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Published in J. Herbots editor / R. Blanpain general editor, International Encyclopaedia of Laws - Contracts, Suppl. 29 (December 2000) 1-192. Reproduced with permission of the publisher Kluwer Law International, The Hague.

[For more current case annotated texts by this author, see Bernstein & Lookofsky, Understanding the CISG in Europe, 2d ed. (2003) and Lookofsky, Understanding the CISG in the USA, 2d ed. (2004).]

excerpt from

The 1980 United Nations Convention on Contracts
for the International Sale of Goods

Joseph Lookofsky

Article 79
Liability Exemptions for Failure to Perform

  1. Introduction
  2. Freedom of Contract and the Gap-Filling Rule
  3. Requirements for Exemption and the Burden of Proof
  4. Non-Performance Due to Failure of ‘Third Person’
  5. Duration of Exemption
  6. Notice of Impediment
  7. Exemption Applies only as Regards Damages

1. Introduction

298. Section N of Chapter V, headed 'Exemptions,' deals with the kinds of problems often discussed in domestic law under such labels as 'impossibility' of performance and force majeure. The main CISG rule, set forth in Article 79(1) provides:

'A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.'

2. Freedom of Contract and the Gap-Filling Rule

299. For those many cases where the contract leaves a gap on the question of a breaching party's liability for breach, Article 79 provides a limited exception to the no-fault starting point set forth in Articles 45(1) and 61(1).[1] Taken together, these three provisions constitute the CISG supplementary regime, i.e., the basis of liability absent contrary agreement.

Of course, before one proceeds to apply the gap-filling rules, one needs to ask whether the basis of a given promisor's liability for non-performance is regulated by the parties' agreement.[2] For although it is rare that the express terms of a sales contract provide for absolute liability (i.e., for any breach, without exemption/exception), many sales contracts contain a force majeure clause or equivalent. Clauses limiting the seller's liability to instances of (grossly) negligent breach are also quite common, especially when coupled with an obligation to repair or replace.[3] [page 160]

1. See supra Nos. 210 and 252.
2. See Article 6, supra No. 70 et seq.
3. The validity of such liability limitations is regulated by the applicable domestic law: see supra Nos. 63 and 79.

3. Requirements for Exemption and the Burden of Proof

300. Article 79(1) sets forth a series of requirements which, when satisfied, provide a liability exemption and thus constitute a modification of the otherwise strict starting point laid down in Articles 45(1) and 61(1).

The burden of proof as regards liability exemption must be lifted by the party who seeks an exemption, and this means that the non-performing party remains liable unless he proves that a series of 'conditions' are fulfilled.

301. First, the non-performing party must demonstrate the existence of an impediment beyond his control.

The Convention does not define the word 'impediment' (empechement), and the legislative history casts little clear light on its 'intended' meaning or scope. From our experience with domestic analogues we know that typical 'impediments' (obstacles) to performance are likely to lead to delay or non-delivery, but a few CISG commentators predicted that certain kinds of obstacles might also 'get in the way' of a seller's obligation to deliver conforming goods [1] In 1999 the Supreme Court of Germany rendered a landmark decision which lends clear and convincing support to this 'expansive' reading of Article 79,[2] thus dealing a severe blow to those (Common lawyers) who - on the basis of a somewhat selective reading of the CISG legislative history, and perhaps overly influenced by their own domestic conceptions - had argued that Article 79 should never apply to cases of non-conformity.[3]

Of course, the fact that we define a given obstacle as a potential 'impediment' to performance does not mean that a given non-performing party thereby qualifies for an Article 79 exemption. For, as the German Supreme Court took pains to emphasize in its 1999 decision, a party can never be granted an Article 79 exemption unless he (also) shows that the 'impediment' in question lies 'beyond his control', and this requirement alone reduces the possibility of a non-conformity exemption to something near nil. For one thing, since a party should always be deemed to be 'in control' of his/her own business and financial condition in general, internal 'excuses' connected with business operations (poor quality control, etc.) or financial management are never 'beyond' that party's control. Moreover, as the Bundesgerichtshof put it: since Article 79 does not alter the basic CISG allocation of risk, the seller must assure that his supplier provides defect-free goods. For this reason, the CISG buyer need not distinguish between cases where his seller is the manufacturer and cases where his seller obtains the goods from others; nor should the risk of non-conformity depend on whether the defect is 'discoverable' by inspection or not.[4]

Similar considerations apply as regards the granting of exemptions in respect of seller's delayed delivery and buyer's delayed payment. As a rule, difficulties in delivery or payment due to financial problems - even when connected to the act of [page 161] public authority in the seller's or buyer's country - are not to be considered impediments 'beyond the [seller's or buyer's] control'; on the contrary, such 'impediments' belong to the non-performing party's own general 'area of risk'.[5]

1. See generally Lookofsky, J., 'Fault and No-Fault in Danish, American and International Sales Law. The Reception of the 1980 United Nations Sales Convention', 27 Scandinavian Studies in Law 109, 135 (1983) [available at <http://www.cisg.law.pace.edu/cisg/biblio/lookofsky4.html>]. Regarding more recent domestic legislation in Finland, Norway and Sweden (but not Denmark) pattemed on Article 79, see Lookofsky, J., Consequential Damages in Comparative Context (1989) at pp. 101-102 with notes 146-149. See also Stoll in Schlechtriem, Commentary (1998) at p. 606 with note 44 (referring, inter alia, to Lookofsky's concurring view).
2. See the decision of Bundesgerichtshof (Germany), 23 March 1999, CLOUT Case No. 271 [reported at <http://www.cisg.law.pace.edu/cisg/text/casecit.html>], see also the extensive commentary by Schlechtriem in 15/16 Juristen Zeitung, 13 August 1999, http://cisgw3.law.pace.edu/cases/990324gl.html. But see Honnold, Uniform Law (1999) at pp. 477-479 [available at <http://www.cisg.law.pace.edu/cisg/biblio/honnold.html>].
3. See, e.g., Honnold, Uniform Law (1999) at 477-478 (contending that the Article 79 exemption cannot apply to defective performance). According to American domestic sales law, a seller is strictly liable for non-conforming goods, so - at least within that (UCC) system - no 'state-of-the-art' exemption applies: see, e.g., Spartanburg County School District Seven v. National Gypsum Co., 842 F.2d 1292 (4th Cir. 1988).
4. See the BGH decision and Schlechtriem's Commentary (both cited supra, note 2). But see Stoll in Schlechtriem, Commentary (1998) at p. 620 (seller not responsible if defect not reasonably discoverable by inspection).
5. See (as regards delayed delivery) the arbitral award rendered by Schiedsgericht der Handelskammer - Hamburg (Germany), 21 March 1996, reported in UNILEX. See also generally Lookofsky, supra note 1, and Bernstein & Lookofsky, Understanding the CISG in Europe (1997) §§6-19 and 6-32.

302. Secondly, the non-performing party who seeks an Article 79 exemption must demonstrate that he or she could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract. This 'foreseeability' requirement is also a key element in the overall Convention allocation of risk.

Indeed, because virtually all potential impediments to performance are 'foreseeable' to some degree, this Article 79 element - like the 'control' element, just discussed - will be very difficult for the breaching CISG promisor to prove.[l]

The party damaged by a foreseeable contingency will, of course, deserve protection if the contract in question contains a force majeure which re-allocates that particular risk.[2] But assuming the parties' contract is silent on the issue of increased cost, the obligor's inability to make a profit on a particular contract will not, in and of itself; lead to a liability exemption under the CISG. This is because price increases, even dramatic ones, are generally foreseeable; put another way, those who sell goods on a long-term basis are in the 'business' of assuming this kind of risk. Granted, at some (extreme) point, we may reach what has been called the 'sacrifice threshold,' i.e., the 'economic force majeure' borderline where Article 79 may afford an oppressed obligor with some measure of relief, but such exceptional (and so far purely theoretical) cases only underscore the general (liability) rule.[3]

1. See A/CONF./97/5, para. 5 of Secretariat's Commentary to Article 65 of the 1978 Draft Convention.
2. For a comparison of the corresponding principle in American and Scandinavian law, see Lookofsky, J., Consequential Damages in Comparative Context (1989), at pp. 78 f. [page 162]
3. See, e.g., the decision of Rechtbank van Koophandel, Hasselt (Belgium). 2 May 1995. No. AR 1849/94, reported [at <http://cisgw3.law.pace.edu/cases/950502b1.html> and] in UNILEX (significant drop in market price of the goods/strawberries after the conclusion of the contract did not constitute 'force majeure' exempting the buyer for non-performance under Art. 79, in that price fluctuations are foreseeable events in international trade which do not render performance impossible but result in economic loss well within the nonnaI risk of commercial activities). See also the decision of the Tribunal of Int'l Commercial Arbitration at the Russian Federation Chamber of Commerce, 17 October 1995, reported as CLOUT Case 142 [reported at <http://www.cisg.law.pace.edu/cisg/text/casecit.html>]. Compare (regarding analogues in American and Scandinavian law) Lookofsky, J., op. cit., Part 3.2.3.

303. Last, but not least, Article 79(1) requires that the non-performing party demonstrate that he or she could not reasonably be expected to have 'avoided or overcome' the impediment or its consequences. This requirement also represents an imposing barrier to a would-be exemptee, particularly in the common case of generically defined obligations.

Suppose, for example, that the seller's obligation is to deliver coal or wood, and that his obligation to deliver is not limited by contract to any particular source of supply. The fact that the seller's intended source of supply (at the time of contracting) later 'dries up' will not exempt him from liability under Article 79(1), in that he can usually avoid breach by securing an alternative source; so, assuming performance is still practicable, the seller remains liable for breach.[l]

Obviously, the foregoing argument assumes that the failure-of-supplier 'excuse' should be subsumed within the Article 79, paragraph (1) rule. It should be emphasized, however, that some CISG commentators would prefer to treat those 'persons' who supply CISG sellers (with goods or raw materials) as 'third persons' within the ambit of Article 79, paragraph (2).[2]

A much-discussed (but rarely exempting) contingency is a party's financial inability to perform, i.e., insolvency and the like. Even if classified as an 'unavoidable impediment,'[3] a party's inability to finance his performance should not lead to an exemption under Article 79(1), in that such a contingency is one which a (commercial) seller or buyer should reasonably foresee; put another way, a party who voluntarily make a promise to sell or buy goods must generally assume the risk of not being able to finance his performance.[4]

On the other hand, an unanticipated (and not reasonably foreseeable) imposition of exchange controls by public authorities might lead to a liability exemption for the buyer,[5] but only if the particular impediment could not reasonably be overcome, e.g. by arranging for alternative payment means.[6]

1. Accord: A/CONF./97/5, para. 5 of Secretariat's Commentary to Article 65 of the 1978 Draft Convention (party required to provide commercially reasonable substitute). See also Example 65b at id. (delivery of replacement machine tools) and the decision of OLG Hamburg (Germany), 28 February 1997, OLG-Rp Hamburg 1997, 149, reported [at <http://cisgw3.law.pace.edu/cases/970228g1.html> and] in UNILEX (seller not exempt from liability under Art. 79 or under 'force majeure' clause in standard terms, since seller's risk covers non-delivery caused by its supplier; seller only exempt from liability if impossible to find goods of similar quality on market).
2. This, however, would not change the outcome in such cases. See infra No. 304.
3. Cf. A/CONF./97/5, para. 10 of the Secretariat's Commentary to Article 65 of the 1978 Draft Convention (probably not an impediment). Compare supra No. 302.
4. See, e.g., the arbitral award rendered by Schiedsgericht der Handelskammer, Hamburg (Germany), 21 March 1996, reported [at <http://cisgw3.law.pace.edu/cases/960321g1.html> and] in UNILEX (difficulties in delivery due to financial problems of seller or seller's supplier, even when connected to the act of public authority, not [page 163] impediment beyond seller's control, but rather part of seller's area of risk). See also, e.g., (re. American law) Restatement 2d of Contracts §261, Comment e. Thus, although modern legal thinking has largely abandoned the classical distinction between 'objective' and 'subjective' impossibility (i.e. the distinction between 'the thing cannot be done' and 'I cannot do it'), subjective impossibility remains a non-viable excuse: see Lookofsky, J., Consequential Damages in Comparative Context (1989) at pp. 90-91.
5. See, e.g., the award rendered by the ICC Court of Arbitration (Paris), No. 7197/1992, reported [at <http://cisgw3.law.pace.edu/cases/927197i1.html> and] in UNILEX, where a suspension of payment of foreign debts ordered by the Bulgarian Government was not a 'force majeure' contingency which prevented the buyer from opening documentary credit. For one thing, buyer did not prove that failure to open the credit was a consequence of ['due to'] the suspension; in any case, the suspension had already been declared at time of conclusion of contract and was therefore an 'impediment' which buyer could reasonably have foreseen.
6. Accord: A/CONF./97/5, para. 10 of Secretariat's Commentary to Article 65 of the 1978 Draft Convention. In this case, avoidability presumes the availability of alternative measures consistent with the contractual obligation assumed: if the contract requires payment from a particular source, the impediment would not be avoidable by alternative means.

4. Non-performance Due to Failure of 'Third Person'

304. Paragraph (2) of Article 79 deals with the situation where a party's failure to perform is 'due to the failure by a third person whom he has engaged to perform the whole or a part of the contract.' In this case the party claiming the exemption is exempt from liability only if:

'a) he is exempt under the preceding paragraph; and
b) the person whom he has so engaged would be so exempt if the provisions of that paragraph were applied to him.'

The first point to be noted is that the rule in paragraph (2) only covers situations where a party has engaged a third person to perform the whole or a part of [that party's obligations under] the contract. Since one contracting party (e.g. the seller: S) will not usually enjoy the right to 'delegate' to an independent third person (TP) any of the contractual duties which S has incurred vis-à-vis the other contracting party (in this case, the buyer: B),[l] Article 79(2) would seem to presuppose a situation like this: S, after entering a sales contract with B, and before breaching any obligation thereby incurred, 'engages' an independent 'third person' (TP) to perform (some of) the duties which S has undertaken vis-à-vis B; S then fails to perform his obligation (to make timely and conforming delivery) to B, whereafter S claims an 'exemption', arguing that S's failure to perform is 'due to' the TP's 'failure', i.e., TP's failure to perform its obligations to S.

Read against this background, it is easy to understand why Article 79(2) has become one of the more misunderstood and controversial CISG provisions. Indeed, one might wonder why any 'special' rule was needed to cover this particular kind of 'excuse'. One explanation is the fear that, given the kind of scenario just described, some might lend a sympathetic ear to S' s argument that the conduct of an 'independent' TP lies 'beyond his [S's] control', thus giving rise to an exemption under the general rule in Article 79(1).[2] But this fear seems unfounded: since [page 164] the possibility that such a TP might fail to perform must almost always be 'foreseeable' by S, it is hard to see why the appointment of such a TP should lead to a reallocation of the usual S-B contractual 'risk', i.e., the general CISG liability scheme.

Quite apart from all this, there is still significant disagreement as to the proper scope of the rule, and the 'chaotic discussions' which preceded the rule's adoption in Vienna hardly help to clear things up.[3] For although many have argued that the 'third persons' reference in paragraph (2) should not be interpreted to include general suppliers of the goods or of raw materials,[4] there is also prominent authority to the contrary.[5]

Clearly, in those cases where the 'double force majeure'[6] solution set forth in paragraph (2) applies, S must prove (a) that he could not himself foresee or avoid the 'impediment' to performance and (b) that the impediment was unforeseeable and avoidable by TP. In other words, in those cases where a party's excuse is deemed due to the failure of a 'third person' who falls within paragraph (2), it should be even more difficult for the non-performing party (seller or buyer) to obtain an exemption than if the situation were judged (solely) in accordance with the rule in paragraph (1).[7] Then again, since the general rule in paragraph (1) should itself be construed as a very narrow ('safety-valve') provision,[8] the possibility of differing interpretations of the scope of the phrase 'third person' in paragraph (2) need not lead courts and arbitrators to different results in 'exemption' cases falling within the overall ambit of Article 79.

1. At least not without that other party's (B's) consent. Regarding, e.g. the general American (domestic law) rule, see, Farnsworth, Contracts §1l.10.
2. Compare Stoll's interpretation of the legislative history in Schlechtriem, Commentary (1998) at 615.
3. See Schlechtriem in 15/16 Juristen Zeitung, 13 August 1999, with note 14 (with reference to Vischer); also in English at http://cisgw3.law.pace.edu/cases/990324gl.html.
4. See A/CONF./97/5, para. 12 of Secretariat's Commentary to Article 65 of the 1978 Draft Convention, Honnold, Uniform Law (1999) pp. 487-490 [available at <http://www.cisg.law.pace.edu/cisg/biblio/honnold.html>] and Tallon in Commentary on the International Sales Law (Bianca & Bonell ed. Milan 1987) at p. 585 [available at <http://www.cisg.law.pace.edu/cisg/biblio/tallon-bb79.html>] (requiring an 'organic link' between the main contract and the subcontract). See also Bernstein & Lookofsky, Understanding the CISG in Europe (1997) §6-19 with sources cited in notes 184-186.
5. See generally Schlechtriem, note 3 supra ('much to be said in favour of considering suppliers and their suppliers as third parties under Art. 79(2)'). See also the award of the ICC Court of Arbitration (Paris), No. 8128/1995, reported in UNILEX (seller not exempted pursuant to Art. 79(2), in that non-delivery caused by seller's supplier was deemed 'part of seller's risk').
6. Re. the corresponding Norwegian epithet see Bergem & Rognlien, Kjøpsoven (1991) s. 669.
7. See Bernstein & Lookofsky, Understanding the CISG in Europe (1997) §6-19 with sources cited in note 188.
8. See supra, Nos. 301-303.

5. Duration of Exemption

305. The exemption provided in Article 79 has effect only for the period during which the impediment exists.[1] Therefore, when a temporary impediment to performance abates, the non-performing party becomes liable once again. On the other hand, since Article 79 does not prevent the other party from exercising any right [page 165] other than to claim damages,[2] a serious delay by one party will entitle the other party to avoid, i.e., put an end to the contract by reason of a fundamental breach.[3]

1. Article 79(3).
2. Article 79(5).
3. See, e.g., regarding buyer's right to avoid, supra No. 225.

6. Notice of Impediment

306. The party who fails to perform must give notice to the other party of the impediment and its effects on his ability to perform.

If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, he is liable for damages resulting from such non-receipt.[l] The requirement that the notice be received (to take effect) represents a reversal of the general CISG transmission-risk rule.[2]

1. Article 79(4). Such liability extends also to cases where a party intends to perform by furnishing a commercially reasonable substitute: see A/CONF./97/5, para. 16 of Secretariat's Commentary to Article 65 of the 1978 Draft Convention.
2. See Article 27, supra No. 139.

7. Exemption Applies Only as Regards Damages

307. Article 79(5) makes it particularly clear that nothing in Article 79 prevents a party from exercising any right other than to claim damages under this Convention. In other words, an 'exemption' - if granted - is only an exemption from liability.

The effect of an impediment on avoidance has already been noted.[l] As regards specific performance, it should be noted that Article 28, and the forum law to which it refers, will usually serve to insulate a non-performing party from a demand that he or she perform (deliver or pay) notwithstanding the fact that performance as agreed is physically impossible.[2] An Article 79 exemption does not preclude a claim to interest,[3] just as a party who receives non-conforming goods remains entitled to a proportionate reduction in price.[4]

1. Supra No. 305.
2. See supra No. 140 et seq.
3. Supra No. 296.
4. Supra No. 231. [page 166]

Pace Law School Institute of International Commercial Law - Last updated April 5, 2005
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