excuse can operate. The party to be excused must prove that it could not have done either.[62] It is in line with the general liability of the parties in regard to the obligations they have assumed that they have to counteract impediments. The two main forms of doing so are mentioned here. First, disturbances will have to be avoided. In order to achieve this, measures will have to be taken against such impediments which are generally looming ahead but cannot, a priori, be put in relation to the fulfilment of concrete obligations. These include measures of protection against accidents and specifically fire; a factory management which guarantees peaceful labour relations; etc. Above all, measures have to be taken against disturbances which are clearly approaching. Second, where a disturbance has already revealed itself, it has to be overcome as speedily as possible invoking, for instance, remedies against hindering decisions by the State insofar as they have a chance of succeeding. It is the requirement of overcoming which is aimed at removing the consequences of disturbances. Hence, the effects of accidents have to be removed fast.[63]

Thus, the basis of reference is what can reasonably be expected from the party concerned, one cannot expect the debtor to take precautions out of proportion to the risk (e.g. the building of a virtual fortress) nor to adopt illegal means (e.g. the smuggling of funds to avoid a ban on their transfer) in order to avoid the risk.[64] "The yardstick used to measure the efforts of the party concerned is again what can reasonably be expected from him. And that is what is customary, or what similar individuals would do in a similar situation. The exemption is thus granted when efforts would have been necessary that go beyond the former."[65] Therefore, an impediment may be avoided or overcome, for example, by choosing another form of transport or another route (like shipping the goods via the Cape of Good Hope instead of the Suez Canal) or even by delivering a commercially reasonable substitute for the performance which was required by the contract. However, the promisor should not be expected to risk his own existence by performing his obligations at all costs. Avoidance should take place in the most effective manner from an economic point of view, that is, with conclusion of an insurance contract (if this is the norm and it is available), with the insertion of special clauses in the contract of sale, or with the adaptation of the price in order to reflect assumption of the risks by the seller or the buyer.[66]

In a word, again reference should be made to the reasonable person, and a case-by-case analysis will be necessary.[67]Whether an event could have been avoided or its consequences overcome depends on the facts.[68]

20.3.3.4 Causation

Finally, the decisive prerequisite for an impediment to be taken into consideration is its causality in regard to the breach of contract.

Tallon believes that impediment should be the only cause for the promisor's non-performance so as to exempt the non-performance.[69] Unlike Tallon, Eiderlein & Maskow are of the opinion that, it cannot be required that the impediment is the exclusive cause of a breach of contract. This is true not only of cases in which it covers the breach of contract only partially, but the impediment should also be accepted when a cause overtakes another cause. It is decisive whether the impediment lastly has caused the breach of contract.[70]

Nevertheless, if a party has breached by delay and an impediment arises thereafter, the impediment will not excuse the non-performance. There will be no excuse if an unforeseeable event impedes performance of the contract when the event would not have affected the contract if the party had not been late in performing.[71]

20.4 RESPONSIBILITY FOR THIRD PARTIES

Another problem is how far the debtor is responsible for failure of a third person whom he has engaged to perform his obligations. Under modern conditions, most contracts are not performed in fact by the contracting parties personally.[72] It often happens that the non-performance of a party is due to the non-performance of a third person.[73]

Accordingly, Art. 79(2) CISG makes excuse for the debtor in these cases and stipulates that the promisor is liable for the conduct of a third person engaged to perform all or part of the contract on the promisor's behalf. It is to be welcomed that the CISG, by contrast to Art. 74 ULIS, directly bears on the problem of exemption where a breach of contract is caused by a third party, even if an interpretation of the relevant rule in detail proves to be difficult.[74] Art. 8:107 PECL also deals with one aspect of this modern division of labour, namely the contracting party's responsibility for non-performance, and reads: "A party which entrusts performance of the contract to another person remains responsible for performance." The basic principle under Art. 8:107 PECL is that if a party does not perform a contract personally but entrusts performance to a third person, it remains nevertheless responsible for the proper performance of the contract vis-à-vis the other party. The internal relationship between the party and the third person is irrelevant in this context. The third person may be subject to instructions of the party, such as an employee or an agent; or he may be an independent subcontractor.[75]

However, Art. 79(2) CISG seems to pose stricter conditions for the exemption of the promisor who must prove that the conditions of the Art. 79(1) CISG are fulfilled not only in relation to himself, but also in relation to the third person. It thus makes excuse for the debtor in these cases more difficult. To the contrary, Eiderlein & Maskow attempt to demonstrate in comparing a classic supplier and a classic sub-contractor, that the differences between the two paragraphs are not that great and that, above all, it cannot be said whether the one or the other of the two paragraphs offers a basis for stricter liability. The attempt to compare the strictness of the two norms is misleading. It seems to be correct to say that a differentiation of Art. 79 between paras. (1) and (2) aims toward finding proper solutions for different circumstances. This fiction has the effect that there will not necessarily be congruence in assessing the claims which are asserted vis-à-vis the engaging party, on the one hand, and his claims for recourse vis-à-vis the third party, on the other. This is the case, in particular, where the non-performance is caused by a carrier who can obtain exemption for other reasons.[76] It has to be taken into account that it will not be easy for the engaging party to prove impediments when the third party can obtain exemption on completely different grounds. Therefore, neither the UNIDROIT Principles nor the European Principles continue to contain a particular rule as Art. 79(2) CISG dealing with the exemptions where third party is involved, and is therefore more lenient. The Official Comment to Art. 8:107 PECL explicitly applies the same standards under Art. 8:108 PECL where the contracting party has entrusted performance of the contract to another person (third party) for the impediment to exempting the contracting party's non-performance.[77]

Practically speaking, the discussion of Art. 79(2) CISG revolved around the liability for secondary suppliers and subcontractors. Art. 79(2) does not illustrate the type of third party that was intended. In addition, the Article does not explain the meaning of "engaged to perform the whole or a part of the contract". Thus, the scope of Art. 79 as applied to third parties is not entirely clear. It is particularly doubtful whether it includes the suppliers of the seller. In this respect, Flambouras suggests that the seller's suppliers should not be considered third persons for the purposes of CISG Art. 79(2), since such persons simply create the preconditions or assist in the preparation for the performance of the promisor's obligation without, however, performing all or part of the actual contract as CISG Art. 79(2) requires. This opinion is supported by recent judgments and arbitral awards.[78] Jenkins submits: "Non-performance by a general supplier of goods would not constitute the kind of impediment necessary for the seller to qualify individually under article 79. Although more comprehensive in the types of third parties, the availability under the Convention is more restrictive because of the scope of impediment necessary to establish the right to an exemption."[79] These submissions are confirmed by the Secretariat Commentary, which states that the third person must be someone who has been engaged to perform the whole or a part of the contract. It does not include suppliers of the goods or of raw materials to the seller.[80]

Rather, with regard to the meaning of "third person", the history of CISG Art. 79 suggests that it only covers persons who are acting independently and are neither within the promisor's organizational sphere nor under his responsibility. Enderlein & Maskow submit: "The fact that a third party carries out a performance directly vis-à-vis another party may indicate that he is a third party in the meaning of the CISG. As to its definition, the third party has to be legally independent of the party for whom he works. But it is, in our opinion, not required and not necessary that he be economically independent."[81] The legislative history behind Art. 79 suggests that the third party must be more than the seller's general supplier. While not agreed to as the exclusive or sole source, the third party must stand in a delegated contractual relationship such as a subcontractor.[82] Nonetheless, according to Schlechtriem, the seller is not liable for secondary suppliers when they are beyond his control and their failure could neither be taken into account nor cured. This would apply in cases where the seller could not choose nor control his suppliers and it was not possible to procure, produce or repair the goods in any other manner.[83] But it is a case applying the normal requirements under Art. 79(1) instead of Art. 79(2).

Thus, in the application of Art. 79 CISG, three situations must be distinguished. First, the obligor is always responsible for his own personnel, as long as he organizes and controls their work. Deficiencies and poor performance caused by individual workers, therefore, do not exempt him from liability. Second, where third persons are involved, the seller's liability depends on whether he engaged these persons in fulfillment of his contractual obligations to the other party. If he did so the obligor can only be exempted where the failure was, for the obligor himself, unforeseeable and beyond his control (Art. 79(2)(a) in conjunction with para. (1)) and the third party personally meets the requirements for exemption from Art. 79(1) (Art. 79(2)(b)). Finally, Art. 79(1) remains the controlling provision in cases where the third party's performance is a mere precondition for the fulfillment of the obligor's obligations, i.e., where a third party does not directly fulfill the obligor's duty to the obligee. In particular, the seller is therefore not liable for secondary suppliers when they are beyond his control and their failure could neither be contemplated nor cured. This exemption will apply only in those very few cases when the seller could neither choose nor control his auxiliary suppliers and it was not possible to procure, produce or repair the goods in any other manner. Nevertheless, explicit limitations on such liability should probably be written into the contract.[84]

20.5 TEMPORARY IMPEDIMENT

It is commonly agreed that a temporary impediment, in principle results in only a temporary excuse.[85] In other words, a temporary impediment constitutes grounds for exemption only for the length of its duration. This is what is provided by CISG Art. 79(3). According to Art. 79(3) the exemption under Arts. 79(1) and 79(2) starts when the impediment occurs and lasts as long as the impediment exists. If an impediment is temporary, Art. 79 does not allow a permanent excuse.

With regard to Art. 79(3), it is to be noted that para. (3) of the 1978 Draft reads: "The exemption provided by this article has effect only for the period during which the impediment exists." Such expression could be constructed as meaning that the exemption ceased with the impediment, even if the later was of very long duration.[86] Therefore, the word "only" was deleted from para. (3) of the Official Text by the acceptance of a Norwegian proposal (A/Conf. 97/C.1/L.191/Rev. 1 = O.R. 134). This deletion suggests that even if the original impediment is removed, it is still possible that a new exemption can arise for the debtor if there is a change in circumstances. The intention behind this amendment was to leave open the possibility that the exemption might continue even after the period during which the exemption existed.[87] It is in pertinent relevance to refer to the analysis of Eiderlein & Maskow, who state: "While at the end of paragraph 1 a distinction is made between the impediment and its consequences because under that paragraph, they are addressed separately in relation to the obligation of avoidance or overcoming. Such a differentiation is not made here. But the 'period during which the impediment exists' has to be conceived in those cases in which there is a difference between it and his consequences, e.g. earthquake and its consequences in contrast to temporary ban on transportation, as including the period during which its consequences have an effect. However, not every period actually used to overcome the consequences is to be taken into account, but only that which is necessary provided that the party concerned makes appropriate efforts. A proposal by the former GDR, which provided for expressly mentioning the consequences, was referred to the Drafting Committee and taken into consideration and, in accordance with the Norwegian proposal, the word 'only' before 'period' was deleted."[88]

Practically speaking, Art. 79(3) will mainly concern damages caused by delay, but, of course, other grounds for exemption can arise during the existence of the original impediment, which will then finally discharge the obligor under Art. 79(1).[89] Thus, as long as the temporary impediment exists, the obligor is still liable for non-performance (CISG Art. 79(5)). Even though not with the desirable clarity as to the substance and the legal techniques, Art. 79(3) has the effect of suspending the obligation to perform as it is often prescribed in international economic contracts and in some instances also in laws as the primary consequence of force majeure.[90] Of course, if the delay in performance because of the temporary impediment amounted to a fundamental breach of the contract, the other party would have the right to declare the avoidance of the contract. However, if the contract was not avoided by the other party, the contract continues in existence and the removal of the impediment reinstates the obligations of both parties under the contract.[91] Therefore, Schlechtriem submits that the importance of this provision is reduced by the fact that the obligor's duty to perform remains unchanged in the event of exempting impediments.[92]

By contrast, in matters of temporary non-performance, under the UNIDROIT Principles the excuse is available for "such period as is reasonable, having regard to the effect of the impediment on the performance of the contract" (UPICC Art. 7.1.7(2)). Under the European Principles, Art. 8:108(2) reads: "Where the impediment is only temporary the excuse provided by this Article has effect for the period during which the impediment exists. However, if the delay amounts to a fundamental non-performance, the creditor may treat it as such." With regard to this provision, several aspects must be clarified. First, although the first sentence of PECL Art. 8:108(2), unlike UPICC Art. 7.1.7(2), follows the CISG in stipulating that the excuse for non-performance is only available during the time that performance is impossible, not more, not less; unlike the CISG, the PECL makes it clear that where exemption is available, the aggrieved party can't resort to performance (Art. 8:101(2) PECL). Secondly, the Official Comment to the PECL makes it clear that temporary impediment means not only the circumstances which cause the obstacle but also the consequences which follow; these may last longer than the circumstances themselves. The excuse covers the whole period during which the debtor is unable to perform. Finally, the second sentence of PECL Art. 8:108(2) and its Official Comment make it clear that, it may be that late performance will be of no use to the aggrieved party. Therefore it is given the right to terminate the contract provided that the delay is itself fundamental. Equally in the case of a temporary excuse, the aggrieved party can use the procedure laid down in PECL Art. 8:106(2) (Nachfrist, see Chapter 4) to serve a notice making time of the essence.[93]

CISG Art. 79(3) does not address the question of termination in case of temporary impediment, but as seen above writers as well as the Secretariat Commentary support the rule laid down in the second sentence of PECL Art. 8:108(2). In this respect, UPICC Art. 7.1.7(4) also confirms that the right to terminate the contract or withhold the performance will not be affected.

20.6 DUTY TO NOTIFY

The duty of the defaulting party to give notice of the impediment has been specified in many domestic legal systems, either directly by legislative or case law or following indirectly from good faith or from the debtors' duty to warn of risks which may affect the performance due. Also, the party who is unable to fulfill his obligations must, according to Art. 79(4), give notice of the impediment and its effects on his ability to perform to the other party, regardless of whether the impediment is of a permanent or temporary nature. It is said that the rationale underlying this requirement is to safeguard the parties from unpleasant surprises.[94]

Under CISG Art. 79(4), the notice is effective upon receipt (sentence 2). The term "received" should be interpreted by analogy in the same way as the term "reaches" in Art. 24.[95] If a party fails to notify within a reasonable time after the party who fails to perform knows or should have known of the impediment, he must compensate for damages caused by the lack of notice, even if he would otherwise be exempt. It should be noted that the damages for which the non-performing party is liable are only those arising out of the failure of the other party to have received the notice and not those arising out of the non-performance.[96] This is the damage which is caused and/or could not have been avoided because the creditor of the performance concerned was not given proper notice of the impediment.[97] It is apparent that CISG Art. 79(4) puts the risk of loss of the notice or the risk of delay in the receipt of the notice on the sender, thus constituting an exception to the rule provided for by CISG Art. 27.[98]

Both the two sets of Principles are similar to CISG Art. 79(4) with regard to the duty to notify the impediment. It is an application of the obligation of good faith which governs the whole of the two sets of Principles. Again, the notice must, in effect, allow the other party the chance to take steps to avoid the consequences of non-performance. It is also necessary in order for it to be able to exercise any right it may have to terminate when performance is partial or late. The Official Comment to the PECL stresses that, the reasonable time may be a short one: circumstances may even require immediate notification. The time starts to run as soon as the impediment and its consequences for the contract become known; or from when the non-performing party should have known. Good faith may even require two successive notices, if for example the non-performing party cannot immediately tell what the consequences of the impediment will be.[99]

20.7 EFFECTS

20.7.1 In General

It is of particular importance to consider the fate of the contract in cases of force majeure. If the tribunal finds an impediment sufficient to excuse one or both of the parties from the non-performance, it will have to address the particular consequences and the question will arise upon to what extent the legal effects of force majeure on the aggrieved party's remedies may be determined.

It is said that questions relating to force majeure are considered ones of fact, and, thus, their legal effects very much depend on the circumstances of each case.[100] In this connection, a leading illustration is Sylvania Technical Systems, Inc. v. Iran, where the Tribunal emphasizes that force majeure defenses "must always be analyzed in the context of the circumstances causing force majeure, taking into account the particular part affected by those circumstances and the specific obligations that party is prevented from performing."[101] Thus, Sylvania and like cases involved careful analysis of particular factual circumstances and particular legal obligations in determining the consequences of force majeure. Such analyses now seem characteristic of the Tribunals approach.[102] For instance, the Tribunal in Amoco International Finance Corporation v. Iran states: "As force majeure arises out of and depends on factual circumstances, it will affect a contract as soon as the circumstances emerge which create the obstacle to performance. The factual effect of force majeure depends on the extent to which these circumstances, practically and objectively, render performance impossible."[103]

Generally speaking, an impediment to performance which fulfils the conditions just set out above relieves the party which has not performed from liability. But again it is necessary to define just what is meant by this rather general expression, which may be ambiguous. Here the approach is a pragmatic one: one must start with the remedies that are available to the aggrieved party, namely damages, specific performance (including repair and substitute replacement) and termination.

20.7.2 Effect on Right to Damages

It seems of no doubt that the three texts exempt the non-performing party from the liability for damages, respectively in Art. 79(5) CISG, Art. 7.17(4) UPICC and Art. 8:101(2) PECL.

However, it is to be noted that, the excuse granted in Art. 79 CISG exempts only the breaching party from liability for damages. All the other remedies of the other parties are not affected by this excuse, i.e. demand for performance, reduction of the price or avoidance of the contract.[104] Rimke therefore believes that: "Paragraph (5) restrains the effects of the exemption to one remedy alone and reserves to the party who did not receive the agreed performance all of its remedies except damages. These remedies include the right to reduce price (Article 50), the right to compel performance (Articles 46 and 62), the right to avoid the contract (Articles 49 and 64) and the right to collect interest as separate from damages (Article 78)."[105] Nonetheless, this laconic formulation in Art. 79(5) offers many tough nuts to crack in regard to interpretation. First of all, it will have to be clarified how far the notion of damages under the CISG Art. 79(5) reaches. In particular, the following two aspects must be made clear.

On the one hand, the question arises on whether the "damages" under Art. 79(5) include penalty or liquidated damages. In this respect, a proposal by the former GDR to expressly include penalties under the contract in their different manifestations (penalties and liquidated damages) was rejected without being put to a vote, but above all because penalties under the contract are not a claim following from the Convention and the shaping of contracts in that respect should not be influenced. Eiderlein & Maskow submit that this objection is not realistic insofar as penalties are agreed frequently without the question of possible exemptions being touched upon. If the latter happens, the contractual agreement will in any way supersede the Convention. The reasons given for the rejection do not exclude that, other contractual clues lacking, the grounds for exemption will also be extended to penalty claims.[106] The Secretariat Commentary states in this respect that: "It is a matter of domestic law not governed by this Convention as to whether the failure to perform exempts the non-performing party from paying a sum stipulated in the contract for liquidated damages or as a penalty for non performance or as to whether a court will order a party to perform in these circumstances and subject him to the sanctions provided in its procedural law for continued non-performance."[107] By contrast, the issue of liquidated damages or agreed payment for non-performance is expressly dealt with both in the UNIDROIT Principles (Art. 7.4.13) and in the European Principles (Art. 9:509) (see Chapter 16). Therefore, it is clear that under the two sets of Principles, no damages of any kind, including "liquidated damages" and penalties, will apply where the non-performance has been excused by the qualifying impediments, unless the parties have agreed otherwise;[108] or unless the claimed damages are those entitled to the aggrieved party by the non-receipt of the impediments notice from the non-performing party (supra. 21.6).

On the other hand, the question arises as to whether the right to interests is restricted by such qualifying impediments. In this respect, there are voices who, assuming that interest is a part of the damages, want to permit an exemption on the ground of impediments. Eiderlein & Maskow submit differently that: "The impediments under Article 79, however, do not free from the obligation to pay interest [see also Schlechtriem, Nicholas, and Stoll]. A point in favour of this is that the entitlement to interest is not mentioned in Article 79, paragraph 5, but could be explained with the genesis of the Convention. We believe, however, that the economic background is also justification for such a solution. The party who does not pay a debt that is due, disposes of the sum of money required for it and/or does not have to procure it. He thus has an advantage vis-à-vis the other party which is compensated by the entitlement to interest of that party."[109] This applies, in particular, to restrictions in the transfer of currency, often cited as an example. Thus, if the impediment relates to the payment of money, as by governmental currency controls, interest accrues on the debt, the payment of which is impeded. It is the case for the PECL Art, 8:107(2), since the entitlement to interest is not mentioned there, either. This is also confirmed by Art. 7.1.7(4) UPICC, which expressly states: "Nothing in this article prevents a party from exercising a right to ... request interest on money due." (For more details in this respect, see the discussion in Chapter 18.)

20.7.3 Effect on Right to Performance

Another nut offered from Art. 79(5) to crack in regard to interpretation is the effects of such qualifying impediments on the right to performance. As stated above, Art. 79 CISG exempts only the breaching party from liability for damages. All the other remedies of the other parties are not affected by this excuse. The Secretariat Commentary clearly states: "Even if the impediment is of such a nature as to render impossible any further performance, the other party retains the right to require that performance under article 42 or 58 [draft counterpart of CISG article 46 or 62]."[110] Thus, even in case of impossibility, the other party could ask for specific performance -- a result that is hardly convincing.

It is argued that para. (5) entails unrealistic results. It would allow an action for specific performance in a case where the goods are destroyed and thus, the performance is physically impossible.[111] Some proposals to extinguish the obligor's obligation to perform if the grounds for exemption existed was, however, rejected at the Vienna Conference. The foremost reason for the rejection was the fear that a release from the obligation to perform could also extinguish collateral rights and secondary claims such as interest. It was also argued that, in cases where obligations are physically impossible to fulfill, the domestic legal doctrine of impossibilium nulla est obligatio (applicable according to Art. 28) would generally prevent a demand for performance anyway.[112] Stoll, in turn, states that upholding the right to require performance is sensible as a basic rule and acknowledges the fact that the right to require performance is not settled by Art. 79. He adds, however, that in a case of impossibility of performance the right to claim performance would be absurd.[113]

Therefore, it is suggested that in such extreme situations where performance has been rendered impossible, a teleological interpretation should be adopted and a "limit of sacrifice"[114] should be admitted beyond which the promisor of the obligation could not reasonably be expected to perform his obligation. Such a solution would be rational, especially in a situation where the performance of the promisor has subsequently become illegal. An example of such a situation is where the seller cannot provide the agreed quality of a chemical substance, which is the subject matter of the sale contract, since a ban has been imposed on its use and a penalty is threatened for any related trading. Arguably, in the latter situation the buyer could, in accordance with CISG Art. 79(5), require delivery of the agreed quantity of the chemical substance from the seller. However, under a teleological interpretation of CISG Arts. 46(1) and 28, the buyer should not be able to require the seller to deliver the goods, since in performing such act, he would break the ban thus bearing the risk of paying a penalty or losing his trading license. This interpretation is supported by the fact that a similar solution is given under English law, where it is accepted that in the absence of any express terms regulating the rights of the parties, the contract would be treated as frustrated, if, as a result of a ban, the performance is rendered impossible or tender of performance would involve violation of the local law.[115]

In some cases, on the other hand, the problem can be solved in that it is assumed that the right to performance is aimed to deliver a commercially reasonable substitute. Of course, it should be mentioned that where the contract does not specify an "origin of goods" and a ban is local, then the seller will not be absolved from his obligation to procure the goods from "other possibly more expensive" available sources. The rights to delivery of substitute goods (Art. 46(2)) or repair (Art. 46(3)), persist where there are grounds for exemption.[116] Furthermore, if the party who is required to overcome an impediment does so by furnishing a substitute performance, the other party could avoid the contract and thereby reject the substitute performance only if that substitute performance was so deficient in comparison with the performance stipulated in the contract that it constituted a fundamental breach of contract.[117]

Nonetheless, Eiderlein & Maskow submit that: "We believe that the party affected by impediments can only be obligated to deliver such substitute in exceptional cases because this otherwise could lead to a far-reaching and, above all, undefined modification of his obligation to perform. When, for instance, payment in the agreed freely convertible currency is prohibited, but can be made in other such currencies, it will have to be assumed that the buyer has the obligation to switch to those currencies. By contrast, it may be too far-reaching when the seller in the event of a prohibition of fluorocarbons as propellant is obligated to use other propellants because he might lack the technological prerequisites for it. When the party concerned, because of the performance requirement offers substitutes, the other party would contradict his own behaviour and thus violate the principle of good faith in international trade (Article 7) were he to reject them, even though they are commercially equivalent. This offers in our view a basis for permanent objection to the claim for performance. The same applies when the seller offers the substitute on his own and its rejection would be considered as an harassment (Article 7)."[118]

After all above, it seems clear that Art. 79 only concerns exemptions from damages. It has no direct significance in relation to the right to require performance. The CISG seems to leave this question to be solved by the domestic laws of the court deciding the case according to CISG Art. 28. Above all, it may be hoped that the general belief expressed in Vienna that a judgment for a physically impossible performance would be neither sought nor obtained should lead to a reasonable limitation to Art. 79(5).[119] By contrast, Art. 8:101(2) PECL specifies that where there is an impediment which fulfils the conditions set by PECL Art. 8:108, the aggrieved party may resort to any of the remedies set out in PECL Chapter 9 except claiming performance and damages. Any form of specific performance(Article 9:101 and 9:102) is by definition impossible.[120] However, this rigid solution might lead to some unreasonable situations particularly in case of temporary impediments. Although as discussed above it seems to amount to an obvious contradiction because it is supposed that performance is not possible, it has become clear at least that the right to performance continues to exist in the event of temporary grounds for exemption and that auxiliary claims that are related to it, like interest, continue to accumulate thus stimulating.[121]

In this respect, the UNIDROIT Principles seems to find a flexible answer to the question of what is to become of the right to performance. As mentioned above, unlike both the CISG and the PECL which specify, though differing from each other slightly, the remedies which the aggrieved party can't resort to in case of exemption, the UNIDROIT Principles adhere to the principle that the excuse is general, but in Art. 7.1.7(4) they make important exceptions in determining certain claims which are not affected by force majeure, namely the right to terminate the contract or withhold delivery or request interest on money due. The Official Comment makes some of its dispositions clear: "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."[122]

20.7.4 Effect on Right to Termination

The existence of grounds for exemption without any doubts does not preclude the right to avoid the contract. According to the express provisions of CISG Art. 79(5), nothing in the Article prevents either party from exercising any right other than to claim damages under the Convention. This means that even if the non-performance is exempted, the aggrieved party retains his right to declare the contract avoided. Consequently, restitution for any portion of the price paid or goods delivered can be demanded, as well as any benefit accruing to the party who received the part performance. That right is given above all when there is a fundamental breach of contract or if there is no delivery within the Nachfrist. The two sets of Principles both follow the approach in the CISG in not restricting in case of exemption the rights of the party who has not received performance to terminate if the non-performance is fundamental. However, however, the question of the terminating of the contract is more complex.

On the one hand, it follows from the discussion stated previously that the existence of an "impediment" does not automatically terminatethe contract, and it is left to the other party to determine what remedies he wishes to pursue (other than in respect of damages) in the light of the supervening circumstances. The general system as applies in the three instruments concerning termination is: the aggrieved party may put an end to the contract by a unilateral declaration provided the non-performance is fundamental. It follows that in principle it will be for the creditor to exercise this right by giving notice of termination to the debtor even in such cases where the debtor has been exempted. However, as it would be pointless to give the aggrieved party the right to keep in force a contract which has become totally and permanently impossible to perform, it follows that in such a case it is unnecessary to require a declaration of termination.[123] Hence, Art. 9:303(4) PECL follows the approach which is of the same result as in those legal systems under which force majeure brings automatic termination of the contract, and it reads: "If a party is excused under Article 8.108 through an impediment which is total and permanent, the contract is terminated automatically and without notice at the time the impediment arises." However, no similar rule is found either in the CISG or in the UNIDROIT Principles.

On the other hand, it is to be noted that, although there are some differences among the three texts with regard to temporary impediment, the doctrine of temporary force majeure in the three texts does not inhibit the other party's ability to terminate the contract, it merely forgives damages and/or performance. If the promisee is not justified in terminating the contract immediately or chooses not to, obviously the obligor may suspend performance. Temporary impediment gives rise to prospective inability to perform. Although the obligor may be excused by temporary impediment, the prospective inability will normally give the promisee a power to suspend performance and demand assurance of due performance. However, if the obligor is not able to provide assurance of due performance, the promisee may terminate the contract despite the impediment that may provide a defense in an action for damages. When the impossibility ceases, the obligor is usually expected to perform in full and is entitled to an appropriate extension of time for performance, but this is not a universal rule. When the delay will make performance substantially more burdensome, the rules on hardship must he consulted, which is to be discussed separately in next chapter.

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FOOTNOTES: Chapter 20

1. See Iran-US Claims Tribunal, Anaconda Iran Ltd. v. Iran, 13 IRAN-U.S. C.T.R. 1986 - 199 et seq. Available online at <http://tldb.uni-koeln.de/TLDB.html>; TLDB Document ID: 231800.

2. See Albert H. Kritzer, International Contract Manual - Guide to Practical Applications of the United Nations Convention on Contracts for the International Sale of Goods-Detailed Analysis 623 (1994).

3. See Dionysios Flambouras in "Comparative Remarks on CISG Article 79 & PECL Articles 6:111, 8:108". (2002) Available online at <http://www.cisg.law.pace.edu/cisg/text/peclcomp79.html>.

4. Another one is Art. 80, which reads: "A party may not rely on a failure of the other party to perform, to the extent that such failure was caused by the first party's act or omission."

5. ULIS Art. 74 reads as follows: " 1 Where one of the parties has not performed one of his obligations, he shall not be liable for such non-performance if he can prove that it was due to circumstances which, according to the intention of the parties at the time of the conclusion of the contract, he was not bound to take into account or to avoid or to overcome; in the absence of any expression of the intention of the parties, regard shall be had to what reasonable persons in the same situation would have intended. 2 Where the circumstances which gave rise to the non-performance of the obligation constituted only a temporary impediment to performance, the party in default shall nevertheless be permanently relieved of his obligation if, by reason of the delay, performance would be so radically changed as to amount to the performance of an obligation quite different from that contemplated by the contract. 3 The relief provided by this Article for one of the parties shall not exclude the avoidance of the contract under some other provision of the present Law or deprive the other party of any right which he has under the present Law to reduce the price, unless the circumstances which entitled the first party to relief were caused by the act of the other party or of some person for whose conduct he was responsible."

6. Two concepts are used which Maskow calls shortly the fault principle and the exemption principle, the first being more or less characteristic of the continental law, the second of the common law. While according to the fault principle a party is only liable if it has committed a fault, according to the exemption principle the party which has committed a breach is held to be liable, unless it can establish reasons for exemption. In general, this would lead to opposite the burden of proof, but, in certain cases, also under the fault principle, the party in breach has to prove its innocence. As far as the practical is concerned it is well known that the two principles do not greatly differ. This is partially due to the fact that a party can best prove its lack of fault, if it can establish exemptions. The CISG, the most important international document in contract law, uses the exemption principle. Interpretations which try to make clear that the fault principle is implemented in the CISG do not correspond to reality. (See Maskow, Dietrich, infra. note 11.)

7. Supra. note 2.

8. See Jacob S. Ziegel in "Report to the Uniform Law Conference of Canada on Convention on Contracts for the International Sale of Goods"(1981). Available online at <http://www.cisg.law.pace.edu/cisg/text/ziegel79.html<.

9. See Secretariat Commentary on Art. 65 of the 1978 Draft [draft counterpart of CISG Art. 79], Comment 1. Available online at <http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-79.html>.

10. See Barry Nicholas in "Force Majeure and Frustration": 27 American Journal of Comparative Law (1979); pp. 231-245. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/nicholas.html>. [This is a commentary on the counterpart to force majeure contained in Art. 65 of the 1978 Draft Convention. It is to be noted that, the match-up indicates that para. (3) of Art. 65 of the 1978 Draft and para. (3) of CISG Art. 79 reflect a change which can be significant under certain circumstances. The remainder of the paragraphs of these articles are substantively the same. See the match-up available online at <http://www.cisg.law.pace.edu/cisg/text/matchup/matchup-d-79.html>.]

11. See Maskow, Dietrich in "Hardship and Force Majeure": 40 Am.J.Comp.L. (1992); p. 664. TLDB Document ID: 126400.

12. See Hartkamp, Arthur in "The UNIDROIT Principles For International Commercial Contracts and the United Nations Convention on Contracts for the International Sale of Goods": Boele-Woelki/Grosheide/Hondius/Steenhoff eds., Comparability and Evaluation, Dordrecht, Boston, London (1994); p. 95. TLDB Document ID: 113000.

13. Ibid., p. 96.

14. See Joern Rimke in "Force majeure and hardship: Application in international trade practice with specific regard to the CISG and the UNIDROIT Principles of International Commercial Contracts": Pace Review of the Convention on Contracts for the International Sale of Goods, Kluwer (1999-2000); p. 238. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/rimke.html>.

15. See Comment and Notes to the PECL: Art. 8:108. Comment A. Available online at <http://www.cisg.law.pace.edu/cisg/text/peclcomp79.html<.

16. See Sylvette Guillemard in "A comparative study of the UNIDROIT Principles and the Principles of European Contracts and some dispositions of the CISG applicable to the formation of international contracts from the perspective of harmonisation of law": Pace Review of the Convention on Contracts for the International Sale of Goods (CISG), Kluwer Law International (2000-2001); pp. 83-113. Available online at <http://cisgw3.law.pace.edu/cisg/biblio/guillemard1.html>.

17. Supra. note 15, Comment B.

18. See Comment 4 on Art. 7.1.7 UPICC; also supra. note 15.

19. See Fritz Enderlein, Dietrich Maskow in "International Sales Law: United Nations Convention on Contracts for the International Sale of Goods", Oceana Publication (1992); pp. 320-321. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/enderlein.html>.

20. See Tom Southerington in "Impossibility of Performance and Other Excuses in International Trade": Tuula Ämmälä ed., Publication of the Faculty of Law of the University of Turku, Private law publication series B:55 (2001). Available online at <http://www.cisg.law.pace.edu/cisg/biblio/southerington.html>.

21. Supra. note 15, Comment D.

22. Supra. note 10.

23. See Denis Tallon, Commentary on the International Sales Law - The 1980 Vienna Sales Convention, C.M. Bianca & M.J. Bonnell eds. (1987); p. 579.

24. Supra. note 19, p. 320.

25. Supra. note 8.

26. See John O. Honnold, Uniform Law for International Sales (1999); p. 476.

27. See Hans Stoll in "Exemptions": COMMENTARY ON THE U.N. CONVENTION ON THE INTERNATIONAL SALE OF GOODS (CISG), Peter Schlechtriem ed., Geoffrey Thomas trans. (2d ed. 1998); p. 608.

28. See Dionysios P. Flambouras in "The Doctrines of Impossibility of Performance and clausula rebus sic stantibus in the 1980 Vienna Convention on Contracts for the International Sale of Goods and the Principles of European Contract Law: A Comparative Analysis": 13 Pace International Law Review (Fall 2001); pp. 267-268. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/flambouras1.html>.

29. Supra. note 15, Comment B.

30. See Peter Schlechtriem, Uniform Sales Law - The UN-Convention on Contracts for the International Sale of Goods, Manz, Vienna (1986); p. 102. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/schlechtriem-79.html>.

31. See Joseph M. Perillo in "Force Majeure and Hardship under the UNIDROIT Principles of International Commercial Contracts": Contratación internacional. Comentarios a los Principios sobre los Contratos Comerciales Internacionales del Unidroit, Universidad Nacional Autónoma de México - Universidad Panamericana (1998); pp. 121-122. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/perillo3.html>.

32. Supra. note 9, Comment 10.

33. Supra. note 29.

34. See Jennifer M. Bund in "Force majeure Clauses: Drafting Advice for the CISG Practitioner": 17 Journal of Law and Commerce (1998); p. 387. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/bund.html>.

35. Supra. note 20.

36. Supra. note 30.

37. See Comment 1 on Art. 7.1.7 UPICC;

38. Supra. note 24.

39. Supra. note 9, Comment 4. However, the seller would not be exempted from liability under this article if he reasonably could have been expected to take the destruction of the goods into account at the time of the conclusion of the contract. Therefore, in order to be exempt from liability, the seller must not have known of their prior destruction and must have been reasonable in not expecting their destruction.

40. Supra. note 14, p. 215.

41. Supra. note 29.

42. This can be supported by both Art. 3.3 UPICC and Art. 4:102 PECL deal with the initial impossibility and stipulate that a contract is not invalid merely because at the time it was concluded performance of the obligation assumed was impossible, or because a party was not entitled to dispose of the assets to which the contract relates. However, as clarified in Chapter 19, such initial impossibility is not the subject to be discussed here.

43. Supra. note 27, p. 610.

44. Supra. note 19, pp. 322-323. Opinions may differ as to whether strikes are beyond the control of the party concerned, for their causes are often found in the enterprise. Eiderlein & Maskow believe that one should follow those authors who like Vischer take a careful stand in the matter and do not exclude strikes as impediments, except when they are internal confrontations at a factory and provided that the other conditions of impediments are fulfilled, too. Rudolph however believes that strikes could generally be considered as possible in the context of negotiations on pay and therefore would not constitute an impediment because they happen at specific intervals. This is true of strikes which can be foreseen at the time of the conclusion of the contract. Lockouts are, at least to a certain extent, not exterior to the activities of the debtor and can, therefore, not be considered as impediments.

45. Supra. note 30, p. 101.

46. Supra. note 19, p. 322.

47. Supra. note 15, Comment C(i).

48. E.g., 1974 Clunet 892; 1975 Clunet 929; 1975 Clunet 934; 1975 , Clunet 917; 1980 Clunet 951.

49. Supra. note 23, p. 580.

50. Supra. note 27, p. 611.

51. Supra. note 9, Comment 5.

52. See Trimarchi, Pietro in "Commercial Impracticability in Contract Law: An Economic Analysis": 11 Int'l Rev. of L. & Ec. (1991); p. 63, 65.

53. Supra. note 19, pp. 323-324.

54. Supra. note 23, pp. 580-581.

55. Supra. note 50.

56. Supra. note 15, Comment C(ii).

57. Supra. note 9, Comments 5, 6.

58. Supra. note 14, p. 216.

59. Supra. note 46.

60. Supra. note 28, p. 271.

61. Supra. note 9, Comment 7.

62. Supra. note 15, Comment C(iii).

63. Supra. note 19, p. 324.

64. Supra. note 62.

65. Supra. note 63.

66. Supra. note 28, p. 272.

67. Ibid.

68. Supra. note 62. In an earthquake zone the effects of earthquakes can be overcome by special construction techniques, though it would be different in the case of a quake of much greater force than usual.

69. Supra. note 23, p. 583.

70. Supra. note 46.

71. Supra. note 47. It is important to mention that the force majeure must have come about without the fault of either party under the European Principles; whereas interpretations which try to make clear that the fault principle is implemented in the CISG do not correspond to reality, the question of fault is not involved here since this concept has been set aside by the Convention

72. See Comment and Notes to the PECL: Art. 8:107. Comment A. Available online at <http://www.cisg.law.pace.edu/cisg/text/peclcomp79.html>.

73. Supra. note 9, Comment 11.

74. Supra. note 19, p. 326.

75. Supra. note 72, Comment B.

76. Supra. note 19, pp. 327-330.

77. Supra. note 72, Comment C.

78. Supra. note 28, p. 274.

79. See Sarah Howard Jenkins in "Exemption for Nonperformance: UCC, CISG, UNIDROIT Principles -- A Comparative Assessment": 72 Tulane Law Review (1998); p. 2026. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/jenkins.html>.

80. Supra. note 9, Comment 12.

81. Supra. note 19, p. 327.

82. Supra. note 26, p. 433.

83. Supra. note 30, p. 104.

84. Ibid.

85. Supra. note 15, Comment E.

86. The Summary Records of the Vienna Diplomatic Conference contain the following explanation: "Mr. ROGNLIEN (Norway), introducing his delegation's amendment [Change paragraph (3) to read: 'Where the impediment is temporary, the exemption provided by this article has effect for the period during which the impediment exists. Nevertheless, the party who fails to perform is permanently exempted to the extent that, after the impediment is removed, the circumstances are so radically changed that it would be manifestly unreasonable to hold him liable.' Alternatively, delete 'only'.] said that the [draft] text of paragraph (3) could be constructed as meaning that the exemption ceased with the impediment, even if the later was of very long duration. That result was undesirable because, in the case of a long-term impediment, circumstances could change radically and make it totally unrealistic to impose performance at that late stage. In reality, the problem of permanent relief had not been dealt with in the paragraph; the matter had been left to national law. Accordingly, his delegation proposed that the rule now embodied in the single sentence of paragraph 3 should relate to temporary impediment. His delegation's proposal contained also a separate provision, in the form of a new second sentence, to deal with the problem which arose when, after the removal of the impediment, the circumstances were so radically changed that it would be manifestly unreasonable to hold liable the party concerned. The question had been discussed for a long time within UNCITRAL without arriving at any agreement. His delegation's proposal, he hoped, provided a solution. If no agreement could be reached on the proposed formula, he would suggest the deletion of the word 'only' from paragraph 3, a second best solution based on the understanding that the paragraph and the whole of [CISG article 79] did not contain provisions regulating a possible permanent relief" (Official Records, p.381). Available online at <http://www.cisg.law.pace.edu/cisg/text/matchup/matchup-d-79.html>.

87. Rognlien's proposed language [Change paragraph (3) to read: 'Where the impediment is temporary, the exemption provided by this article has effect for the period during which the impediment exists. Nevertheless, the party who fails to perform is permanently exempted to the extent that, after the impediment is removed, the circumstances are so radically changed that it would be manifestly unreasonable to hold him liable.' Alternatively, delete 'only'.], which is similar to ULIS Art. 74(2), was not accepted. However, his "second best solution" was approved. Commentators' assessments of the significance of the deletion of the word 'only' range from Tallon and Vilus, who do not appear to regard this as having any significance, to Honnold, Schlechtriem and Nicholas who advise: "[T]his change was designed to avoid any impression that paragraph (3) laid down a rigid rule requiring contract relations to resume on the original basis no matter how long the interruption or how great the change in the circumstances ... (John O. Honnold)"; "The Norwegian proposal concerned the case of temporary impediments which later vanish. In that case, consideration would be given to the fact that the economic situation of the debtor might fully have changed. Though the contractual agreement should be decisive in this situation, some delegates apparently assumed that recourse to domestic law would still be possible....By the acceptance of the Norwegian amendment to delete the work 'only' in article 79(3), it became clear that, even if the original impediment is removed, it is still possible that a new exemption can arise for the debtor if there is a change in circumstances" (Peter Schlechtriem); "The intention behind this amendment was to leave open the possibility that the exemption might continue even after the period during which the exemption existed. The paragraph therefore might be read as if it said something like the following: 'The exemption has effect for the period during which the impediment exists and may have permanent effect if after the impediment has ceased to exist the circumstances have so radically changed that it would be manifestly unreasonable to hold the non-performing party liable [for damages]' . . . It has to be said, however, that even if the non-performing party persuades the court to adopt this interpretation, he may find that, though he is indeed exempt from liability in damages, he may still be compelled to perform" (Barry Nicholas). Available online at <http://www.cisg.law.pace.edu/cisg/text/matchup/matchup-d-79.html>.

88. Supra. note 19, p. 331.

89. Supra. note 83. However, Art. 79(3) does not provide whether or not the performing party is under obligation to perform after the impediment has ceased to exist. Southerington submits that this should be clear since Art. 79(5) explicitly limits the application of Art. 79 to damages and the promisee's duty to perform remains unchanged in the event of exempting impediments. (Supra. note 20.)

90. Supra. note 88.

91. Supra. note 9, Comment 14.

92. Supra. note 30, p. 105.

93. Supra. note 85.

94. See Nassar, Nagla, Sanctity of Contracts Revisited, Dordrecht, Boston, London (1995); p. 202. TLDB Document ID: 105700.

95. Supra. note 88.

96. Supra. note 9, Comment 15.

97. Supra. note 88.

98. Supra. note 28, p. 273.

99. Supra. note 15, Comment F.

100. Supra. note 94, p. 203.

101. See 8 IRAN-U.S. C.T.R. (1985 I); 298 at 230.

102. See Crook, John R. in "Applicable Law In International Commercial Arbitration: The Iran-US-Claims Tribunal Experience": 83 AJIL (1989); p. 294. TLDB Document ID: 120000.

103. See 15 Iran-U.S.C.T.R (1987 II); 189 at 211.

104. Supra. note 9, Comment 8.

105. Supra. note 14, pp. 217-218.

106. Supra. note 19, p. 332.

107. Supra. note 9, Comment 9.

108. Supra. note 15, Comment D.

109. Supra. note 19, p. 311.

110. Supra. note 107.

111. Supra. note 14, p. 217.

112. In Vienna, the rule on exemption produced primarily two controversial issues: The first involved the scope of the rule; the second the scope of liability for acts of employees, subcontractors and other "third persons". Regarding the first, the Federal Republic of Germany proposed the clarification that despite Art. 79(5) (restriction of the effects of exemption on damage claims) the existence of grounds for exemption should extinguish the obligor's obligation to perform. Comparable Norwegian proposals, corresponding to ULIS Art. 74(2), provided for the release of the obligor's duty to perform in the event of temporary but lengthy impediments if the circumstances had fundamentally changed in the meantime. There were several reasons for the rejection of these proposals, the foremost being the fear that a release from the obligation to perform could also extinguish collateral rights and secondary claims such as interest. There was special apprehension that the Norwegian proposal to Art. 79(3) intended to introduce the "theorie de l'imprevision" into the Convention. Finally, there was the fact that, in cases where obligations are physically impossible to fulfill, domestic legal doctrine - "impossibilium nulla est obligatio" would generally prevent a demand for performance anyway. The rejection of the German and Norwegian proposals can be interpreted to mean that an impossible obligation remains intact and is actionable, as long as the obligee does not declare an avoidance on the basis of a fundamental breach. Especially in the case of incurable defects for which the seller may not be responsible under Art. 79(1), there is a danger the domestic courts will set fines or penalties based on their rules of procedure for failure to follow an order for specific performance. In the end, such fines or penalties could be the equivalent of granting damages and could even surpass them in amount. According to Schlechtriem, a German court could, however, on the basis of Art. 28, dismiss a complaint asking for specific performance in such a case. Moreover, recognition of a foreign judgment that ordered specific performance of an impossible act would conflict with German public policy (328(1) No. 4 Code of Civil Procedure; Art. 27 No. 1 of the European Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters). (Supra. note 30, pp. 102-103)

113. Supra. note 27, p. 623.

114. Supra. note 27, p. 622.

115. Supra. note 28, pp. 275-276.

116. Supra. note 19, p. 333. When the right to repair, however, hinders the satisfaction of exactly those rights, and is taken into account in the conditions for repair claims, the general problem of the right to performance will arise.

117. Supra. note 104.

118. Supra. note 19, p. 335.

119. Supra. note 30, p. 103. See also supra. note 2, p. 642.

120. Supra. note 108.

121. Requests by Norway and the FRG, which had intended to avoid this, could not be carried through. Given today's far-spread practice of credit sales in international trade, the following situation is characteristic: The seller has delivered the goods, but because of currency transfer regulations introduced later, payment is prevented. The seller could withdraw from the contract in this case, but may not be interested in doing so because for commercial (the goods have effectively been sold to a third party) or foreign trade reasons (re-exportation is prohibited) he cannot again obtain possession of the goods or because he cannot use them for another purpose. Should he therefore be hindered to require payment? Such concerns as they have been articulated, in particular by Soviet delegates (O.R., 384), have prevented many delegations from supporting the FRG proposal. At the diplomatic conference, it was not possible to find a flexible answer to the question of what is to become of the right to performance. The rigid solution that has been adopted led to the most diverse interpretations which were guided by the idea of making it manageable in practice. (Supra. note 19, p. 333.)

122. See Comment 2 on Art. 7.1.7 UPICC.

123. Supra. note 108.

CHAPTER 21. HARDSHIP

     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".[1]

21.1 GAP IN THE CISG?

The problem of hardship and adaptation of a contract to changed circumstances as a legal consequence thereof is by far less elaborated, established and acknowledged than the principle pacta servanda sunt. Nonetheless, some legal systems exist in which the adaptation has found its expression in legislation, and others in which this principle is widely accepted by case law and legal literature. Furthermore, it seems that this principle has reached a breakthrough on the international level with its being adopted under the two Principles. However, it has not found its expression in the CISG, though attempts were made to introduce such a provision. The Convention provides no specific rule as to whether a disturbance which does not fully exclude performance, but makes it considerably more difficult, such as change of circumstances, hardship, can be considered as an impediment. The facts of that case would have to be considered in the context of Art. 79.[2]

The question of whether situations of hardship are covered and provided for by Art. 79 is probably the most discussed problem concerning Art. 79. As mentioned previously, all legal systems have to determine when a contracting party should be excused from performance of its obligations because of supervening circumstances. Some systems only accept a narrow range of excuses; others are more generous. The CISG deals with the issue of changed circumstances on an international level by avoiding any reference to existing domestic concepts. Art. 79 of CISG uses the term "impediment" to describe the types of event beyond the contracting party's control that will be acceptable as an excuse. However, "impediments" is not defined. There appear to be considerable difficulties, particularly because of the fact that the Convention has developed a system of its own with regard to impediments. "The Convention's autonomy, illustrated by the lack of reference to accepted wording and concepts of domestic laws (force majeure, frustration, impracticability, Wegfall der Geschäftsgrundlage), renders the interpretation of Article 79 extremely difficult because one cannot resort to these laws as a guide."[3]

Nonetheless, many commentators state that Art. 79 is "vague or imprecise" and contains "elastic words" that will be read in the context of each system's view. It is said that the general wording of Art. 79, which makes use of phrases like "due to an impediment" and "not reasonably expected to overcome", leaves room for judicial interpretation. The judge or arbitrator will have a natural tendency to refer to similar concepts in his own law. Because Art. 79 is a "chameleon-like" example of "superficial harmony", its character permits it to take on that meaning which best conforms to the reader's background. However, one must bear in mind that such reference to domestic laws in interpreting Art. 79 jeopardizes uniformity in the application of the Convention, which is the Convention's major goal, as set out in Art. 7(1). The fact that Art. 79 presents problems of application might tempt one to consider solving that problem by applying Art. 7(2). Art. 7(2) permits recourse to the applicable law by virtue of the rules of private international law when questions are not expressly settled but governed by the CISG. The problem of hardship could thus be regulated by rules of domestic law if there was a gap in the CISG regarding the promisor's invocation of radically changed circumstances, making its performance more onerous. The history of Art. 79, however, rules out the assumption of the existence of such a gap.[4]

All factors considered, it would seem that the decisive question ought to be whether the CISG intended for the principle of hardship to exist side by side with Art. 79. The drafting history of the Convention is a legitimate and valuable aid in the interpretation of the Convention's provisions. It reveals that Art. 79 CISG is indeed a stricter version of its predecessor, Art. 74 ULIS, which had been criticized for excusing non-performance too readily, such as where performance merely became more difficult. The legislative history of Art. 79 also indicates that a party cannot rely on the exemption merely on the ground that performance has become unforeseeably more difficult or unprofitable. The UNCITRAL debates show that the CISG drafters were opposed to allowing commercial or economic hardship as an excuse for non-performance and that this was the reason for adopting the requirement of an impediment as a precondition for relief in place of the more liberal ULIS test of a change of circumstances. It is clear in the travaux préparatoires that the purpose of Art. 79 CISG is to set definite limits on the promisor's liability for breach of contract and that the word "impediment" represents a unitary conception of exemption from liability in contracts governed by the Convention, as opposed to other theories of imprévision or hardship that are based on "changed circumstances".[5] Some submits that the majority of academic opinion supports that a disturbance which does not fully exclude performance, but makes it considerably more difficult / onerous (e.g., change of circumstances, hardship, economic impossibility, commercial impracticability, etc.) cannot be considered as an impediment (doctrine of clausula rebus sic standibus).[6]

On the other hand, Bund submits oppositely: "Arguably, however, the hardship provisions could come into play during a CISG excuse controversy since the CISG does not address the concept of hardship. Although the CISG drafters opted not to include hardship provisions, their omission should not compel the conclusion that the drafters were opposed to the concept of hardship. More than likely, the delegates did not include hardship provisions because they were unable to agree on the appropriate language for the doctrine of hardship -- a doctrine that is more amorphous than the impossibility-type standard in article 79."[7] No doubt "impediment" is capable of many meanings. Lots of commentators, therefore, want to allow changes in the circumstances in serious cases to be impediments. It is said that although the reasoning differs, there is evidence that the barrier evoked by the use of the term "impediment" is not limited to physical or legal bars to performance. Despite the fact that Art. 79's "impediment" connotes a barrier that prevents performance, it refers to a more flexible standard than force majeure. It is, however, not evident how insurmountable the standard should be in practice. There may be a nuance between great difficulty of performance and absolute impossibility. Here, a case-by-case analysis is required.[8]

Anyway, the discussion shows that at present it cannot be determined with sufficient security how the issue of changed circumstances can be decided on the basis of the CISG. The parties are, therefore, urgently recommended to make arrangements in the matter and/or to exclude adjustment.[9] Furthermore, the appropriate legal remedy in such cases of hardship or imprévision is principally the right to renegotiate the contract and to adapt it to the changed circumstances. The adaptation of the contract by the judge, however, is not expressly allowed by the CISG, and must therefore be regarded as impossible.[10]

21.2 INTERPLAY BETWEEN CISG EXCUSE AND UNIDROIT PRINCIPLES / PECL HARDSHIP

As the term impediment is not defined in Art. 79 CISG, an interesting question is bound to arise whether the hardship provisions in UPICC Arts. 6.2.1 through 6.2.3 and PECL Art. 6:111 can be invoked to expand the meaning of impediment found in the CISG to include cases of economic or commercial hardship. This is to be furthered below. In this respect, it seems fairly obvious that a tribunal would first have to examine the UNCITRAL debates to see what range of impediments the drafters had in mind before accepting the relevance of the UNIDROIT (or the PECL) hardship provisions as an interpretational aid.[11] Above all, the hardship provisions in the two Principles will be examined in general below, followed by the analysis of their gap-filling application.

21.2.1 Hardship: UNIDROIT Principles Arts. 6.2.1 through 6.2.3

In contrast to the CISG, the UNIDROIT Principles dedicate an entire section (Section 6.2)-- comprised of three Articles, namely Arts. 6.2.1 through 6.2.3 -- to hardship. At the outset, it is to be noted that the UNIDROIT Principles deal with force majeure in the chapter on Non-Performance. Hardship is dealt with in the chapter on Performance. The logic of this divided treatment is clear. If performance is impossible it will not be performed; whether the non-performance is excused or will be the basis for a money judgment for damages or restitution is a question dealt with under Non-Performance. If performance is burdensome, the consequences of the burden is dealt with as an aspect of performance.[12] Nonetheless, the provisions on "hardship" contained in the chapter on Performance should be compared with the provision on "force majeure", contained in the chapter on Non-Performance.

To some extent, the concepts of excuse and hardship overlap. However, they are implemented in different ways. Essentially, if a non-performing party is "excused" it is relieved of its obligation to perform without incurring liability for damages; whereas, a party facing "hardship" is entitled to request renegotiation of the contract (or even have a court impose modifications), but is not entitled to withhold performance. In addition, a primary distinction between excuse and hardship is that excuse is invoked after non-performance, while hardship is invoked in advance of non-performance.[13] Most importantly, there seems to be difference upon the trigger point between the two concepts. The rule of force majeure is draconian and unforgiving. Nothing short of total impossibility will excuse non-performance or partial non-performance. Impracticability will not suffice as an excuse. Rather, impracticability as well as hardship far short of impracticability must be tested under the Hardship articles.[14]

Under the UNIDROIT Principles, hardship alone never forgives non-performance. It instead compels renegotiation and authorizes courts to "adapt" (revise) the contract to take the hardship into account. Nonetheless, the Section on Hardship starts with the caption: "Contracts to be observed". Art. 6.2.1 provides: "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." This Article stresses the exceptional character of hardship by emphasising the serious nature of the principle pacta sunt servanda. The purpose of this Article is to make it clear that 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.[15] This seems to be more or less self evident, and is similarly mentioned in Art. 1.3. It is only repeated here in order to make clear that the UNIDROIT Principles also take the principle pacta servanda sunt as a basis, and that the possibility of adaptation is of an extraordinary character.[16] Thus, the UNIDROIT Principles encompass the concept of pacta sunt servanda -- the maxim that contractual promises must be kept.[17] 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.[18] As an exception, the UNIDROIT Principles address the concept of hardship in the case of a change of circumstances in Arts. 6.2.2 and 6.2.3, something similar to the public law theory of rebus sic stantibus.[19]

It should be emphasised that the notion of hardship does not mean that performance is prevented or rendered impossible - it makes it more onerous. Art. 6.2.2. sets out the characteristics of an event that makes the excuse of hardship available. According to this provision, a change in the market after the conclusion of the contract only amounts to hardship if the equilibrium of the contract has been fundamentally altered. The requirement of a fundamental alteration of the contract entails that normal economic risks is not to be regarded as hardship but only developments in the market that lie far beyond the normal economic development.[20] The application of hardship is, according to Art. 6.2.2, further conditioned that the event occurs after the conclusion of the contract, that the event could not reasonable be taken into account, that the event is outside the disadvantaged party's control, and that the risk of the event is not assumed by the disadvantaged party. After that, the effects of hardship is specified in Art. 6.2.3. According to this provision, it is important to recall that the existence of hardship does not permit a termination of the obligations, but gives the disadvantaged party a right to request that the parties renegotiate the contract so as to re-establish the equilibrium of the contract and to facilitate its survival. Upon failure to reach an agreement, the disadvantaged party can request the court or arbitral tribunal to either terminate or adapt the contract.

21.2.2 Change of Circumstances: PECL Art. 6:111

There is a trend beyond the UNIDROIT Principles to the effect that excessive hardship is a ground for relief. The Commission on European Contract Law has formulated a rule that is basically the same as UNIDROIT's, and considered a hardship rule to be necessary and inserted it in one article, i.e. Art. 6:111 PECL, under the heading "Change of Circumstances". As discussed previously, PECL Art. 8:108 contains a rule similar to CISG Art. 79 and UPICC Art. 7.1.7. In addition, PECL Art. 6:111 contains a provision on hardship, which is not dealt with under the CISG nevertheless dedicated with an entire section (Section 6.2) under the UNIDROIT Principles. In contrast to the single paragraph found in Art. 79(1) CISG, which in only includes impediments which must be equated with actual impossibility, the European Principles deal with the issue of change of circumstances in a quite thorough way, providing not only a basic statement of principle (Art 6:111(1))[21] and the operational parameters of the concept (Art. 6:111 (2)), but also the mechanism for the adaptation or termination of the contract by the court (Art. 6:111(3)).[22]

It is found that the majority of countries in the European Community have introduced into their law some mechanism intended to correct any injustice which results from an imbalance in the contract caused by supervening events which the parties could not reasonably have foreseen when they made the contract. In practice contracting parties adopt the same idea, supplementing the general rules of law with a variety of clauses, such as "hardship" clauses. The European Principles adopt such a mechanism, taking a broad and flexible approach, as befits the pursuit of contractual justice which runs through them: they prevent the cost caused by some unforeseen event from falling wholly on one of the parties. The same idea may be expressed in different terms: the risk of a change of circumstances which was unforeseen may not have been allocated by the original contract and the parties or, if they cannot agree, the court must now decide how the cost should be borne. The mechanism reflects the modern trend towards giving the court some power to moderate the rigours of freedom and sanctity of contract.[23]

But it should always be borne in mind that the rules adopted by the two Principles are not mandatory. The parties can adopt whatever they want in the way of adjustment or renegotiation, and they are perfectly free to agree that a particular change in circumstances shall not affect the terms of the contract - for instance, they may exclude any change on the grounds of a fall in the value of money. In any case, it will only be in exceptional circumstances that the rules permitting renegotiation will operate. They must not provide a means for a party which has entered a contract which has simply turned out badly to revise it.[24]

21.2.3 Gap-filling Application of Hardship Provisions?

As discussed above, the two Principles both include an excuse provision (respectively in UPICC Art. 7.1.7; PECL Art. 8:108) that parallels Art. 79 of the CISG. In addition, however, the two Principles also contain provisions dealing with the concept of hardship (respectively in UPICC Arts. 6.2.1 through 6.2.3; PECL Art. 6:111).

Generally speaking, the two sets of Principles serve a gap-filling role for the interpretation of CISG contracts. The two Principles can be used to: (1) interpret the CISG; (2) answer unresolved questions that fall within the scope of the CISG; or (3) resolve issues that are not addressed in the CISG. The purpose of the two Principles' gap-filling role is to preclude an easy resort to the domestic law indicated by the conflict of law rule of the forum. Thus, when the CISG does not adequately resolve a given issue, a court may look to the two Principles (which are international in character) rather than resort to domestic law. Courts have not yet decided whether the hardship provisions of the UNIDROIT Principles serve a gap-filling role for Art. 79 of the CISG. Seemingly, for judges and arbitrators, the provisions on hardship of the two Principles may serve as a means of interpretation of, or supplementation to, Art. 79 CISG. This requires that Art. 79 contain a gap with respect to situations of hardship. However, it is clear that the CISG does not contain a specific provision dealing with hardship. It has also been shown that it cannot be determined with sufficient clarity how the issue of radically changed circumstances can be decided upon, on the basis of Art. 79 and the CISG in general. Furthermore, the adaptation of the contract by the judge is not expressly allowed by the CISG, and must therefore be regarded as impossible.

With regard to the interplay between CISG Art. 79 and hardship provisions (Arts. 6.2.1 through 6.2.3) of the UNIDROIT Principles, it is generally believed, (as is proven in the history of Art. 79) that Art. 79 does not contain a gap as to situations of imprévision or hardship. Proposals brought forward during the drafting process of the CISG to make provision for those situations were expressly rejected. The rejection of a hardship provision indicates the CISG never intended that hardship should exist side by side with Art. 79. Moreover, the purpose of Art. 79 is to set definite limits on the promisor's liability for breach of contract. Judges and arbitrators, therefore, cannot use the provisions on hardship of the UNIDROIT Principles to interpret or supplement the CISG.[25] The Secretariat Commentary makes it clear: "Neither article 65 [draft counterpart of CISG article 79] nor any other provision of this Convention would release the seller from the obligation to deliver the goods on the grounds that there had been such a major change in the circumstances that the contract was no longer that originally agreed upon. The parties could, of course, include such a provision in their contract."[26]

Nonetheless, according to the doctrine of party autonomy as stated in CISG Art. 6 and following the Secretariat Commentary, parties to a contract which is governed by the CISG are free to agree on the applicability of the UNIDROIT Principles to their contract. In this case, the UNIDROIT Principles' provisions on hardship become a part of their agreement and thus supplement Art. 79 CISG. It is also possible for the parties to include only the UNIDROIT Principles' hardship provisions into their contract. In view of the narrow scope of Art. 79 and the uncertainties surrounding it, the contractual supplementation of Art. 79 with the respective provisions of the UNIDROIT Principles may be strongly advisable. Depending on the needs and features of their transaction, the parties can adapt the provisions of the UNIDROIT Principles so as to take into account these needs and features.[27]

Regarding the possibility of application of the provisions of PECL Art. 6:111 as a means of specifying the meaning of the CISG's general principles (Art. 7(2)) it is suggested that this solution should not be adopted for the following reasons. First, it is highly unlikely that a non-European Union judge or arbitrator will refer to the PECL in order to interpret the meaning of the CISG's general principles when applying CISG Art. 7(2).[28] Second, even if CISG Art. 7(2) is applied by a European Union judge or arbitrator, it is hard to imagine that the latter would refer to PECL Art. 6:111 to justify renegotiation or adaptation of the contract, since CISG Art. 7(2) only requires settlement with reference to the general principles on which the CISG is based. Neither the legislative history nor the language of the CISG indicates the existence of any general principle allowing renegotiation or judicial adaptation in the case of changed circumstances or economic impossibility.[29] Only if a general principle exists within the CISG's system (e.g., full compensation), may the PECL provisions be used in order to specify one of the possible meanings of that principle (e.g. the mode of calculation of the rate of interest).

Nonetheless, the principle of party autonomy as established not only in the CISG or the UNIDROIT Principles but also under the PECL requires such general inapplicability of the PECL Art. 6:111 not to disrespect the intentions of the contracting parties, which could have provided in their contracts for renegotiation or adaptation in the cases of hardship, economic impossibility, etc. One should note, however, although it is not expressly excluded 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.[30]

Based on the foregoing analysis it is thus clear that PECL Art. 6:111 or UNIDROIT Principles Arts. 6.2.1 through 6.2.3 may only apply if the contracting parties agree on its incorporation into the contract of sale. In this situation, in accordance with CISG Art. 6, PECL Art. 6:111 or UPICC Arts. 6.2.1 through 6.2.3 will apply as a special provision of a contractually incorporated a set of terms. Taking into consideration the problems relating to the renegotiation or adaptation in the cases of radical change of circumstances where the CISG applies, it is therefore suggested that the contracting parties should make clear their intentions, that is, whether they will provide for the possibility of renegotiation where the price of goods has been altered by inserting a hardship clause or for the possibility of mutual discharge from liability in the cases of economic impossibility or hardship by inserting a force majeure clause. Such provision will be desirable especially in situations where (a) there is a long term contract (e.g., distribution agreement consisting of a number of successive sale agreements between the same parties), (b) the price of goods sold tends to fluctuate in the international market, or (c) where, especially in contracts subjected to arbitration, the parties subject their contract to legal sources or principles of supranational character.[31]

21.3 CONDITIONS FOR INVOKING HARDSHIP

21.3.1 In General

Strict conditions must be fulfilled for the renegotiation mechanism to be triggered: these are set out respectively in Art. 6.2.2 UPICC and Art. 6:111(2) PECL.

Art. 6.2.2 UPICC contains the definition of hardship. This definition has the form of a general description and states that hardship is 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 subparas. (a) to (d).[32] Under PECL Art. 6:111(2), it suggests that the renegotiation mechanism applies only where performance of the contract has become excessively onerous because of a change of circumstances, provided that the change of circumstances meets the requirements laid down in subparas. (a) to (c). In this respect, there is some generic similarity in language and the substantive requirements between the UNIDROIT Principles and the PECL. One should note, however, that unlike the European Principles, the UNIDROIT Principles require that the events in question be "beyond the control of the disadvantaged party".

Generally speaking, hardship requires a change in circumstances so severe and fundamental that the promisor cannot be held to its promise in spite of the possibility of performance. If an unforeseeable event, (not within the control of the disadvantaged party) and the occurrence of which was not a risk assumed by the disadvantaged party, occurs or becomes known after contracting, and the equilibrium of the contract is fundamentally altered for either party because of an increased cost of performance or the decrease in value of the performance to be received, hardship results. This means that the two Principles have taken the objective approach, that is to say, hardship exists if these objective criteria are observed, and it is not necessary that the parties themselves in a subjective manner have made the maintenance of certain conditions a basis of their relationship.

21.3.2 Crucial Point: Fundamental Alteration of Equilibrium

The first condition is that the change in circumstances must have brought about a major imbalance in the contract. According to Art. 6.2.2 UPICC, hardship occurs where "the occurrence of events fundamentally alters the equilibrium of the contract". Under the PECL Art. 6:111(2), the renegotiation mechanism is triggered when "performance of the contract becomes excessively onerous because of a change of circumstances".

Since the general principle is that a change in circumstances does not affect the obligation to perform (see Art. 6.2.1 UPICC and Art. 6:111(1) PECL), it follows that hardship may not be invoked unless the alteration of the equilibrium of the contract is fundamental.[33] A subsequent change in the economic context is not enough to give rise to the right to have the contract revised.[34] The mechanism only comes into play if the contract is completely overturned by events, so that although it still can be performed, this will involve completely exorbitant costs for one of the parties. The terms show clearly that the court should not interfere merely because of some disequilibrium. "The crucial point clearly is the definition of 'fundamental' change. This formula by no means should lead to the result that normal economic risks can be shifted to the other party. This would undermine the foundations of a market economy."[35] 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.[36]

Thus, only substantial increases or decreases will trigger the doctrine of hardship. In any event, to avoid undermining the foundations of a market economy, the reference to cost and value should not lead to the result that normal economic risks can be shifted to the other party. In practice a fundamental alteration in the equilibrium of the contract may manifest itself in two different but related ways -- either there is an increase in the cost of the disadvantaged party's performance, or a decrease in the value of what it has to receive. The "excessive onerosity" may be the direct result of increased cost in performance or it may be the result of the expected counter-performance becoming valueless. In neither situation is it possible to give precise rules to cover the diversity of situations which may arise.[37]

Nonetheless, the Official Comment on Art. 6.2.2 UPICC gives some guidance. 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. 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.[38]

Although performance has become more onerous or burdensome, if performance is possible, such possibility of performance distinguishes hardship from, e.g. Art. 79 of the Convention, where performance is impossible. As to be shown below, some requirements for hardship to arise resemble the presuppositions of force majeure, although in fact they should only partly do so. Thus, 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.[39] Additionally, hardship is distinguishable from frustration of purpose.[40] 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.[41]

Furthermore, it is to be noted that, on the one hand, 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. On the other hand, 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.[42]

21.3.3 Additional Requirements for Hardship to Arise

As a factual matter, hardship exists if the equilibrium of the contract is "fundamentally altered" by the occurrence of some events or the performance becomes "excessively onerous" because of a change of circumstances. But the occurrence of some such events or the change of some circumstances forms a hardship case only if certain additional criteria are fulfilled. Among these additional criteria, except the only difference that unlike the European Principles, the UNIDROIT Principles require that the events in question be "beyond the control of the disadvantaged party" (Art. 6.2.2(c) UPICC), the substantive requirements between the two Principles resemble. To invoke hardship a party must thus show the following criteria be met:

21.3.3.1 Time factor: occurrence after conclusion

The second condition (the first additional requirement) is that the events fundamentally altering the equilibrium or the change of circumstances must have occurred after the contract was made. According to Art. 6.2.2(a) UPICC, the events causing hardship must "occur or become known to the disadvantaged party after the conclusion of the contract"; Art. 6:111(2)(a) reads similarly: "the change of circumstances occurred after the time of conclusion of the contract".

On the one hand, 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.[43] On the other hand, if unknown to either party circumstances which make the contract excessively onerous for one of them already existed at that date, the rules on mistake (see Arts. 3.4, 3.5 UPICC and Arts. 4:103, 4:105 PECL, which are not the subject here) will apply.[44]

21.3.3.2 Unforeseeability

Thirdly (the second additional requirement), even if the events or change in circumstances occurs after the conclusion of the contract, such events cannot cause hardship if they could reasonably have been taken into account by the disadvantaged party at the time the contract was concluded. In this respect, Art. 6.2.2(b) UPICC requires: "the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract"; Art. 6:111(2)(b) resembles: "the possibility of a change of circumstances was not one which could reasonably have been taken into account at the time of conclusion of the contract"

This condition is parallel to that applicable to force majeure or impossibility of performance and should be interpreted in the same way. As is the case with allegations of force majeure, foreseeability is a central concern in hardship cases. The general notion is that if an event is foreseeable, the parties should deal with it in the contract; otherwise, the party disadvantaged by the event should bear its burden. Yet, as stated previously, almost everything that ever happens is in some sense foreseeable.[45] 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.[46]

Again, the question is whether the event was so outside the bounds of probability that reasonable parties would not provide for it.[47] Hardship cannot be invoked if the matter would have been foreseen and taken into account by a reasonable man in the same situation, by a person who is neither unduly optimistic or pessimistic, nor careless of his own interests.[48]

21.3.3.3 Risk not assumed

There is a fourth criterion (the third additional requirement) which deliberately differs from force majeure. It excludes cases in which the disadvantaged party has assumed the risk relating to those events which have caused the hardship. (This is of course also possible in force majeure cases, but a presumption if it exists at all, runs in the opposite direction.) The taking of the risk can be made not only expressly, but also be derived from the nature of the contract (prospective transactions) or be otherwise implied.[49]

Under Art. 6.2.2(d) UPICC, which requires that "the risk of the events was not assumed by the disadvantaged party", 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.[50] The allocation must be express, or be inherent in the nature of the contract. Thus, if the contract is aleatory, such as an contract of insurance, the obligor cannot complain that the risk has occurred, even though the occurrence far exceeded what had been foreseen. Thus, if an insurer writes a policy covering the risks of war and civil insurrection, it must honor the policy even if war and civil insurrection breaks out in three countries in the same region.[51] Art. 6:111(c) PECL requires similarly that "the risk of the change of circumstances is not one which, according to the contract, the party affected should be required to bear". In sum, it must be lastly decided whether the party affected by a change in circumstances should be required to bear the risk of the change, either because it expressly undertook to do so (for instance by taking the risk of a shift in exchange rates) or because the contract is a speculative one (for instance a sale on the futures market). If so, the party cannot make use of hardship.[ 52]

Finally, it is to be recalled again that the two Principles allow the parties broad autonomy to determine the terms of their relationship. The grounds for invoking hardship may be broadened or reined in by the terms of the contract. For example, the Official Comment on Art. 6.2.2 UPICC makes it clear: "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."[53]

21.4 EFFECTS OF HARDSHIP

21.4.1 In General

Once such events or change of circumstance discussed infra. 21.3 is established, the renegotiation mechanism will be triggered. Generally speaking, the effectsof hardship have both a procedural and a substantive law aspect. The procedural aspect starts with renegotiation, either "the disadvantaged party is entitled to request" (Art. 6.2.3(1) UPICC) or "the parties are bound to enter into" ( Art. 6:111(2)) such renegotiation, and may lead to a court decision in case of the failure "to reach agreement" within a reasonable time or period. In such cases of the parties' failure to reach agreement during renegotiation, either party is authorized to resort to the court (Art. 6.2.3(3) UPICC). "Here, the parties, in the first instance, are allocated the responsibility to resolve the disequilibrium or to fill the gap in their agreement. Only after an unsuccessful attempt for a reasonable time may either party request the intervention of a court or arbitral tribunal."[54]

Once the matter is brought before a court (including an arbitral tribunal: Art. 1.10 UPICC; Art. 1:301 PECL), the court may either terminate or adapt the contract. The solution seems to be a problem in some jurisdictions since it includes to a certain degree the imposition of conditions by the judiciary. This is true even if the court only terminates the contract, since it has to fix the respective terms at the same time. A tendency in this direction, problematical enough if practiced in national law, causes even more concern in international trade, where the party autonomy is of particular importance. The judge usually has to decide what the law is and not to make decisions for the parties or anybody else.[55] Nevertheless the two sets of Principles have proposed to put this burden on the shoulders of the judge in these exceptional cases and by adding certain substantive rules (Art. 6.2.3(4) UPICC; Art. 6:111(3) PECL) which give a certain legal basis for this constructive legal decision-making. It is said, however, the contract may only be terminated if this is reasonable. Otherwise the court must adapt the contract. Insofar the original equilibrium of the contract is given as a yardstick for adaptation.[56] But the procedure adopted does not impinge on rules allowing the contract to be brought to an end in other circumstances, forexample the right to terminate a contract of indefinite duration by giving notice.[57]

One should note, however, as for the consequences of a change in circumstances, the two sets of Principles result in notably different results. While the UNIDROIT Principles permit ("the disadvantaged party is entitled to request" (Art. 6.2.3(1) UPICC)) the parties to engage in renegotiations, the European Principles require ("the parties are bound to enter into" (Art. 6:111(2))) it. This obligation has its repercussions if the parties are unable to agree and the matter is resolved by a court. The present author thinks this divergency appears to be of merely technical nature instead of those of a "policy" nature. Furthermore, under the European Principles, the court has the power to sanction if the attitude of the parties during renegotiations merits sanction (Art. 6:111(3) PECL, the second sentence).[58]

21.4.2 Triggering of Renegotiation

21.4.2.1 Request for renegotiation

Since hardship consists in a fundamental alteration of the equilibrium of the contract, the first sentence of Art. 6.2.3(1) UPICC, which reads: "In case of hardship the disadvantaged party is entitled to request renegotiations", 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.[59] This is confirmed by the PECL Art. 6:111(2), although differing from the UNIDROIT Principles in its plain language in require the parties to enter into renegotiation, under which if performance has become excessively onerous, "the parties are bound to enter into negotiations with a view to adapting the contract or ending it". Like many expressly agreed clauses, Art. 6:111 envisages at the outset a process of negotiation to reach an amicable agreement varying the contract.

Thus, once hardship is established, the disadvantaged party may request renegotiation of the contract. Furthermore, the other party, if it is concerned about maintaining the contractual relationship, may also seek to open negotiations.[60] However, it is to be noted that, 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). 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.[61]

21.4.2.2 Renegotiation in good faith

The second sentence of Art. 6.2.3(1) UPICC clearly states: "The request shall be made without undue delay and shall indicate the grounds on which it is based". Accordingly, on the one hand, the request for renegotiations must be made as quickly as possible after the time at which hardship is alleged to have occurred. 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.[62] On the other hand, Art. 6.2.3(1) UPICC 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.[63] The UNIDORIT Principles stress communication. Therefore, it is important that the request state the grounds for the request, unless those grounds are obvious.[64] 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.[65]

Although no similar rule is found under Art. 6:111 PECL, its Official Comment makes it clear: "Under the general duty of good faith, the party which will suffer the hardship must initiate the negotiation within a reasonable time, specifying the effect the changed circumstanceshave had upon the contract."[66] Nevertheless, a delayed or incomplete request is not automatically excluded. The disadvantaged party does not lose its right to request renegotiations simply because it fails to act without undue delay or to set forth the grounds on which the request for renegotiations is based in making the request. The delay or insufficiency in making the request may however affect the finding as to whether hardship actually existed and, if so, its consequences for the contract.[67] On the other hand, if the hardship claim is justified, the other party is obligated to negotiate in good faith to adapt the contract to alleviate the burden.[68] "The negotiations must be conducted in good faith, that is to say, they must not be either protracted or broken off abusively. There will be bad faith if one party continues to negotiate after it has already entered another, incompatible contract with a third party. Normally the principle of good faith will require that every point of dispute between the parties should be brought up in the negotiations."[69]

Clearly, although nothing is said (in Art. 6.2.3 UPICC or Art. 6:111 PECL) to that effect, both the initiation of renegotiations by either party and the conduct of both parties during the renegotiation process are subject to the general principle of good faith (Art. 1.7 UPICC; Art. 1:201 PECL) and to the duty of cooperation (Art. 5.3 UPICC; Art. 1:202 PECL). Thus the initiating 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.[70] A party who negotiates or breaks off negotiations in bad faith is liable for the losses caused to the other party (Art. 2.15(2) UPICC; Art. 2:301(2) PECL).

Finally, another application is specified in Art. 6.2.3(2) UPICC in stipulating: "The request for renegotiation does not in 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.[71] Although again no similar rule is found under Art. 6:111 PECL, its Official Comment clearly states: "The victim who withholds its performance on the grounds that it is excessively onerous (for instance during renegotiation) does so at its own risk."[72]

21.4.3 Court Measures in case of Hardship

If the parties fail to reach agreement on the adaptation of the contract to the changed circumstances within a reasonable time, either party is authorized to resort to the court. Art. 6.2.3(3) UPICC reads: "Upon failure to reach agreement within a reasonable time either party may resort to the court." Although no similar rule is found in Art. 6:111 PECL, as noted above, the obligation of the parties to enter into renegotiation established under Art. 6:111 PECL, which appears to be a divergency of technical nature from Art. 6.2.3 UPICC, has its repercussions if the parties are unable to agree and the matter is resolved by a court. Furthermore, the Official Comment on Art. 6:111 PECL makes it clear: "If the parties' negotiations do not succeed, either of the parties may bring the matter before the court."[73] 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.[74]

Upon a showing of hardship, the court may react in a number of different ways. Art. 6.2.3(4) UPICC states: "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." Similarly, the first sentence of Art. 6:111(3) PECL reads: "If the parties fail to reach agreement within a reasonable period, the court may: (a) end the contract at a date and on terms to be determined by the court; or (b) adapt the contract in order to distribute between the parties in a just and equitable manner the losses and gains resulting from the change of circumstances." Clearly, the court may, in effect, either terminate the contract or modify its terms. Thus, although the court will intervene only in the last resort, it is given wide powers. The court has great flexibility in its power to terminate or revise. The termination may be on such terms as the court deems just. It should be noted that in many cases, the reliance interest of the party not burdened by hardship ought to be redressed. Revision need not always be a price adjustment. The place of delivery could be changed.[75] Of course, as to be demonstrated below, there is a strong possibility that a court will refuse to revise the contract by a declaration that the contract be performed as originally agreed.

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. Accordingly, Art. 6.2.3(4)(a) UPICC and Art. 6:111(3)(a) PECL both provide that termination shall take place at a date and on terms to be fixed or determined by the court. Another possibility would be for a court to adapt the contract with a view to restoring its equilibrium. 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.[76]

In other words, the modification of the clauses of the contract must be aimed at re-establishing the balance within the contract by ensuring that the extra cost imposed by the unforeseen circumstances are borne equitably by the parties. They may not be placed solely on one of them. Unlike the risks which result from total impossibility, the risks of unforeseen events are to be shared. The court may intervene in a variety of ways. According to the texts, the proposed solutions are only options. First, the court may reject the application. It will do so if, in its opinion, the remedy would be worse than the harm: if, for instance, the remedy were to create a new hardship on the other party's side. Second, it may extend the period for performance, increase or reduce the price or the contract quantity or order a compensatory payment. Much will depend on the procedural rules of the forum, but these will often permit similar results to be reached e.g. by granting a délai de grâce or by reducing the counter-performance to be rendered. It is to be noted that Art. 6:111(3)(b) PECL establishes a limit to the court power to adapt the contract: "in a just and equitable manner". Moreover, the Official Comment on Art. 6:111 PECL clearly states that the court can modify clauses of the contract but it cannot rewrite the entire contract. The modifications made to the contract must not amount to imposing a new contract on the parties. Otherwise, the only option open to the court would be to declare the contract ended. It is obvious that if the parties fail to agree on a change to the contract, the resulting difficulties will usually be such that the court will end up declaring the contract ended. And the court will fix the date for the contract to end in such a way as to ensure that the aggrieved party is not unfairly prejudiced by the other party's failure to agree ending the contract or to negotiate for adaptation of the contract.[77]

Finally, it is to be recalled that under the European Principles, the court has the power to sanction if the attitude of the parties during renegotiations merits sanction. The second sentence of Art. 6:111(3) PECL clearly states: "In either case [the court's option to adapt or end the contract upon failure of parties' renegotiation], the court may award damages for the loss suffered through a party refusing to negotiate or breaking off negotiations contrary to good faith and fair dealing." Thus, the obligation to renegotiate is independent and carries its own sanction. The compensation provided here will normally consist of damages for the harm caused by a refusal to negotiate or a breaking off of negotiations in bad faith (for instance, the expenses of bringing the action insofar as these have not been recouped by an award of costs). It may be awarded against either party.[78]

21.4.4 Concluding Remarks

Based on the foregoing discussion it is clear that the court's decision to terminate or to modify the contract is very much a last resort. The whole procedure is devised to encourage the parties to reach an amicable settlement through renegotiation. Furthermore, both the initiation of renegotiations by either party and the conduct of both parties during the renegotiation process are subject to the general principle of good faith. A disadvantaged party may not during the tendency of renegotiation or resolution withhold its performance. It is only in cases where the negotiations are unsuccessful that the parties are entitled to resort to judicial system, where the court is authorised to make a decision on the merits in accordance with Art. 6.2.3(4) UPICC or Art. 6:111(3) PECL.

Clearly, the first aim should be to preserve the contract. The court could even require the parties to make a last effort at renegotiation if it believes that there is still a chance of saving the contract. It may employ any means that are permitted under its national law, such as appointing a mediator to assist the parties.[79] In short, a court is authorized to grant four possible options of relief if it finds a hardship: (1) terminate the contract at a specified date and on terms to be fixed; (2) adapt the contract with a view to restoring its equilibrium; (3) direct the parties to resume negotiations to reach an agreement adapting the contract; (4) confirm the terms of the contract as originally agreed.[80] However, a judge can only terminate or adapt a contract where it is reasonable under the circumstances. Art. 6.2.3(4) UPICC 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.[81]

In any event, it is in effect the court which declares the contract ended in case of hardship, in contrast to what happens when the non-performance is imputable to one of the parties or when performance becomes impossible. It may be that, after fruitless negotiations, one of the parties will take the initiative and announce unilaterally the end of the contract. If the other challenges this, the court must decide whether the party was justified in taking this attitude. In addition the court will have to fix the date as from which the contract is ended, taking into account how much of it has been performed. It is this date which will determine the extent of restitution which will become due. The hardship provisions in the two Principles also empower the court to end the contract upon terms, for instance provided that an indemnity is given. It may also order the payment of an addition to the price or of compensation for a limited period and the termination of the contract at the end of the period. So the mechanism adopted by Arts. 6.2.1 through 6.2.3 UPICC and Art. 6:111 PECL gives the court wide powers. These must be used in moderation, to avoid any reduction in the vital stability of contractual relations. This moderation is shown by the experience of countries which have already a similar rule.[82]

Go to table of contents to full text of Remedies for Non-performance: Perspectives from CISG, UNIDROIT Principles & PECL.

FOOTNOTES: Chapter 21

1. See Comment 2 on Art. 6.2.1 UPICC.

2. See Fritz Enderlein, Dietrich Maskow, International Sales Law: United Nations Convention on Contracts for the International Sale of Goods, Oceana Publication (1992); p. 324. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/enderlein.html>.

3. Ibid., p. 320.

4. See Joern Rimke in "Force majeure and hardship: Application in international trade practice with specific regard to the CISG and the UNIDROIT Principles of International Commercial Contracts": Pace Review of the Convention on Contracts for the International Sale of Goods, Kluwer (1999-2000); pp. 219-220. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/rimke.html>.

5. See Dionysios Flambouras in "Comparative Remarks on CISG Article 79 & PECL Articles 6:111, 8:108" (2002). Available online at <http://www.cisg.law.pace.edu/cisg/text/peclcomp79.html>. See also Jacob Ziegel, infra. note 11; Joern Rimke, supra. note 4, p. 220.

6. See Dionysios Flambouras, ibid.

7. See Jennifer M. Bund in "Force majeure Clauses: Drafting Advice for the CISG Practitioner": 17 Journal of Law and Commerce (1998); pp. 392-393. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/bund.html>.

8. Supra. note 4, p. 226.

9. Supra. note 2, p. 325.

10. See Denis Tallon, Commentary on the International Sales Law - The 1980 Vienna Sales Convention, C.M. Bianca & M.J. Bonnell eds. (1987); p. 592.

11. See Jacob Ziegel in "Editorial remarks on the manner in which the UNIDROIT Principles may be used to interpret or supplement CISG Article 79". Available online at <http://www.cisg.law.pace.edu/cisg/principles/uni79.html>.

12. See Joseph M. Perillo in "Force Majeure and Hardship under the UNIDROIT Principles of International Commercial Contracts": Contratación internacional. Comentarios a los Principios sobre los Contratos Comerciales Internacionales del Unidroit, Universidad Nacional Autónoma de México - Universidad Panamericana (1998); p. 120. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/perillo3.html>.

13. Supra. note 7, p. 390.

14. Supra. note 12, p. 126.

15. See Comment 1 on Art. 6.2.1 UPICC.

16. See Maskow, Dietrich in "Hardship and Force Majeure": 40 Am.J.Comp.L. (1992); p. 661. TLDB Document ID: 126400.

17. Supra. note 11.

18. Supra. note 1.

19. See Sylvette Guillemard in "A comparative study of the UNIDROIT Principles and the Principles of European Contracts and some dispositions of the CISG applicable to the formation of international contracts from the perspective of harmonisation of law": Pace Review of the Convention on Contracts for the International Sale of Goods (CISG), Kluwer Law International (2000-2001); pp. 83-113. Available online at <http://cisgw3.law.pace.edu/cisg/biblio/guillemard1.html>.

20. Supra. note 16, p. 662.

21. Unlike the UNIDROIT Principles, the European Principles do not expressly provide for the binding force of contracts in its general provisions. Art. 6:111 PECL which deals with changes in circumstances begins with the rule that "[a] party is bound to fulfil its obligations even if performance has become more onerous, whether because the cost of performance has increased or because the value of the performance it receives has diminished." In this one relatively long article, the European Principles set out almost the same conditions for hardship as the UNIDROIT Principles.

22. As stated above, Arts. 6.2.2 and 6.2.3 of the UNIDROIT Principles deal with the definition of hardship and the effects of hardship respectively. This splitting up is intended to achieve greater clarity.

23. See Comment and Notes to the PECL: Art. 6:111. Comment A. Available online at <http://www.cisg.law.pace.edu/cisg/text/peclcomp79.html>. Admittedly, it can be argued that if sanctity of contract were applied strictly, and the idea that relief might be given when circumstances change unforeseeably were rejected, parties would be given a stronger incentive to introduce appropriate clauses into their contracts. But experience suggests that frequently the parties are not sufficiently sophisticated, or are too careless of their own interests, to do this; or they insert clauses which do not cover every eventuality. It can also happen that the operation of the clause itself runs into some unforeseen difficulty. For instance, a price fluctuation clause which operates by reference to the price of oil may have been drafted with only moderate rises in that price in mind and may give distorted results during an oil crisis. It is therefore impractical to leave such questions to be expressly agreed.

24. Ibid.

25. Supra. note 4, p. 240.

26. See Secretariat Commentary on Art. 65 of the 1978 Draft [draft counterpart of CISG Art. 79]. Comment 5. Available online at <http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-79.html>.

27. Supra. note 4, pp. 240-241.

28. The drafters of the PECL aimed to make a major contribution to the formation of a European ius commune, i.e., lex mercatoria, the scope of which is limited to the States of the European Union. In contrast, the CISG may be applied universally.

29. The various national laws solve in very different ways the problem of changes of circumstances which make the obligations of one party much more onerous but which do not amount to force majeure. Some accept it as a basis for modifying the contract, others do not. (See notes to Art. 6:111 PECL, supra. note 23.)

30. See Comment 5 on Art. 6.2.2 UPICC.

31. See Dionysios P. Flambouras in "The Doctrines of Impossibility of Performance and clausula rebus sic stantibus in the 1980 Vienna Convention on Contracts for the International Sale of Goods and the Principles of European Contract Law: A Comparative Analysis": 13 Pace International Law Review (Fall 2001); pp. 292-293. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/flambouras1.html>.

32. See Comment 1 on Art. 6.2.2 UPICC.

33. See Comment 2 on Art. 6.2.2 UPICC.

34. Supra. note 23, Comment B.

35. Supra. note 20.

36. Supra. note 33.

37. Supra. note 34.

38. Supra. note 33.

39. See Comment 6 on Art. 6.2.2 UPICC.

40. Under the Restatement (Second) of Contracts which is available to buyers under section 1-103 of the UCC, section 265 only permits discharge when a party's principal purpose is substantially frustrated. The principal purpose "must be so completely the basis of the contract that, as both parties understand, without it the transaction would make little sense." The mere fact that the transaction has become less profitable is insufficient to establish frustration of purpose; the performance must become commercially valueless, which requires near total frustration. At least one author suggests that a fifty percent decrease in value of the performance to be received or a fifty percent increase in the cost of performance is sufficient to satisfy the "fundamental change" requirement of Art. 6.2.2 UPICC, a substantial difference from the level reflected in section 265. (See Sarah Howard Jenkins, infra. note 54, p. 2028.)

41. Supra. note 33.

42. See Comment 4 on Art. 6.2.2 UPICC.

43. See Comment 3 on Art. 6.2.2 UPICC.

44. Supra. note 34.

45. Supra. note 12, p. 128.

46. Supra. note 43.

47. Supra. note 12, p. 129.

48. Supra. note 34.

49. Supra. note 16, pp. 662-663.

50. Supra. note 43.

51. Supra. note 12, pp. 129-130.

52. Supra. note 34.

53. See Comment 7 on Art. 6.2.2 UPICC.

54. See Sarah Howard Jenkins in "Exemption for Nonperformance: UCC, CISG, UNIDROIT Principles -- A Comparative Assessment": 72 Tulane Law Review (1998); pp. 2028-2029. Available online at http://www.cisg.law.pace.edu/cisg/biblio/jenkins.html>.

55. Supra. note 16, p. 663.

56. Ibid.

57. Supra. note 23.

58. Supra. note 19.

59. See Comment 1 on Art. 6.2.3 UPICC.

60. Supra. note 23, Comment C.

61. Supra. note 59.

62. See Comment 2 on Art. 6.2.3 UPICC.

63. See Comment 3 on Art. 6.2.3 UPICC.

64. Supra. note 12, p. 130.

65. Supra. note 63.

66. Supra. note 60.

67. Supra. notes 62, 63.

68. Supra. note 64.

69. Supra. note 60.

70. See, e.g. Comment 5 on Art. 6.2.3 UPICC.

71. See Comment 4 on Art. 6.2.3 UPICC.

72. Supra. note 22.

73. Supra. note 22, Comment D.

74. See Comment 6 on Art. 6.2.3 UPICC.

75. Supra. note 12, p. 131.

76. See Comment 7 on Art. 6.2.3 UPICC.

77. Supra. note 73.

78. Supra. note 60.

79. Supra. note 73.

80. Supra. note 54, p. 2029.

81. Supra. note 76.

82. Supra. note 73.

CHAPTER 22. FORCE MAJEURE & HARDSHIP CLAUSES

     Force majeure and hardship clauses, frequently introduced into contracts for international sales transactions, deal with situations of changed circumstances. In these clauses, the contracting parties define impediments, excuses, and the consequences thereof. The sphere of operation and the purpose of force majeure and hardship clauses in international contracts will now be considered in more detail.[1]

22.1 GENERAL CONSIDERATIONS

As discussed previously, the conceptions dealing with situations of changed circumstances are oriented on the two basic concepts of force majeure and hardship. Generally speaking, thus, parties to commercial contracts, whether they engage in domestic or international contracts, are protected as a rule under the doctrine of changed circumstances. However, the degree of protection they receive may vary depending on the applicable rules governing their contract. Nevertheless, it is commended to include carefully-negotiated and -drafted force majeure or hardship clauses in the contracts, because the excuse provisions in applicable instruments may not afford adequate protection under certain circumstances. It is especially the case where the contracts are governed by the CISG, which addresses the issue of changed circumstances in Art. 79 nevertheless does not solve the problem entirely.[2]

With respect to situations of changed circumstances, the UNIDROIT Principles and the European Principles could offer sufficiently elaborate and widely accepted rules on hardship and force majeure. By implementing these rules into their contract, parties could supplement the narrow and vague provisions of Art. 79 CISG.[3] On the other hand, parties are expected to specify in more detail the contingencies which justify invoking hardship or force majeure, because most legal systems and international instruments generally recognize party autonomy to provide for varying clauses concerning changed circumstances so as to take account of the particular features of the specific transaction.[4] By including a force majeure or hardship clause, parties can delineate the types of extraordinary circumstances that will excuse non-performance, thereby increasing predictability. Where the express terms of the agreement delineate the standard to be applied for exemption, that express provision -- even if extracted from the applicable law -- should be honored by the courts.[5]

Indeed, the contracting parties in international trade are normally very experienced and aware of the risks involved. Therefore, they are likely to include special clauses in their contract, use pre-drafted contracts or use general terms specific to a particular trade. Such contractual arrangements may appear as force majeure or hardship clauses. In the former case, the clause generally covers future situations where events occur which are beyond the control of the parties and render execution of the contract impossible, either temporarily or permanently, and may or may not provide for the discharge of the debtor of the obligation in question where these events occur (e.g. force majeure events, embargoes, export/import limitations, etc.). A force majeure clause may impose more or less lenient conditions or may provide for the obligor's liability in force majeure situations. On the other hand, a hardship clause attempts to anticipate and deal with the situation where unforeseen circumstances fundamentally change the contractual equilibrium such that an excessive, normally economic, burden is thrust upon one of the parties. Such a clause is likely to set some parameters for renegotiation of the contract in its entirety (or some contractual terms) and its objectives, should the circumstances change (e.g. if a dramatic devaluation of the currency occurs). Force majeure clauses are normally used in short term contracts of sale where the contracting parties' obligations are limited to the delivery of the goods and the payment of the price. In these situations, the number of discharging events is normally limited and restrictively enumerated in the force majeure clauses. On the other hand, in contracts performed over a long period of time (e.g. distribution, agency agreements consisting of successive contracts of sale, supply contracts) the absolute application of the pacta sunt servanda rule appears quite harsh since during the existence of the contractual relationship unpredictable and otherwise unavoidable factors could render the performance of the contractual obligations excessively onerous or unfair. Consequently, in such situations the insertion of a hardship clause is often viewed as necessary.[6]

While it might be argued that, in view of wider and narrower formulations of the doctrine of changed circumstances or so-called (clausula) rebus sic stantibus in different legal systems or international instruments and of certain differences in its practical application it would not be easy to establish a common core of such a general principle of law, the consideration of changed circumstances in certain contexts is nevertheless warranted by the express wording contained in the contracts under so-called force majeure or hardship clauses. Contracts can and do take account of the conditions and needs presented by various types of transactions. Here the contractual practice can help to obtain ideas for the interpretation of the grounds presumed under the prepared instruments for excusing non-performance. Clauses, model contracts, and the like, which have prevailed in a certain context, can play a role in this regard.[7]

22.2 FORCE MAJEURE CLAUSE

22.2.1 Introduction

Force majeure clauses, often very detailed, are almost invariably included in international business contracts, irrespective of their proper or selected governing law.[8] They only have relevance, however, if they differ from the doctrine of force majeure that would be applicable without the existence of such a clause.[9] In this respect, force majeure clauses that parties include in their contracts either supplement the governing law or limit or supplant the default rule thereof. It seems clear that, when provision is made to anticipate the consequences of force majeure events, the parties tend to depend much more on the terms of their agreement than an the subjacent rules of the system of law applicable to the contract.[10]

Under most circumstances, parties should include a force majeure clause in their contract to provide greater predictability and more appropriate protection than the doctrine of excuse governing the transaction -- usually CISG Art. 79. Force majeure clauses can provide increased protection for clients in several ways. For example, Art. 79 CISG does not explicitly state whether an impediment excuses performance if partial performance is possible. Thus, the parties could draft a force majeure clause that explicitly states that a party must perform to the extent possible. By negotiating the issue of partial performance in advance, parties can avoid expensive litigation down the road. Similarly, parties could include a force majeure clause to overcome the obstacle of foreseeability. To some extent, every impediment is foreseeable; and where certain situations or "impediments" are foreseeable, parties generally assume their risk unless explicitly allocated in the contract. Therefore, since a force majeure clause in a CISG contract may limit or supersede the applicability of Art. 79, parties could negotiate force majeure excuses without regard to foreseeability. Thus, even if a party could not claim excuse under Art. 79 -- because the impediment was foreseeable the party could be excused by an event delineated in the force majeure clause. The illustrations provided above do not exhaust the benefits that force majeure clauses provide for international contracts. Force majeure clauses can be tailored to meet the needs of parties, to account for exceptional circumstances, and to compensate for inadequate protection by the applicable doctrine of excuse.[11]

However, in order to protect clients, practitioners should negotiate and draft the clauses very carefully. In particular, practitioners should consider the following tips when drafting force majeure clauses: force majeure clauses are generally drafted in such a way as to offer a definition of the concept, followed by a non-exhaustive list of the events agreed upon by the parties as constituting force majeure. Furthermore, a duty of notification, obligating the affected party to give notice of the force majeure event, is often provided. Finally, force majeure clauses set out the legal effect of a force majeure situation.

22.2.2 Drafting Considerations

Drafters must firstly decide whether to list specific force majeure events, include a "catchall" category, or both.[12] It is the recommended and usual practice that force majeure clauses, after defining the concept in a catch-all provision, set out a non-exhaustive list of agreed force majeure events.[13] Examples of traditional events contained in such lists are tornadoes, lightning, floods, fires, earthquakes, and unusually severe weather conditions.[14] The list of specific force majeure events included in international contracts has evolved in such a way as to include impediments to the ability of the parties to fulfill their obligations. These are in addition to the classical events of natural calamities and wars, and may be the result of: (a) the increasing participation of States or their entities in business activities (authorisations, approvals, concessions and regulations), or (b) turmoil of a social nature (strikes, lock-outs).[15] When the laundry list approach is utilized, the drafter should consider phrasing it as "including, but not limited to ..." Otherwise, a court could interpret the clause as excluding any event not specifically listed in the clause.[16] On the other hand, the drafter could state that the catchall provision covers "any other event, whether or not similar to the causes specified above." The drafter could avoid leaving room for judicial discretion in the laundry list approach by listing very precise events. However, drafters should remember that under the ejusdem generis rule of construction "general words following specific ones will be given a limited meaning." Therefore, if the force majeure clause enumerates contingencies (i.e., a laundry list), the drafter must be very comprehensive. As an alternative, the force majeure clause could delineate excusing effects rather than excusing events.[17]

Secondly, the force majeure clause should explicitly state what the performing party must do in order to properly invoke the clause.[18] For example, the clause may require that a party that wishes to be excused from performance under the clause give prompt notice of such an intention to the other party, unless the other party has actual notice. Failure to provide such notice often results in drastic consequences where one cannot rely on the clause to excuse non-performance. Such a situation, however, is not thought to result automatically from a failure to provide timely notice; there is usually an express provision in the contract.[19] Moreover, where notice is required, the drafter should address other notice issues, including: (1) when the excusing event is deemed to have occurred, i.e., when the duty to give notice arises; (2) time limits; (3) whether notice must be written; and (4) whether notice becomes effective on dispatch or upon receipt, etc.

Thirdly, the drafter should resolve any uncertainty as to the consequences of a situation of force majeure, which is generally to imply a disclaimer of liability for the effects of such an event. Generally, the promisor is not liable for damages where force marjeure exists. However, e.g., it cannot be determined with sufficient security how the right to performance can be affected by the impediments under Art. 79 CISG. Unlike most municipal laws which adopt the notion of force majeure, in international trade practice force majeure does not necessarily result in the termination of the contract. More often, in international trade practice there is provision for two stages with respect to the effect of force majeure. In the first stage, either the duty to discharge the obligation is suspended for the duration of the force majeure condition or the time of performance of the contract is extended for a specific period. If the event which constitutes force majeure is permanent or continues after the expiration of that period, each party is entitled to terminate the contract. If the force majeure condition ceases before the expiration of the additional period of time, however, the contract revives without consequences.[20] Drafters should use very clear language when dealing with these issues so as to make their intention clear.

In short, in defining force majeure clause, the drafter should resolve any uncertainty left by default rule, e.g. Art. 79 CISG. Drafters should use very clear language and define the scope of the force majeure clause to avoid leaving a gap in the clause.

22.3 HARDSHIP CLAUSE

22.3.1 Introduction

In practice, specific clauses are used to give the possibility of adjusting the contract under certain circumstances. It is fairly common in contracts dealing with international trade, particularly those that have long durations, to make provisions for revision of the contract in case of changed circumstances.[21] Among these clauses, hardship clauses organise the revision of the contract whenever a change of circumstances significantly modifies the economy of the contract.[22] They apply to situations of changed circumstances in which the parties intend not to dissolve the contract but to continue it.[23]

Perillo even believes that the widespread use of hardship clauses in long-term contracts has created a custom and the hardship clause must be implied in the contract even if it was not expressly included by parties: "Sophisticated international trade agreements of long duration typically contain a renegotiation or other adaptation clause that provides flexibility to the relationship -- so typical as to perhaps rise to the strength of a usage. The absence of such a clause may reflect that such a clause has been rejected by one or both parties, but is more likely to have been overlooked by unsophisticated parties or deliberately omitted by a sophisticated drafter. In the last two cases, the court should consider the contracts as having an omitted term and fill the gap with the help of the UNIDROIT Principles."[24] However, another commentator notes that the fact that parties sometimes include a hardship clause in the contract may prove that no general customary principle exists. Moreover, there is such a variety in these hardship clauses with regard to their scope, application and remedy, that it is difficult to base a customary principle on them.[25]

In fact, arbitrators have consistently refused to read customary hardship clauses into long-term contracts. Rather, they have ruled that hardship clauses should be interpreted strictly. Accordingly, a clause mentioning specific changes must be interpreted as meaning that no other changes should be taken into account. Therefore, parties are recommended to specifically instruct the arbitrators or tribunals to take account of the changed circumstances by inserting in advance a hardship clause in their contracts. As noted previously, the CISG has not resolved the existing problems of hardship. Hardship clauses may, therefore, be highly desirable in cases where the CISG applies. On the other hand, the mere presence of a hardship clause should not in itself exclude the application of the general law on changed circumstances. It would be too cumbersome if parties were obliged to negotiate and draft hardship clauses covering all possible events which may affect performance. Consequently, the general law on changed circumstances remains applicable to all changes not covered by a hardship clause.[26]

22.3.2 Drafting Considerations

Hardship clauses are usually highly complex and vary significantly from case to case. However, in general terms, it can be stated that the provisions in current use have two basic common features, namely the determination of the events which may trigger the readjustment process and the establishment of an appropriate procedure for the adaptation of the relationship to new circumstances.[27] In other words, hardship clauses always consist of two main parts. The first part of the clause defines the hypothesis when the clause applies. The second part deals with the effects of hardship, i.e., what happens whenever the hypothesis is realised.[28] In a hardship clause it is important to stipulate when and how the parties will rearrange the contractual terms in case the contract loses its economic balance due to certain events which may or may not be specified.[29]

On the one hand, hardship clauses usually state that the circumstances at the time of the conclusion of the contract have changed. This change of circumstances must be serious or substantial and beyond the control of either party. Furthermore, the change must be entirely uncontemplated and unforeseeable. Then, a hardship clause often goes on to describe the effect of the change in circumstances, namely that the contract is out of balance, leading to a substantial economic hardship. Here, some clauses set out the requirement that a party is prejudiced. This, however, seems too extensive.[30] With regard to the wording of hardship clauses, it can be very broad and refer to "events" as the circumstances which are to be considered. Sometimes, the wording is more specific. For example, "monetary events", or specific changes in environmental conditions are taken into account. However, it seems advisable to use broad wording, give a list of specific circumstances as examples, and insert the excluded circumstances. On the other hand, the use of more subjective criteria, such as "unfair" or "inequitable" should also be avoided due to their vagueness.[31] In short, the hypothesis of a hardship clause has two aspects: the clause sets out the circumstances in which hardship exists; it then describes the consequences or effect of these circumstances on the parties to the contract.[32]

On the other hand, hardship clauses usually provide for revision of the contract. Some clauses set out criteria for the revision of the contract. An example of such a clause is, "to restore the equilibrium between the parties as it was at the time of the conclusion of the contract." A more subjective approach would be, for example, "with fairness" or "equitable adjustment".[33] In a case where no agreement between the parties can be reached, hardship clauses provide for sanctions. The stipulation of revision of a contract is only useful if it is followed by a sanction that deals with the situation in which no agreement can reached. "A hardship clause without a sanction is hardly worth the paper on which it is written." Sanctions are usually the termination of the contract or adaptation of the contract by a third person. In the latter case, provision can be made for the intervention of an arbitrator, an expert, or even a court.[34]

22.4 OVERLAPPING OF THE CLAUSES

As discussed above, provision should be made for situations of changed circumstances in international commercial contracts. Such contractual arrangements may appear as force majeure or hardship clauses. Force majeure and hardship clauses traditionally differ in their sphere of application and their legal effects and, thus, in their aims in dealing with a situation of changed circumstances. Modern contract practice in international trade, however, has evolved in such a way that the difference between these two types of clauses has diminished.[35]

The prerequisites for a given event to constitute force majeure in international trade practice are less restrictive than in municipal law. Thus, in some modern clauses, events of force majeure are defined as events that do not necessarily render the contract performance impossible, but hamper the normal discharge of the contract obligation, or make it exorbitant from a commercial standpoint.[36] An overlap with situations of hardship is evident here. In departing from the traditional approach to drafting force majeure clauses, modern clauses of this kind contain renegotiation provisions, obligating the parties to renegotiate the terms of the contract and adapt it to the new circumstances. Whether or not drafters put such provisions into their force majeure clauses will, inter alia, depend on what value they attach to their relationship. As an alternative to renegotiation, or in the case of its failure, force majeure clauses may also contemplate recourse to arbitration or some other kind of alternative dispute resolution, such as a technical expertise procedure. It is evident that these broad force majeure clauses providing for the adaptation of the contract overlap with hardship clauses.

Indeed, standard forms of contracts containing force majeure and hardship clauses are frequently introduced into international commercial contracts. When parties draft their own force majeure clauses, however, it is recommended that for the sake of uniformity, simplicity and efficiency the contract contain only one clause covering the problem of changed circumstances. Here, the scope of a force majeure clause can be broadened as far as the limits of freedom of contract permit. As shown, this is already the case in modern contractual practice where force majeure clauses overlap to a great extent with provisions on hardship. Despite the fact that the concept of hardship also relates to changed circumstances, such a force majeure clause should be considered capable of covering the entire problem.[37]

22.5 USE OF STANDARD FORMS: ICC No. 421 (partial)

The use of standard forms of contract is widespread in international trade. They are valid if the parties have expressly or impliedly concluded their contract by reference to them. In general it must be said that, depending on the scope and duration of the transaction in question, the topic of changed circumstances is too important to be addressed in standardised force majeure or hardship clauses. In this respect, the ICC has promulgated its Document No. 421 (1985). There are two sets of provisions: The first lays down the conditions for relief from liability when performance has become literally or practically impossible (force majeure). The second covers the situation where changed conditions have made performance excessively onerous (hardship). One should note, however, ICC Document No. 421 contains a rather elaborate model force majeure clause and responds to many of the defects that have been ascribed to Art. 79 CISG. The clause, however, does not provide for the adaptation of the contract. The second set of provisions dealing with hardship do not provide a draft clause suitable for incorporation, but rather drafting suggestions. This is in recognition of the fact that the concept of "hardship" is relatively recent in international contract law. Alternatively, parties to international commercial contracts are recommended to agree that the UNIDROIT Principles or the European Principles, which could offer sufficiently elaborate and widely accepted rules on hardship and force majeure, shall govern their contract. The two sets of Principles may also have the function of standard forms of contracts. Here, the model force majeure clause contained in ICC Document No. 421 is appended as follows:

Force majeure (exemption) clause

"Grounds of relief from liability

1. A party is not liable for a failure to perfom any of his obligations in so far as he proves

2. An impediment within paragraph (1) above, may result from events such as the following, this enumeration not being exhaustive

3. For the purposes of paragraph (1) above, and unless otherwise provided in the contract, impediment does not include lack of authorisations, of licences, of entry or residence permits, or of approvals necessary for the performance of the contract and to be issued by a public authority of any kind whatsoever in the country of the party seeking relief.

Duty to notify

4. A party seeking relief shall as soon as practicable after the impediment and its effects upon his ability to perform became known to him give notice to the other party of such impediment and its effects on his ability to perform. Notice shall also be given when the ground of relief ceases.

5. The ground of relief takes effect from the time of the impediment or, if notice is not timely given, from the time of notice. Failure to give notice makes the failing party liable in damages for loss which otherwise could have been avoided.

Effects of grounds of relief

6. A ground of relief under this clause relieves the failing party from damages, penalties and other contractual sanctions, except from duty to pay interest on money owing as long as and to the extent that the ground subsists.

7. Further it postpones the time for performance, for such period as may be reasonable, thereby excluding the other party s right, if any, to terminate or rescind the contract. In determining what is a reasonable period, regard shall be had to the failing party s ability to resume performance, and the other party s interest in receiving performance despite the delay. Pending resumption of performance by the failing party the other party may suspend his own performance.

8. If the grounds of relief subsist for more than such period as the parties provide [the applicable period to be specified here by the parties, or in the absence of such provision for longer than a reasonable period, either party shall be entitled to terminate the contract with notice.

9. Each party may retain what he has received from the performance of the contract carried out prior to the termination. Each party must account to the other for any unjust enrichment resulting from such performance. The payment of the final balance shall be made without delay."

Parties who wish to incorporate this clause by reference in their contracts are recommended to use the following wording:

"The Force Majeure (Exemption) clause of the International Chamber of Commerce (ICC Publication No. 421) is hereby incorporated in this contract".

Go to table of contents to full text of Remedies for Non-performance: Perspectives from CISG, UNIDROIT Principles & PECL.

FOOTNOTES: Chapter 22

1. See Joern Rimke in "Force majeure and hardship: Application in international trade practice with specific regard to the CISG and the UNIDROIT Principles of International Commercial Contracts": Pace Review of the Convention on Contracts for the International Sale of Goods, Kluwer (1999-2000); p. 227. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/rimke.html>.

2. It is likely that Art. 79 will be the Convention's least successful provision. The most discussed problem in the context of Art. 79 is whether radically changed circumstances, where the performance of one of the parties has become much more onerous and difficult, but not impossible, falls within the scope of this provision. Because of Art. 79's vagueness, however, it cannot be determined with sufficient certainty how this issue can be decided on the basis of the CISG.

3. Supra. note 1, pp. 242-243.

4. Party autonomy is generally established under, e.g. CISG Art. 6; UPICC Art. 1.5 and PECL Art. 1:102(2). In pertinent part, for instance, the Official Comment on the UNIDROIT Principles deals with the relationship between hardship/force majeure and contract practice: "The definition of hardship in this article [Art. 6.2.2 UPICC] 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." (Comment 7 on Art. 6.2.2 UPICC); similarly, "[t]he definition of force majeure in para. (1) of this article [Art. 7.1.7 UPICC] 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." (Comment 4 on Art. 7.1.7 UPICC)

5. See Sarah Howard Jenkins in "Exemption for Nonperformance: UCC, CISG, UNIDROIT Principles -- A Comparative Assessment": 72 Tulane Law Review (1998); pp. 2029-2030. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/jenkins.html>.

6. See Dionysios P. Flambouras in "The Doctrines of Impossibility of Performance and clausula rebus sic stantibus in the 1980 Vienna Convention on Contracts for the International Sale of Goods and the Principles of European Contract Law: A Comparative Analysis": 13 Pace International Law Review (Fall 2001); pp. 283-284. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/flambouras1.html>.

7. Supra. note 1, p. 221.

8. See Ugo Draetta in "Force Majeure Clauses in International Trade Practice": 5 Int'l Bus. L. J. (1996); p. 550.

9. See P.J.M. DeClercq in "Modern Analysis of the Legal Effect of Force Majeure Clauses in Situations of Commercial Impracticability": 15 J.L. & Com. (1995); p. 213.

10. See Delaume, Georges, Law And Practice of Transnational Contracts, New York, London, Rome (1988); p. 53. Available online at <http://tldb.uni-koeln.de/TLDB.html>; TLDB Document ID: 101500.

11. See Jennifer M. Bund in "Force majeure Clauses: Drafting Advice for the CISG Practitioner": 17 Journal of Law and Commerce (1998); pp. 405-406. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/bund.html>.

12. Supra. note 9, p. 232.

13. Supra. note 1, p. 230. In this respect, Bund believes that courts may be more willing to give effect to "laundry list" force majeure clauses that contain specific events, rather than to a catchall or combination-type clause for several reasons. First, a clause that merely lists general categories leaves judges discretion and, in certain situations, they could refuse to excuse performance since they are not bound by specified events. Second, under rules of construction, namely ejusdem generis, courts have refused to excuse performance for events that are dissimilar to events specifically listed in the clause (e.g., economic factors). Including a general catchall provision, therefore, may be a wasted effort. (Supra. note 11, p. 408.)

14. Supra. note 9, p. 233.

15. Supra. note 8, p. 552.

16. Supra. note 11, p. 408.

17. Supra. note 11, pp. 410-411.

18. See John S. Kirkham in "force majeure - Does it Really Work?": 30 Rocky Mtn. Min. L. Inst. (1984); § 6.05(2)(a).

19. Supra. note 8, p. 552.

20. Supra. note 1, pp. 231-232.

21. Some of these clauses provide the contract will terminate when a specified change in circumstances has occurred. Other clauses, such as indexation clauses or price revision clauses provide the contract terms will be automatically changed if such circumstances arise. Finally, some clauses, adaptation clauses, merely order the parties to adapt the contract terms to the new circumstances. (Infra. note 25, p. 109.)

22. See Wouter Den Haerynck in "Drafting Hardship Clauses in International Contracts": Structuring International Contracts, Dennis Campbell ed. (1996); p. 234.

23. See Clive M. Schmitthoff, Schmitthoff's Export Trade 146 (8 ed. 1986); p. 648.

24. See Joseph M. Perillo in "Force Majeure and Hardship under the UNIDROIT Principles of International Commercial Contracts": Contratación internacional. Comentarios a los Principios sobre los Contratos Comerciales Internacionales del Unidroit, Universidad Nacional Autónoma de México - Universidad Panamericana (1998); p. 117. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/perillo3.html>.

25. See van Houtte, Hans in "Changed Circumstances and Pacta Sunt Servanda": Gaillard ed., Transnational Rules in International Commercial Arbitration (ICC Publ. Nr. 480,4), Paris (1993); pp. 109-110. TLDB Document ID: 117300.

26. Ibid.

27. Supra. note 10, p. 59.

28. Supra. note 22, p. 235.

29. See Puelinckx, A.H. in "Frustration, Hardship, Force Majeure, Imprévision, Wegfall der Geschäftsgrundlage, Unmöglichkeit, Changed Circumstances": 3 J.Int'l Arb. No. 2 (1986); p. 53. TLDB Document ID: 128100.

30. Supra. note 1, pp. 228-229.

31. Supra. note 22, pp. 237-238.

32. See Clive M. Schmitthoff in "Hardship and Intervener Clauses": J. Bus. L. (1980); p. 85.

33. Supra. note 22, p. 239.

34. Supra. note 1, p. 229.

35. Supra. note 1, p. 232.

36. Supra. note 8, p. 551.

37. Supra. note 1, p. 241, 243.