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GUIDE TO ARTICLE 79

Comparison with Principles of European Contract Law (PECL)


Match-up of CISG Article 79 with PECL Articles 8:108 and 8:107; see also PECL Article 6:111
CISG Article 79

(1) 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) If the party's failure is due to the failure by a third person whom he has engaged to perform the whole or a part of the contract, that party 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.

(3) The exemption provided by this article has effect for the period during which the impediment exists.

(4) The party who fails to perform must give notice to the other party of the impediment and its effect on his ability to perform. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, he is liable for damages resulting from such non-receipt.

(5) Nothing in this article prevents either party from exercising any right other than to claim damages under this Convention.

PECL Article 8:108 [Excuse Due to an Impediment]
(complete and revised version 1998)

(1) A party's non-performance is excused if it proves that it is due to an impediment beyond its control and that it could not reasonably have been expected to take the impediment into account at the time of the conclusion of the contract, or to have avoided or overcome the impediment or its consequences.



(2) 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.


(3) The non-performing party must ensure that notice of the impediment and of its effect on its ability to perform is received by the other party within a reasonable time after the non-performing party knew or ought to have known of these circumstances. The other party is entitled to damages for any loss resulting from the non-receipt of such notice.


PECL Article 8:107 [Performance Entrusted to Another]

A party which entrusts performance of the contract to another person remains responsible for performance.

See also PECL Article 6:111 [Change of Circumstances] dealing with Hardship

(1) 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.

(2) If, however, performance of the contract becomes excessively onerous because of a change of circumstances, the parties are bound to enter into negotiations with a view to adapting the contract or ending it, provided that:

(a) the change of circumstances occurred after the time of conclusion of the contract,

(b) 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, and

(c) the risk of the change of circumstances is not one which, according to the contract, the party affected should be required to bear.

(3) 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.

In either case, 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.


Definitions

For the PECL definition of "non-performance", go to PECL art. 1:301(4) and the comment and notes that accompany this definition. For the PECL definition of "fundamental non-performance", see the match-up of CISG art. 25 with PECL art. 8:103.

For the PECL definition of "reasonableness", go to PECL art. 1:302 and the comment and notes that accompany this provision. For a provision relevant to the PECL phrase "knew or ought to have known" as well as the PECL concept of reasonable foreseeability, see PECL art. 1:305 [Knowledge and behaviour of person for whom a party is responsible].


Editorial remarks

Comparative Remarks on CISG Article 79 & PECL Articles 6:111, 8:108

Dionysios Flambouras [*]
May 2002

1. Introduction to the concept of "exemption" in Art. 79 CISG
2. Is hardship covered under Art. 79 CISG?
3. The legislative history of Art. 79 CISG
4. The legal effect of the exemption in CISG and issues of specific performance
5. Art. 8.108 PECL (Excuse Due to an Impediment)
6. Art. 6.111 PECL (Change of Circumstances)
7. Conclusions

1. Introduction to the concept of "exemption" in Art. 79 CISG

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).[1]

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.

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.[2]

2. Is hardship covered under Art. 79 CISG?

The CISG deals with the issue of changed circumstances on an international level by avoiding any reference to existing domestic concepts.

The most difficult question concerning the application of Article 79 CISG is whether situations of hardship (i.e., where the performance by one of the parties has become much more onerous and difficult - but not impossible - usually in financial terms) are covered in the embedded exemption.[3]

The solution to this issue cannot come by direct reference to domestic legal systems[4] that differ greatly from each other in regard to rules of hardship or imprévision,[5] as this would produce divergent results in the interpretation and application of the Convention. This would contravene the uniformity mandate of article 7(1) CISG.

Also no reference to domestic laws can be attempted under the gap-filling operation of Article 7(2), as the legislative history of Article 79 excludes the possibility of the existence of a relevant gap.[6]

As the term impediment is not defined, an interesting question is whether the hardship provisions in Articles 6:111 (Change of Circumstances) and 8:108 (Excuse due to an impediment) of the Principles of European Contract Law can be invoked to expand the meaning of impediment found in the CISG to include cases of economic or commercial hardship.[7]

3. The legislative history of Article 79 CISG

Article 79 CISG uses the term "impediment" to describe the types of event beyond the contracting party's control that will be acceptable as an excuse for nonperformance of its obligations under the contract.

The drafting history of the Convention is a legitimate and valuable aid in the interpretation of the Convention's provisions. It reveals that Article 79 CISG is indeed a stricter version of its predecessor, Article 74 ULIS, which had been criticized for excusing non-performance too readily, such as where performance merely became more difficult.[8]

The legislative history of Article 79 also indicates that a party cannot rely on the exemption merely on the ground that performance has become unforeseeably more difficult or unprofitable.[9]

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.[10]

It is clear in the travaux préparatoires that the purpose of Article 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".[11]

4. The legal effect of the exemption in CISG and issues of specific performance

The legal effect of the exemption in the Convention is stated in Art. 79(5) CISG.[12]

Although the wording of Article 79(5) would allow a claim for performance in situations where obligations are physically impossible to fulfill, it is thought that the general belief expressed at the Vienna Conference that judgment for a physically impossible performance would neither be sought nor obtained should lead to a reasonable limitation of Article 79(5) CISG.[13]

The term "impediment" was used in the drafting of the Convention to denote an external force that objectively interferes with performance of the contract and renders performance impossible.[14]

The creditor of the obligation in question may still require specific performance of the obligation under Article 79(5) CISG. This solution, however, may not appear satisfactory in the situations where performance has been rendered impossible, i.e., the subject matter of the performance no longer exists (the goods have perished) or the performance would be excessively onerous or expensive (e.g., necessity for expensive salvage operation or subsequent illegality[15]).

One suggested approach to the problem in such extreme situations is to admit a "limit of sacrifice" beyond which the promisor of the obligation could not reasonably be expected to perform his obligation.[16]

In a leading case on article 79 CISG, the German Supreme Court identified the existing debate among scholars as to whether: "CISG Art. 79 encompasses all conceivable cases and forms of non-performance of contractual obligations creating a liability and is not limited to certain types of contractual violations and, therefore, includes the delivery of goods not in conformity with the contract because of their defectiveness"; or "whether a seller who has delivered defective goods cannot rely on Art. 79 CISG at all."[17]

It is arguable that an interpretation based on the plain meaning of the language in Article 79 CISG would suggest that a seller's obligation to deliver goods in conformity with the contract under Art. 35 may also be conceivably excused due to an impediment under Art. 79(1).

5. Article 8:108 PECL (Excuse Due to an Impediment)

There is an apparent similarity in the wording of the corresponding PECL provisions to Article 79 CISG.[18] However, the differences in the scope of the two regimes becomes clear when we consult the PECL commentary. The Comments to the PECL help explain its provisions. The scope of application of Article 8:108 is defined by Comment A to the PECL, which states that "unlike the equivalent article of CISG [] Article 8:108 has to apply only in cases where an impediment prevents performance."

Comment C expressly states that the circumstances of the impediment are like those "traditionally required for force majeure."[19]

6. Article 6:111 PECL - Change of Circumstances

Although the question whether financial difficulties constitute a ground for exemption was a controversial point of discussion in UNCITRAL during the drafting of the CISG, "in the end, the general view was probably that both physical and economic impossibility could exempt an obligor. [] As a rule, however [] increased procurement and production costs do not constitute exempting impediments."[20]

According to Professor Schlechtriem, "under very narrow conditions - impediment also includes 'unaffordability'" (id.). Schlechtriem explains that "[i]t is imperative, in [his] opinion to treat radically changed circumstances as 'impediments' under Article 79 in exceptional cases in order to avoid the danger that courts will find a gap in the Convention and invoke domestic laws and their widely divergent solutions."[21]

In contrast to the single paragraph found in the Convention (see Art. 79(1) CISG),[22] the Principles deal with the issue of change of circumstances in a quite thorough way, providing not only a basic statement of principle (see Article 6:111(1) PECL) and the operational parameters of the concept (see Article 6:111 (2) PECL), but also the mechanism for the adaptation or termination of the contract by the court (see Article 6:111(3) PECL).

It is also clear that the effect of the PECL provisions follow a different scheme, because they entitle the party whose performance has become "excessively onerous because of a change of circumstances" to request re-negotiation of the contract, with the support of the court and even its intervention if the parties fail to reach agreement. The adaptation of the contract by the judge, however, is not expressly allowed by the CISG, and must therefore be regarded as impossible in that context.[23]

7. Conclusions

Both the CISG and the PECL contain provisions for exemption for the nonperformance of contractual obligations. Article 79 CISG only governs impossibility of performance and 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).[24] In contrast to the Convention, which in Article 79 CISG only includes impediments which must be equated with actual impossibility, the PECL provide for special rules concerning hardship (Article 6:111 PECL). Although there is some generic similarity in language and the substantive requirements between the Convention and the PECL, both the scope and the rationale, as well as the application of the respective provisions vary substantially.[25]

[See also commentary by the author on this subject in: John Felemegas ed., An International Approach to the Interpretation of the United Nations Convention on Contracts for the International Sale of Goods (1980) as Uniform Sales Law, Cambridge University Press (2006) 499-505.]


FOOTNOTES

* LLB (Athens), LLM (Bristol), M.Stud. (Oxon), Doctoral Candidate (Athens). Advocate of the Athens Bar; Solicitor in England & Wales.

Articles 8:108 [Excuse due to an impediment] and 6:111 [Change of circumstances] dealing with hardship are the provisions of the Principles of European Contract Law discussed in these comparative editorial remarks. Click here for the text of these provisions set alongside Article 79 CISG and for the Official PECL Comments and Notes on these provisions.

1. 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). For an excellent discussion of the two competing attitudes on 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, see Sarah Howard Jenkins, "Exemption for Nonperformance: UCC, CISG, UNIDROIT Principles - A Comparative Assessment", 72 Tulane Law Review (1998) 2015-2030; also available at <http://www.cisg.law.pace.edu/cisg/biblio/jenkins.html>.

For an interesting comparison see also Dionysios Flambouras, "The Doctrine of Impossibility of Performance and Clausula Rebus Sic Standibus in the 1980 Convention on Contracts for the International Sale of Goods and the Principles of European Contract Law - A Comparative Analysis" 13 Pace International Law Review 261-293 (Fall 2001).

2. For a discussion of these two concepts and a comparative analysis of their function in the CISG and the UNIDROIT Principles, see J. Rimke, "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) 197-243; also available at <http://www.cisg.law.pace.edu/cisg/biblio/rimke.html>.

3. In other words, the difficulty arises in the cases where it is hard to distinguish between "absolute impossibility" and "economic impossibility" ("rendering performance extremely onerous", see Tallon in C.M. Bianca & M.J. Bonell (eds), Commentary on the International Sales Law - The 1980 Vienna Convention (1987) 2.6.4 p. 581-582.

4. "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." See Fritz Enderlin & Dietrich Maskow, United Nations Convention on Contracts for the International Sale of Goods, at 320 (1992).

5. See Stoll, in Commentary on the UN Convention on the International Sale of Goods, at 618 (Peter Schlechtriem ed.,1998).

6. The legislative history of the Convention reveals that the problem of hardship was considered during the drafting process of Article 79, but a provision specifically dealing with it has been deliberately omitted from the CISG; i.e., no gap praeter legem exists. See Rimke, op. cit., at 220; see also John O. Honnold, Documentary History of the Uniform Law for International Sales (1989), at 349-350.

7. Cf. J. Ziegel, "Comparative Editorial Remarks on article 79 CISG and its UNIDROIT Principles counterparts", available at <http://www.cisg.law.pace.edu/cisg/principles/uni79.html>, where the author discusses the same question in terms of article 79 CISG and the comparable provisions in the UNIDROIT Principles of International Commercial Contracts.

8. For instance, the term "circumstances" in Article 74 ULIS was replaced by the term "impediment" in Article 79 CISG, thus narrowing the exemption and providing an objective criterion. See John Honnold, Uniform Law for the International Sales under the 1980 United Nations Convention 534; 534-537 (2d ed.1991). See also, generally, Rimke, op. cit., at 222.

Cf. Stoll, at 603, where it is noted that the deletion of the word "only" from the draft Article 79(3) - previously limiting the exemption "only" for the period during which the impediment existed - indicates that when the impediment ceases to exist, an exemption for the non-performing party on account of a change in circumstances cannot be ruled out entirely.

9. See also Rimke, op. cit., at 223. However, note that under a literal interpretation of the text, a very serious change in circumstances could arguably qualify as an "impediment" for the purposes of Article 79 CISG. See John Honnold, Uniform Law for the International Sales under the 1980 United Nations Convention (2d ed.1991), at 543; Enderlein & Maskow, United Nations Convention on Contracts for the International Sale of Goods (1992), at 325.

"The borderline between impracticability and a reasonably insurmountable impediment is [] uncertain". See Denis Tallon, in Commentary on the International Sales Law - The 1980 Vienna Sales Convention, C.M. Bianca & M.J. Bonnell eds. (1987), 576, where the author concludes that the standard demanded in Article 79 CISG is more flexible than that of traditional force majeure, but stricter than frustration or hardship.

10. See J. Honnold, Uniform Law for International Sales Under the 1980 United Nations Convention (2d ed. 1991), 432.1 432.2.

11. See J. Honnold, Documentary History of the Uniform Law for International Sales 185, 252 (1989).

12. "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)"; see Rimke, op. cit., at 217. See also text contained in footnote 22, infra, that refers to the Secretariat Commentary to the Draft Convention 1978.

13. 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 642 (1994). Cf. Article 28 CISG (limiting orders of specific performance) and Article 8.109 PECL (Clause limiting or excluding remedies for non-performance).

14. See J. Honnold, ibid., at 427. The impediment must actually prevent performance, see id. 432.1. Cf. Some other commentators have noted that Article 79 embodies the CISG's provisions for frustration of purpose and impossibility, see, e.g., Henry D. Gabriel, "A Primer on the United Nations Convention on the International Sale of Goods: From the Perspective of the Uniform Commercial Code", 7 Ind. Int'l & Comp. L. Rev. 279, 280 (1997).

See also, e.g., Nuova Fucinati v. Fondmetall International, Italy 14 January 1993, [District Court Monza], CLOUT case no. 54, also available at <http://cisgw3.law.pace.edu/cases/930114i3.html>. In that case, an Italian court held that although the Convention did not apply to the contract, even if Art. 79 CISG had applied, nonetheless the court would have rejected the seller's request for dissolution on the basis of supervening excessive onerousness (caused by a market price increase by 30%) by reading "impediment" to mean "impossible", as per the domestic law (Article 1463 of the Italian Civil Code). In the court's opinion, the seller could not rely on hardship as a ground for avoidance, since the Convention did not contemplate such a remedy in Article 79 or elsewhere in the CISG.

It seems that the Italian court would have dealt with the matter as one that was governed but not expressly settled by the Convention and it would have resolved the issue by turning to the conflict of law rules of the forum, under Art. 7(2) CISG.

It is arguable that this approach to the interpretation of impediment does not promote uniformity. Similarly, divergent results would be produced by the possible introduction of "hardship" as a general principle of the Convention under Art. 7(2); a possibility that would be contrary to the intention of the drafters and the legislative history of the Convention.

15. Honnold, Uniform Law for International Sales (1999) p. 493-495 435.5. Note that, even though not precluded by Article 79(5) CISG, there can be domestic law restrictions on one's ability to require specific performance under such circumstances by virtue of the statement in Article 28 CISG that "a court is not bound to enter a judgement for specific performance unless the court would do so under its own law in respect of similar contracts of sale not governed by this Convention." See related reference to Article 28 in paragraph 9 of note 22 infra.

16. See Stoll in Schlechtriem ed., Commentary 55, 57 p. 622.

This approach is advocated mainly by German commentators, who refer to cases of imprévision or great difficulty to perform as "economic impossibility" (wirtschaftliche Unmöglichkeit) - and suggest that a "limit of sacrifice" (Opfergrenze) should be allowed, in the event of an unforeseeable impediment to performance as a result of a material change in economic conditions.

That approach to the problem of change in circumstances bases the exemption on the principle of good faith, as stated in Article 7(1) CISG. Note, however, that this approach has been criticized as hindering uniformity/harmony in the Convention's application; see Rimke, op.cit., at 224.

17. The court did not deem it necessary to resolve this conflict stating that the specific defect in the goods was not outside the seller's control and, thus, the seller was responsible for the consequences of a delivery of goods not in conformity with the contract. See Germany, 24 March 1999 Federal Supreme Court, CLOUT case no. 271, also available at <http://cisgw3.law.pace.edu/cases/990324g1.html>. Thus, the court left open the question of whether or not Art. 79 CISG can be invoked by a party to excuse the failure to perform "any of its obligations" under the contract, including the delivery of defective goods.

The court also spoke on many other CISG-related issues in the case (issues of validity, international character of the Convention, conformity of the goods, damages, mitigation; see A.H. Kritzer, Editorial Comments in the online presentation of the court judgment, ibid.)

18. Compare the wording in CISG articles 79(1)-(5) with the corresponding provisions in PECL articles 8.107, 8.108(1)-(3), 8.109.

19. See Comment and Notes to the PECL; Article 8:108, available online at <http://www.cisg.law.pace.edu/cisg/text/peclcomp79.html>.

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

Also note that a proposal aimed at incorporating an Article in the Convention that allowed a party to "claim an adequate amendment of the contract or its termination" on account of "excessive difficulties" was expressly rejected by UNCITRAL's Working Group, see J. Honnold, Documentary History of the Uniform Law for International Sales (1989), at 350.

21. P. Schlechtriem, id., at footnote 422a; see also that author's text in footnote 423, id.

22. Note that the text of the Secretariat Commentary on article 65 of the 1978 Draft [draft counterpart of CISG article 79] provides additional important guidance:

     "8. The effect of article 65 [draft counterpart of CISG article 79(1)] in conjunction with article 65(5) [draft counterpart of CISG article 79(5)] is to exempt the non-performing party only from liability for damages. All of the other remedies are available to the other party, i.e. demand for performance, reduction of the price or avoidance of the contract. However, 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.

     "9. 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]. 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. [Cf. article 26 [draft counterpart of CISG article 28] which provides that if, in accordance with the provisions of this Convention, one party is entitled to require performance of an obligation by the other party, a court is not bound to enter any judgment for specific performance unless the court [would] do so under its own law in respect of similar contracts of sale not governed by this Convention]."

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

See also Todd Weitzmann, "Validity and Excuse in the U.N. Sales Convention", 16 Journal of Law and Commerce (1997) 265-290, also available at <http://www.cisg.law.pace.edu/cisg/biblio/1weitzm.html>. Weitzmann examines some theoretical issues of contract law that flow from the similarities between the effects of excuse and validity provisions (including the academic debate between Honnold and Tallon), as well as the pitfalls created in the application of Article 79 CISG that undercut the development of a uniform excuse principle. The author has captured the essence of the problem when he states: "Two theoretical difficulties with Article 79 emerged [] both of which could undercut the development of a uniform excuse principle. First, Article 79 could be supplanted directly by a country's domestic law of excuse by virtue of a court concluding that excuse is a validity issue, to be decided under domestic law according to Article 4(a). Second, the principle of justice represented by Article 79 could be averted indirectly when a court reads the language of the Convention in light of presuppositions derived from domestic traditions."

24. E.g., Tallon, op .cit., at 3.1, p. 592.

25. For a similar conclusion (in the context of the UNIDROIT Principles this time and their potential to supplement art. 79 CISG), Cf. J. Ziegel, "Comparative Editorial Remarks on article 79 CISG and the UNIDROIT Principles", available at <http://www.cisg.law.pace.edu/cisg/principles/uni79.html>. See also, Anja Carlsen, "Can the Hardship Provisions in the UNIDROIT Principles Be Applied When the CISG is the Governing Law?" (Pace Essay 1998), where the author, in a more expansive and thorough discussion of the issues, also concludes that the "hardship" provisions in the UNIDROIT Principles should not be applied in a gap-filling manner when the CISG is the governing law of a contract; essay available at <http://www.cisg.law.pace.edu/cisg/biblio/carlsen.html>.

Cf. Tom Southerington, "Impossibility of Performance and Other Excuses in International Trade", available on-line at <http://www.cisg.law.pace.edu/cisg/biblio/southerington.html>. In the Southerington article, the author points out that under Section 36(1) of the Contracts Act (Finland), which contains rules on validity of contracts, a term of a contract governed by Finnish law (the Sale of Goods Act and the CISG, since Finland is a Contracting State) may be adjusted or set aside if that term "is unconscionable or its application would lead to unconscionability". Under Finnish internal law, a term of the contract or even the entire contract may be adjusted or declared discharged if it is considered to be unconscionable.

There is a concern that the rationale for excluding issues of validity from the realm of the CISG is linked to differences in approach to the issue by the divergent legal traditions. It is the Southerington thesis that, in a contract governed by the CISG, it is possible that a domestic doctrine of hardship may coexist with the UN Sales Convention via Article 4(a) of the CISG, i.e., in circumstances in which there is a domestic validity rule on unconscionability such as the Section 36(1) of the Contracts Act (Finland). This is arguably an indirect way of removing issues from the sphere of the Convention and resorting to national laws and as such it undercuts uniformity in the application of the international sales law.

See also footnote text reference to Todd Weitzmann's article, supra note 23.

Cf. P. Schlechtriem suggests a possible basis for arguing that the problem of hardship and adjustment of the sales contract is matter governed by the Convention, see "Transcript of a Workshop on the Sales Convention", 18 Journal of Law and Commerce (1999) 191-258, excerpt available at <http://www.cisg.law.pace.edu/cisg/biblio/workshop-79.html>. The Schlechtriem argument refers to the remedy of price reduction under CISG Art. 50 as "a kind of adjustment of the contract to reflect a disturbed balance between performance on one side and obligation on the other side. The defects in the goods, or the non-conformities of the goods, constitute a disturbance of the equilibrium or balance of the exchanged performances." Id., at 237. Schlechtriem's argument for the use of the principle underlying Art. 50 "as a springboard to develop a general rule of adjustment in hardship cases" would entail that the solution comes from within CISG, thus eliminating divergent results in the interpretation and application of the Convention's provisions.


Comment and notes on PECL 8:108, 8:107 and 6:111

Like the commentaries to the UNIDROIT Principles and the U.S. Restatements, the comments to the PECL help explain the text. The PECL notes identify civil law and common law antecedents and related domestic provisions. With the permission of the Commission on European Contract Law, these comments and notes are presented below. The source of this material is Ole Lando & Hugh Beale eds., Principles of European Contract Law: Parts I and II, Kluwer Law International (2000) 379-384, 378, 322-328.


COMMENT AND NOTES: PECL Article 8:108: Excuse Due to an Impediment

(1) A party's non-performance is excused if it proves that it is due to an impediment beyond its control and that it could not reasonably have been expected to take the impediment into account at the time of the conclusion of the contract, or to have avoided or overcome the impediment or its consequences.

(2) 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.

(3) The non-performing party must ensure that notice of the impediment and of its effect on its ability to perform is received by the other party within a reasonable time after the non-performing party knew or ought to have known of these circumstances. The other party is entitled to damages for any loss resulting from the non-receipt of such notice.

Comment

A. General

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 (see Notes below) Article 8:108 has to apply only in cases where an impediment prevents performance.

The rules in Article 8:108 are not mandatory. The parties may modify the allocation of the risk of impossibility of performance, either in general or in relation to a particular impediment; usages (especially in carriage by sea) may have the same effect.

B. Scope

The excuse may apply to any obligation arising out of the contract, including obligations to pay money. 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.

The term "impediment", covers every sort of event (natural occurrences, restraints of princes, acts of third parties).

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.

C. The circumstances of the impediment

The conditions laid down for the operation of the Article are to the conditions traditionally required for force majeure. They are necessarily in general [page 379] terms, given the great variety of fact situations to which they must apply. It is for the party which invokes it to show that the conditions are fulfilled.

(i) outside the obligor's control

First, the obstacle must be something outside the debtor's sphere of control. 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.

Illustration 1: In consequence of an unexpected strike in the nationalized company which distributes natural gas, a chinaware manufacturer which heats its furnaces only with gas is obliged to interrupt its production. The manufacturer is not liable toward its own clients, if the other conditions of excuse are fulfilled. The cause of non-performance is external.

Illustration 2: The employees of a company unforeseeably go on strike in order to force the management to buy foreign machines which will improve the working conditions. For the time being it is actually not possible to obtain these machines. The company cannot claim as against its customers that the strike is an excuse, as the event is not beyond its control.

The force majeure must have come about without the fault of either party. 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.

Illustration 3: A French bank, A, is instructed by company B to transfer a sum of money to a bank in country X by 15 July. It has not carried out the instruction by 18 July when all transfers of money between France and X are suspended. Bank A cannot claim to be excused from its obligation to B; the transfer could have been made if it had been done in the time allowed under the contract.

(ii) could not have been taken into account

Secondly, the impediment must be one that could not have been taken into account at the time the contract was made. If it could have been, one may say either that the party affected took the risk or that it was at fault in not having foreseen it. This condition also applies, in the same way, to the operation of Article 6:111.

However, 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. A price control [page 380] 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.

On the question of to whom the event should have been foreseeable, see Article 1:305 (knowledge and behaviour of persons for whom a party is responsible).

(iii) insurmountable impediment

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 Article states that the party to be excused must prove that it could not have done either.

Whether an event could have been avoided or its consequences overcome depends on the facts. 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.

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.

D. Effects

An impediment to performance which fulfils the conditions just set out 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 (as does Article 8:101, which in paragraph (2) sets out the remedies which do not apply when a non-performance is excused, namely specific performance and damages).

First, any form of specific performance (Article 9:101 and 9:102) is by definition impossible. Nor do damages of any kind, including "liquidated damages" and penalties, apply unless the parties have agreed otherwise.

The question of the ending of the contract, on the other hand, is more complex. For the sake of simplicity, the Principles have retained in this case the same general system as applies in the case of non-performance of contract: 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 under Article 9.303. 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. Hence Article 9:303(4) (see the comment to Article 9:301). The result is the same [page 381] as in those legal systems under which force majeure brings automatic termination of the contract.

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. This option is governed by the general rules, that is to say the right to terminate depends on whether or not the non-performance is fundamental.

If the aggrieved party does not elect to terminate the contract, it may demand performance of that part of the contract which still can be performed. In this case its own obligation will be reduced proportionately under Article 9:401 (Reduction of Price).

Illustration 4: If A has leased a warehouse to B and subsequently it is partially destroyed by fire, causing a temporary impediment, B may terminate the contract if occupation of the whole of the premises was an essential part of the contract. If, on the other hand, it does not give notice of termination, B cannot obtain damages for loss of occupation but the rent will be reduced proportionately.

E. Temporary impediment

It is commonly agreed that a temporary impediment, in principle results in only a temporary excuse. This is what is provided by paragraph (2)).

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.

Illustration 5: The warehouse containing a pharmaceutical manufacturer's raw materials is unforeseeably flooded and the raw materials are rendered unuseable. The delays in delivering to clients which will be excused include not only the period of the flood itself but also the time necessary for the manufacturer to obtain new supplies.

It may be, however, 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 (see Article 8:103).

Illustration 6: An impresario in Hamburg has engaged a famous English tenor to sing at the Hamburg Opera from 1 to 31 October. The singer catches Asian flu and has to retire to bed (this would constitute an impediment within paragraph (1); he tells the impresario that he will be unable to come to Hamburg before 10 October. Assuming that the tenor's presence for the whole month is an essential part of the contract, the impresario may terminate. If he chooses not to do so, the contract remains in force for the remaining period but the tenor's fees will be reduced proportionately. [page 382]

Equally in the case of a temporary excuse, the aggrieved party can use the procedure laid down in Article 8:106(2) to serve a notice making time of the essence.

F. Notice

Paragraph (3) of Article 8:108 is an application of the obligation of good faith which governs the whole of the Principles. The non-performing party must in effect warn the other party, within a reasonable time, of the occurrence of the obstacle and of its consequences for the contracts. 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.

Illustration 7: In the example given in illustration 5, the manufacturer must notify its customers of the loss of the raw materials and also of the time it will take to replace them and the probable date for resumption of deliveries.

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 (see above); 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.

The risk of the notice not getting through is placed on the non-performing party, see Article 1:303.

The sanction for failing to give this notice is liability for the extra loss suffered by the aggrieved party as the result of not being informed; normally the aggrieved party will recover damages.

Illustration 8: In the example given in Illustration 6, if the tenor does not warn the impresario immediately of his unavailability, the latter may recover compensation for being deprived of the chance to obtain a replacement, so reducing his loss.

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

1. Force majeure and impossibility

Article 8:108(1) is modelled on CISG art. 79(1), which has been followed in the FINNISH and SWEDISH Sale of Goods Acts, 27 and 40. See also Unidroit art. 7.1.7.

(a) Civil law systems

Even if all legal systems now admit that impossibility of performance should be excused, the way the excuse is given effect varies considerably.

The Romanistic legal systems rest on the theory of force majeure laid down in arts. 1147 and 1148 of the FRENCH, BELGIAN and LUXEMBOURG Civil Codes, on which has developed detailed caselaw on the conditions under which the debtor will be excused.

In FRANCE these conditions are strict. Performance must be impossible and this must be due to circumstances which were unforeseeable at the time when the contract was made and which are outside the control of the debtor (cause étrangère). SPANISH CC art. 1105 has a similar rule. [page 383]

A related doctrine of impossibility is found in AUSTRIAN, GERMAN, ITALIAN and PORTUGUESE law, see ABGB 1447, BGB 275, Italian CC Arts. 1218 and 1256 and Portuguese CC art.790.

Some laws take a more flexible approach. CISG art. 79, the FINNISH and SWEDISH Sale of Goods Acts 27 and 40 and DANISH Sale of Goods Act 24, which is held to embody a general principle of contract law, include impediments which must be equated with impossibility: see von Caemmerer & Schlectriem 694 f.; Honnold 542; Ramberg, Köplagen 346 f; and Gomard, Obligationsret II 172. DUTCH and GREEK law will also excuse the debtor in cases other than absolute impossibility, see respectively BW arts. 6:74 and 6:75, Greek CC arts. 336 and 380. Traces of a more flexible attitude are also to be found in recent BELGIAN case law, which comes close to Article 3.108(1), see Trib. Comm. de Bruxelles 9 March 1981, JCB/BRH 1982 I 182; compare Cass. 13 April 1956, Arr. Cass. 670, R.C.J.B., 1957, 85, obs. Heenen. See Kruithof, Hommage Dekkers 281.

Several legal systems, and notably the AUSTRIAN, DUTCH, GERMAN, GREEK, ITALIAN, PORTUGUESE and SPANISH have, in addition to the rules on impossibility or force majeure, accepted that changed circumstances may excuse the debtor, see notes to Article 6:111 above.

(b) Common law

ENGLISH and IRISH law take a different route. A party is normally obliged to fulfil his promise and will be liable in damages for failure to perform. However, he is sometimes excused where performance has become impossible without his fault, e.g. because the subject matter of the contract has been destroyed. If the impossibility occurred after the contract was made, and it is impossible to perform the contract as a whole, the non-performing party may be excused under the doctrine of frustration, see Taylor v. Caldwell (1863) 3 B. & S. 828, Q.B. The results of frustration are similar to those under Article 8:108, in that both parties are discharged automatically. SCOTTISH law broadly follows the Common law.

2. Temporary impediment

CISG art.79(3) is equivalent to the first sentence of Article 8:108(2). CISG does not address the question of termination but writers support the rule laid down in the second sentence of 8:108(2), see v. Caemmerer & Schlechtriem 670. It is probably the rule in all legal systems that the excuse has effect as long as the impediment lasts. The rule is expressed in ITALIAN CC art. 1256(2) and PORTUGUESE CC art.792, and is accepted in GREEK law, see Gasis in Erm.AK II/1, intro. to arts. 335-348 no. 42, art. 336 no.7 (1949).

Under several legal systems the creditor may terminate the contract if the delay has lasted so long that he would be entitled to terminate under the rules on non-performance. This holds true of ITALIAN and PORTUGUESE law, see the provisions cited above, of AUSTRIAN law, see ABGB 918; of DUTCH law, see BW art. 6:74(2); and of BELGIAN law (Kruithof, TPR 1983, 629 no. 119, see also Cass. 13 June 1956, Arr. Cass., 367). GREEK and DANISH case law support the same rule: Greece, Athens 3384/1976, NoB 25 (1977) 389 II. It is unlikely that this rule would follow from ENGLISH and IRISH law but a long delay may frustrate the contract. In SPANISH law a temporary impediment may justify termination if it frustrates the purpose of the contract (Diez Picazo, II 660; Lacruz-Delgado II, 1, 25. 193).

3. The duty to give notice

Article 8:108(3) is similar to CISG art. 79(4), and see the FINNISH and SWEDISH Sale of Goods Acts, 28, 40 and 58. The duty of the defaulting party to give notice of the impediment has been stated in DANISH, GREEK and GERMAN case law: see respectively Ussing, Alm.Del.141; 4271/1956 EEN 25 (1958) 226, 227 II; and OLG Hamburg 13 May 1901, OLGE 3 no. 4, p. 8. In ITALY writers have expressed the view that the duty follows from the principle of good faith and CC art. 1780 imposes a duty on the depository to notify loss of goods in custody. In other civil law countries the duty to give notice may also follow from good faith or from the debtors' duty to warn of risks which may affect the performance due, e.g. SPANISH CC art. 1559.

Under ENGLISH, IRISH and SCOTTISH law there is no such principle.

See generally Zweigert & Kötz Chapters 36 and 37; Rodière & Tallon; Mengoni Riv.Dir.Comm. 1954, I, 185; Honnold no. 423ff., von Caemmerer & Schlechtriem 679-704; Bianca & Bonell-(Tallon) 572-595; Force majeure and hardship; Treitel, Frustration. [page 384]

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COMMENT AND NOTES: PECL Article 8:107: Performance Entrusted to Another

A party which entrusts performance of the contract to another person remains responsible for performance.

Comments

A. General

Under modern conditions, most contracts are not performed in fact by the contracting parties personally. This provision deals with one aspect of this modern division of labour, namely the contracting party's responsibility for non-performance. Two other aspects, namely the imputation of actual or constructive knowledge as well as of certain states of mind of persons assisting in the performance of the contract, are dealt with by Article 1:305.

B. Purpose

The basic principle 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.

C. Impediment in the third person

On the conditions under which an impediment that arises in the other person excuses the contracting party, see Article 8:108, Comment C.

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

In several countries there are code provisions which are either close equivalents to Article 8:107 (see DUTCH BW art. 6.76; ITALIAN CC art. 1228 and PORTUGUESE CC art. 800(1)) or which in other terms lay down the same principle, see AUSTRIAN ABGB 1313a; in DENMARK Danske lov 1683 art. 3.19.2; GERMAN BGB 278; GREEK CC arts. 317 and 477. Under SPANISH law the debtor may entrust performance to another unless the contract requires personal performance, CC art. 1161; but unless the creditor accepts the substitution, the debtor remains responsible, Ministero de Justicia, II, art. 1721.

In other countries, the principle is not provided by legislation but is recognized by the courts or writers. This is the case in FINLAND, see Hoppu 130; FRANCE see Viney, la Responsabilité no. 813-847; BELGIUM, Cass. 5 Oct. 1990, Arr. Cass., 125 no. 58; De Page II, no. 592; van Oevelen, R.W. 1987-88, (1168) 1187 ff.; Dirix, Aansprakelijkheid 341 ff; ENGLAND: Treitel, Remedies 15; SCOTLAND: McBryde ch. 17-48, 17-50; SWEDEN; Ramberg, Köplagen 358 ff. [page 378]

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COMMENT AND NOTES: PECL Article 6:111: Change of Circumstances

(1) 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.

(2) If, however, performance of the contract becomes excessively onerous because of a change of circumstances, the parties are bound to enter into negotiations with a view to adapting the contract or ending it, provided that: [page 322]

(a) the change of circumstances occurred after the time of conclusion of the contract,

(b) 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, and

(c) the risk of the change of circumstances is not one which, according to the contract, the party affected should be required to bear.

(3) 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.

In either case, 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.

Comment

A. General

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 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.

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. But it should always be borne in mind that the rules adopted by the Principles are not [page 323] 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. The first paragraph restates the principle of sanctity of contract in unambiguous terms, and the exceptional nature of the intervention is reinforced by the word "However" which introduces the rule on renegotiation in paragraph (2). The mere fact that a contract has become more onerous than expected is not enough: to adopt the phrase used by the Italian Civil Code, art. 1467, the contract must have become "excessively" burdensome. This point is developed in paragraph (2).

On the other hand, this concept of "imprévision" (it is convenient to borrow this term from French administrative case law) is distinct from "impossibility", which is covered by Article 8:108. Although in either case an unforeseen event has occurred, impossibility presupposes that the event has caused an insurmountable obstacle to performance, whereas in "imprévision" performance may still be possible for the debtor but will be ruinous for it. Of course there is sometimes a very fine line between a performance which is only possible by totally unreasonable efforts, and a performance which is only very difficult even if it may drive the debtor into bankruptcy. It is up to the court to decide which situation is before it (see also the comment to Article 8:108).

"Imprévision" is also differentiated from impossibility by its consequences. The latter, if it is total, can only lead to the end of the contract (see Article 9:301 and comment). "Imprévision" gives the court the choice of declaring the contract terminated or revising its terms.

However, 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: hence the obligation to enter negotiations. The court may also remit the matter to the parties for a last effort of negotiation. In the absence of an agreement, it is up to the court to decide. The victim who withholds its performance on the grounds that it is excessively onerous (for instance during renegotiation) does so at its own risk.

The procedure adopted does not impinge on rules allowing the contract to be brought to an end in other circumstances, for example the right to terminate a contract of indefinite duration by giving notice.

B. Conditions for the procedure to apply

Strict conditions must be fulfilled for the renegotiation mechanism to be triggered: these are set out in Article 6:111(2)).

(i) Performance excessively onerous

The first condition follows directly from the first subsection: the change in circumstances must have brought about a major imbalance in the contract. Any contract, especially one of a long duration, is made in a particular economic context which [page 324] may not last - it is this notion which underlies the ancient "clausula rebus sic stantibus". A subsequent change in the economic context is not enough to give rise to the right to have the contract revised. The "imprévision" 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 of the paragraph show clearly that the court should not interfere merely because of some disequilibrium.

The "excessive onerosity" may be the direct result of increased cost in performance - for example, the increased cost of transport if the Suez Canal is closed and ships have to be sent round the Cape of Good Hope. Or, as the paragraph states, it may be the result of the expected counter-performance becoming valueless; for example if the cost of building work which has already been executed is to be determined by reference to some index of a price which collapses in a quite unforeseeable way. In neither situation is it possible to give precise rules to cover the diversity of situations which may arise.

Illustration 1: A canning business buys the whole of a producer's future crop of tomatoes at 10 pence per kilo. It cannot demand renegotiation when by harvest time the market price has fallen to 5 pence per kilo because of an unexpected flood of imported tomatoes.

Illustration 2: A contract is made to supply for irrigation for fifty years at a fixed price but the price becomes derisory through inflation. The supplier may be able to demand renegotiation.

(ii) Time factor

The second condition is that the change of circumstances must have occurred after the contract was made. 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 will apply, see Articles 4:103 and 4:105.

(iii) Circumstances could not have been taken into account

Thirdly, the change of circumstances should not have reasonably been taken into account by the parties. This condition is parallel to that applicable to impossibility of performance and should be interpreted in the same way. 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.

Illustration 3: During a period when the traffic in a particular region is periodically interrupted by lorry driver's blockades, the reasonable man would not choose a route through that region in the hope that on the day in question the road will be clear; he would choose another route. [page 325]

(iv) Risk

Lastly it must be 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 this section.

C. The obligation to renegotiate

Like many expressly agreed clauses, Article 6:111 envisages at the outset a process of negotiation to reach an amicable agreement varying the contract. 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 circumstances have had upon the contract. The other party, if it is concerned about maintaining the contractual relationship, may also seek to open negotiations. 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.

The obligation to renegotiate is independent and carries its own sanction in paragraph (3)(c). The compensation provided by (3)(c) 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.

D. The court's powers

If the parties' negotiations do not succeed, either of the parties may bring the matter before the court.

The court will intervene only in the last resort, but it is given wide powers. The court may, in effect, either terminate the contract or modify its terms. In accordance with the purpose of the , its 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. If the negotiations are unsuccessful it will have to make a decision on the merits in accordance with paragraph (3).

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.

Illustration 4: A town council has arranged for the supply of electricity by a private company at a fixed tariff. If the price of the coal used to produce the electricity increases dramatically because of shortages, the additional payment which the town should be required to make should not cover the whole of the additional cost of the coal. Part of the extra cost should fall on the company. [page 326]

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 text, 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 (compare the case where the means of fixing the price becomes impossible under Article 6:107, above). 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.

There is, however, a limit to this power: 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. For example, in illustration 4 the court could not impose requirements which would in effect force the electricity producer to change its plant to burn oil instead of coal.

In such a case, 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.

It is in effect the court which declares the contract ended, 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 Article also empowers 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 Article 6:111 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.

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

Unidroit arts. 6.2.1-6.2.3 are similar to Article 6:111. 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 (on force majeure see notes to Article 8:108 below). Some accept it as a basis for modifying the contract, others do not. [page 327]

1. Change of circumstances accepted as basis for modifying contract

A famous example, though applying only to administrative contracts, is the FRENCH doctrine of imprévision. Under this doctrine change of circumstances may lead to the ending of the contract or its modification by the court granting a monetary compensation, see the Gaz de Bordeaux case, Conseil d'Etat 30 March 1916, D.P. 1916 3:25; Ghestin, Billiau & Jamin No.283.

Several laws, whether by statute or case law, admit as a general principle that the contract may be ended or modified, when as expressed in a GERMAN case, "to maintain the original contract would produce intolerable results incompatible with law and justice". See BGH 25 May 1977, NJW 1977, 2262, 2263; BGH 13 Nov. 1975, NJW 1976, 565, 566 ; Staudinger & Schmidt, s. 242 no. 838 and references there. According to another German case, RG 3 Feb. 1922, RGZ 103, 328, 33, the normal consequence is that the contract will not be terminated unless it is impossible to adapt it. The German case law is based on the good faith principle in BGB 242. Also the DUTCH BW art. 6:258 applies the good faith principle to provide for an ending or modification of the contract in the case of changed circumstances. This provision was "applied" by the Dutch courts under the former Code's good faith rule before the new provision came into force in 1992.

Art. 1467 of the ITALIAN CC provides that if contracts for continued or periodic performance or for deferred performance are made excessively onerous for the debtor by extraordinary and unforeseeable events, he may demand that the contract be ended. The other party may avoid this by an equitable offer to modify the terms of the contract, though revision of the contract [is] not provided for in art. 1467 (but see Art. 1664 (Construction Contracts). SPANISH case law permits the court to end the contract if a less radical way of preserving it cannot be found (Diez Picazo, II 873: "rebus sic stantibus" clause, TS 23 December 1963, 12 November 1990, 23 April 1991, 8 July 1991, 10 February 1997); but the principle is applied only exceptionally ("pacta sunt servanda": see Albaladejo II, 1, 78).

Art. 388 of the GREEK Civil Code gives the judge wide powers to adapt the contract to new circumstances or to end it altogether. The same solution appears in PORTUGUESE law (CC art. 437).

In AUSTRIAN ABGB 936, 1052, 1170a form, by way of analogy, the statutory foundation for the recognition of the rule that a fundamental change of circumstances may, under certain rather restrictive conditions, affect the validity of a contract. The change must have been unforeseeable for both parties at the time of the conclusion of the contract and relate to characteristic features of the type of the relevant agreement.

In a few decisions SCANDINAVIAN courts, which generally do not accept change of circumstances as a ground for the revision of a contract, have modified the terms of long-lasting continuing contracts, at first by invoking an "implied condition" (see note to Article 4:103) but lately by applying 36 of the Contract Act on unconscionable clauses, see for DENMARK, Gomard, Kontraktsret 179 ff.; for FINLAND, Wilhelmsson, Standardavtal 130 ff.; for SWEDEN, Hellner, Speciell avtalsrätt II; 2, 59 ff. In the U.S. change of circumstance has made a hesitant appearance, see e.g. Aluminum Co. of America v. Essex Group 499 F.Supp 53 (W.D. Pa. 1980); U.C.C. 2-615 and Restatement 2d of Contracts, 261 comment (a).

2. Change of circumstances not accepted as basis for modification

Some legal systems do not give any relief. This is the case for FRENCH, BELGIAN and LUXEMBOURG law except for administrative contracts, see note 1 above, though in Belgium relief may be given on the basis of other doctrines, see generally Philippe. ENGLISH law seems to reject any notion of relief for changed circumstances not amounting to impossibility: Davis Contractors Ltd. v. Fareham U.D.C. [1956] A.C. 696 (H.L.) The only possible exception, frustration of the venture, may follow from the isolated decision in Krell v. Henry [1903] 2 K.B. 740 (C.A.) where a change of circumstances rendered the contract pointless. SCOTTISH law seems to be the same as English law, as is the law of IRELAND, see Clark 422-438. CISG art. 79 appears to be limited to cases of impossibility though there is disagreement among the various commentators.

See generally Zweigert & Kötz 516-536 ; Abas; Philippe; Rodière & Tallon; Chambre de Commerce Internationale: Force majeure et imprévision; on CISG art.79 see Bianca & Bonell (-Tallon) 572; Honnold 423 ff.; von Caemmerer & Schlechtriem 675 ff. [page 328]

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Pace Law School Institute of International Commercial Law - Last updated January 8, 2007
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