Does Article 79(1) CISG Solve Investigations of Commercial Impracticability - Essay Example

Rough Draft Does Article 79 CISG Solve cases of Commercial Impracticability? Introduction The wording of Article 79 of the Convention on Contracts for the International Sale of Goods (CISG) appears to be wide enough to provide for exemption from liability in cases of economic hardship that impede performance in a manner comparable to non-economic impediments that excuse non-performance.1 Still there appears to be some confusion about whether or not Article 79(1) can only arise to allow exemption in cases where the breach relates to timing of delivery or whether or not it is capable of allowing exemptions in the case of failure to deliver conforming goods.2 The potential for creating these kinds of interpretive difficulties raises the question of whether or not Article 79(1) sufficiently solves cases of commercial impracticability. A. CISG’s Interpretive Problems The main problem with Article 79(1) is related to the problem of interpretation and application of the CISG in general. The CISG attempts to set out basic remedies and as results lacks specificity. As a result adjudicators have at their disposal broad discretionary powers of interpretation and application. The result is a body of inconsistent findings and uncertainty of law, ultimately compromising the CISG’s goal of harmonization of the law of compensatory damages.3 It is within this legal framework that Article 79(1) functions. B. The Doctrine of Impracticability Article 79(1) requires that the party seeking exemption from liability take all reasonable steps to “avoid or overcome” the relevant impediment or any consequences flowing from it.4 Article 79(1) of CISG reads as follows: A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.5 Essentially what this means is that at the time of contracting the vendor intends to use a specific supplier and if that supplier does not have the goods at the time the Vendor is required to obtain them, he will not be exempt from liability under Article 79(1). This is because Article 79(1) requires that the vendor is reasonably expected to foresee this possibility and should take practical steps to overcome such a scenario. In other words, the vendor ought to have been in a position to seek out an alternative supplier. Failure to take these kinds of practical steps will not permit the vendor to escape liability under Article 79(1). Quite simply, once performance remains a practical possibility, the vendor is bound to perform his obligations under the CISG contract. Presumably, if a vendor is obliged to deliver extremely rare goods and those goods are destroyed by means outside of the vendor’s control, Article 79(1) ought to permit an exemption.6 In this regard, Article 79(1) has the capacity to resolve the commercial impracticability issue. Cases involving the practicability an impracticability of delivering goods rarely give rise to divergent rulings.7 C. The Doctrine of Force Majeure Problems arise however, in cases where non-delivery relates to questions of insolvency and other economic constraints. Presumably, economic impediments, although a commercial impracticability will not be exempt under Article 79(1) because these contingencies are risks that vendors and purchasers normally assume.8 The predisposition against permitting economic hardship as a viable exemption under the impracticability principle in Article 79(1) can be entirely unfair, particularly in cases where the insolvency of economic hardship arises out of conduct on the part of public officials. For instance, in the case of ICC Arbitration Case No. 7197 of 1992 the purchaser could not open a letter of credit as a result of the Bulgarian government’s suspension of foreign exchange. Even so, the arbitration panel held that the Bulgarian government’s order was not force majeure but rather an assumed risk.9 It is difficult to reconcile such an unforeseen event with an assumed risk. It is one thing to expect a purchaser to reasonably expect that the possibility of financing his or her purchase might circumvent a purchase. However it is entirely unreasonable to expect the purchaser to anticipate that government officials might suspend payment of foreign debts. The arbitration panel in ICC Arbitration Case No. 7197 of 1992 however, did leave open the possibility that a defaulting party under a CISG contract could successfully plead force majeure under Article 79(1). The panel ruled that the defendant did not prove that the government’s suspension of foreign exchange preventing his opening up the letter of credit.10 In this regard, the burden of proof under Article 79(1) is on the party seeking an exemption. The difficulties for the party seeking exemption is illustrated by the case of Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry 155/1994. In the arbitration proceedings before the ICC in the Russian Federation, a Russian supplier was required to deliver chemical material to a German purchaser by the expiration of the fourth quarter of the year 1992. The supplier failed to meet the deadline for delivery and when sued for breach of contract claimed that he had been unable to meet production because of an emergency halt to production at the plant specifically mentioned in the contract. The tribunal held that the defendant had not been able to discharge the burden of proof required by Article 79(1). More specifically, the tribunal ruled that the defendant had not proven that the stoppage was not reasonably foreseeable and neither had he proved that the emergency stoppage was an insurmountable obstacle.11 Ultimately the question of hardship under CISG Article 79(1) remains largely unsettled.12 The uncertainties connected with the application and interpretation of Article 79(1) particularly in relation to permitting hardship to succeed as a valid exemption may have been avoided if CISG had at the very least provided a definition of hardship. The United Nations Principles of International Commercial Contracts (UNIDROIT) provides a working definition of the term hardship. Article 6.2.2 defines hardship as: Where the occurrence of events fundamentally alters the equilibrium of the contract either because the value of the performance a party receives has diminished…13 In order to avoid frivolous claims however, Article 6.2.2 qualifies the application and reach of the hardship definition. In order for a hardship defence to succeed the party claiming hardship will have to demonstrate that events altering the equilibrium of the contract were not known to the “disadvantaged party” prior to concluding the contract.14 Moreover, the party relying on hardship pursuant to Article 6.2.2 must demonstrate that the events could not have been “reasonably” considered prior to concluding the contract15, the events were outside of the control of the party seeking the exemption16 and the risks of such an event had not been assumed by the party seeking the exemption.17 In applying the definition of hardship as contained in Article 6.2.2 of the UNIDROIT Principles, reference must be made to Article 6.2.1 which provides as follows: Where the performance of a contract becomes more onerous for one of the parties, that party is nevertheless bound to perform its obligations subject to the following provisions on hardship.18 The last part of Article 6.2.1 refers to Article 6.2.1 which follows. In other words, the obligation to perform the contract is not absolute and will be discharged upon the occurrence of circumstances such as those delineated in Article 6.2.2. In this regard, the counter-principle rebus sic santibus (circumstances have changed) which functions when exceptional circumstances arise to nullify the parties initial presumptions at the time of contracting19. Article 6.2.2 therefore provides that the hardship principle will only arise in specific circumstances set forth therein. In this regard Article 6.2.2 is useful for providing guidelines as to when hardship makes it impractical for a party to an international commercial contract to meet his or her obligations. Article 79(1) of the CISG merely leaves it open to interpretation and does not provide guidance of any kind. Upon a closer examination of 6.2.2 of UNIDROIT however, it does not provide an appreciable improvement over Article 79(1) of the CISG. To start with the requirement the party seeking an exemption demonstrate that he/she could not have reasonably taken the difficulties into account prior to contracting is particularly problematic. As Keilhack argues, virtually any event can be anticipated since business people today typically have “access to sufficient information to make all kinds of predictions.”20 Conversely, it is also impossible for parties to a contract to predict in advance, all eventualities that might become important in the future and consider the consequences of those events with respect to their ability to perform their obligations. As Keilhack submits, it therefore follows that Article 6.2.2(b) of the UNIDROIT Principles is applicable to negligence and will apply in instances where a “party fails to exercise a reasonable degree of care and prudence where a change in circumstances is evident.”21 Keilhack’s negligence argument indicates that Article 6.2.2(b) is applied in much the same way as Article 79(1) of the CISG. In the Russian case cited above, the ICC’s ruling under Article 79(1) of the CISG can be construed as applying a negligence test. By ruling that the supplier had failed to prove that the emergency stoppage was an insurmountable obstacle, the ICC was basically concluding that the supplier had not proven that he had used all care and diligence to overcome the emergency stoppage. Ultimately Article 6.2.2(b), while providing part of the criteria for hardship as an exemption for liability and purporting to define what could amount to hardship is no clearer in application than Article 79(1) of the CISG. Both provisions appear to place an onerous burden on the party seeking an exemption to the extent that he or she must not only prove that the circumstances were not reasonably foreseeable, but that those difficulties could not have been overcome. Article 6.2.2(d) of the UNIDROIT Principles however does appear to be more precise content and application. Article 6.2.2(d) offers an exemption in the event the “disadvantaged party” did not assume the “risk of the events.”22 Article 79(1) does not specifically speak to the assumption of risk and it is therefore not clear whether or not assumption of risk as provided for in Article 6.2.2(d) will apply to exemptions under Article 79(1). Be that as it may, the significance of such a provision is obvious. For instance, if a party can reasonably foresee an event occurring and goes ahead with the terms and conditions of the contract, it is reasonable to conclude that he assumes the risks associated with the event. On the other hand, if it is unreasonable to expect for a party to predict a specific turn of events, it is reasonable to conclude that he or she did not assume the risk associated with the event. In this regard, Article 6.2.2(d) does what Article 79(1) does not. Article 6.2.2 specifically provides for an exemption only in cases where it is either expressly or impliedly certain that the disadvantaged party did not or could not have assumed the risk which gave way to the hardship.23 This is one of the unique features of the UNIDROIT Principles. It attempts to allocate risks and determine contractual obligations in a manner consistent with the reality of the relationship, not only as it is at the time of contracting but as it develops over time.24 In other words, the UNIDROIT principles attempt to ensure that contracting parties take into account what might affect the contractual obligations and relations into the future. Aside from Article 6.2.2(d) of the UNIDROIT Principles however, it is difficult to see how the definition of hardship in Article 6.2.2 of the UNIDROIT Principles is more precise than Article 79(1) in that both provisions are essentially vague and open to interpretation. D. Analysis of Article 79(1) Any realistic interpretation of the exemptions provided for under Article 79(1) of the CISG must be read by reference to Article 45(1) which provides that damages for breach of contract incur strict liability.25 In this regard Articles 45(1) and 79 may be said to function as gap-fillers in that they determine whether or not the injured party can recover damages.26 Article 79(1) provides the primary exemption and applies when either of the parties fail to meet their respective obligations under the CISG contract. In determining whether or not the exemption should apply in the particular case, the adjudicating court is required to comply with Article 7(1) of the CISG which requires that adjudicators take into account the international nature of the contract and the need to promote uniformity.27 When read together with Article 45(1) with respect to strict liability and bearing in mind the interpretive guideline in Article 7(1), an exemption under Article 79(1) is particularly problematic for the party seeking an exemption. Article 45(1) provides the reference point for considering whether or not an exemption under Article 79(1) will apply. When one considers that liability is strict, Article 79(1) will require extraordinary circumstances in order to succeed. Starting out with the presumption that liability is strict puts the would-be exemptee in a particularly difficult position. The would-be exemptee will be required to discharge an onerous burden in any attempt to prove impracticability. In short, the would-be exemptee will have to satisfy the court that a departure from Article 45(1) is justified in the particular case. This is particularly problematic when Article 7(1) promotes uniformity and at the same time requires that the international character of the contract guide adjudicators in interpreting the provisions contained in the CISG. The approach encapsulated by Article 45(1) virtually calls for a very restrictive and selective application of the Article 79(1) exemption. In an opinion published by the CISG’s Advisory Council in 2007, it was acknowledged that Article 79 itself has “been invoked in litigation and arbitration by sellers and buyers with limited success.”28 The Advisory Council also noted that the decisions made by adjudicators have been particularly divergent in the interpretation of words and phrases within the context of Article 79. Moreover, adjudicators appear to have a relatively single goal which is to ensure that buyers and sellers seeking exemption do not successfully obtain an exemption on the basis of an excuse rather than an impediment.29 These observations made by the CISG-AC indicate the onerous burden of proof that would-be exemptees are burdened by. More importantly, the CISG-AC acknowledges that the issues associated with Article 79 are a result of either the “flexibility in language” or “an unusual level of ambivalence in its drafting history.”30 The result is, adjudicators are at liberty to adopt broad interpretation techniques in the application of Article 79 in general. In this regard, adjudicators are more likely to refer to national laws and this alone will give way to divergent and inconsistent rulings.31 So aside from compromising the adjudicator’s ability to take account of the international character of the CISG, the vague and ambivalent nature of Article 79(1) also provides too much leeway thereby compromising the spirit of uniformity envisioned by Article 7(1). Complicating matters with respect to achieving uniformity and thereby consistency in the interpretation of Article 79(1) is the fact that common law and civil law jurisdictions take an entirely different approach to the question of liability. Common law systems usually start out from a strict liability approach while civil law systems take a fault-based approach.32 In this regard, the resulting rulings are inconsistent so that parties seeking an exemption cannot predict with any degree of certainty how a court might determine whether or not a case can be made in respect of the three elements contained in Article 79(1). Again the three elements are: that the breach occurred as a result of an impediment, the impediment was beyond the offending party’s control, and he could not have reasonably taken the event into consideration at the time the contract was made and he could not have reasonably been expected to overcome or avoid the risk.33 The word “impediment” itself is vague and can be interpreted in a variety of ways, depending on the jurisdiction in which it is applied. Relying on national customs and laws is therefore unavoidable. For the common law lawyer, the idea that an impediment or any kind of impracticability could exempt a supplier who furnishes non-conforming goods goes against the strict liability concept where a warranty makes the exemption irrelevant.34 For common law lawyers the supplier is typically required to ensure that the goods are of merchantable quality and such an assurance is under warranty with the result that liability is strict. Therefore in common law jurisdictions, adjudicators are expected to take a particularly hard line with suppliers seeking an exemption under Article 79(1) when the breach complained of is attached to the delivery of non-conforming goods. However, it can be argued that the question of warranty as understood in the common law context is adequately dealt with under Section 46(2) and 46(3) of the CISG.35 Articles 46(2) and 46(3) provides that the seller is required to deliver goods that are free of defects and this obligation requires that the seller either deliver replacement goods or repair the defective goods.36 The seller will therefore have a difficult time finding relief under the exemption provisions within Article 79(1) of the CISG if the goods delivered are non-conforming. Essentially, Article 79(1) when read together with Articles 46 and 45 of the CISG imply that the seller is always required to deliver conforming goods and should not generally be exempted. The problem is, Article 79(1) suggests otherwise and the exemptions provided for seemingly permit exoneration where none should exist. Conclusion Article 79(1) of the CISG is undoubtedly vague and ambiguous. In the context of customary international law, its vague and ambiguous nature is open to diverse interpretations and as a result has created tensions between two competing interests. The competing interests are the need to recognize that some circumstances could justifiably create a commercial impracticability and that some parties might get by with what could only be an excuse for non-performance rather than a legitimate impediment. The CISG-AC in acknowledging the interpretive difficulties implicit in Article 79(1) which inevitably creates tension between two competing interests provided a tangible suggestion. The CISG-AC recommends that unless there is a warranty either express or implied, the seller should not be taken to have guaranteed that the goods are free of defective.37 Certainly this approach to interpretation in an improvement on the ad hoc methods of interpretation and has the potential to improve on the uncertainties and flexibilities associated with Article 79(1). Bibliography Brunner, C. (2009) Force Majeure and Hardship Under General Contract Principles: Exemption for Non-Performance in International Arbitration. Kluwer Law International. CISG 1980. CISG-AC Opinion No. 7 Exemption of Liability for Damages under Article 79 of the CISG, Rapporteur. Professor Alejandro M. Garro, Columbia University School of Law, New York. Adopted by the CISG-AC at its 11th meeting in Wuhan, People’s Republic of China, 12 October 2007. Available online at: http://www.cisg.law.pace.edu/cisg/CISG-AC-op7.html (Retrieved November 26, 2009) Cuniberti, G. (2006) “Is the CISG Benefiting Anybody?” Vanderbilt Journal of Transnational Law. Vol 39: 1511-1550. ICC Arbitration Case No. 7197 of 1992. Keilhack, R. K. (2003) The Hardship Approach in the UNIDROIT Principles of International Commercial Contracts and its Equivalent in German Law of Obligations – A Comparison. GRIN Verlag. Lookofsky, J. (2008) Understanding the CISG. Kluwer Law International. Lookofsky, J. and Flechtner, H. (2005) “Nominating Manfred Forberich: The Worst CISG Decision in 25 Years?” The Vindobona Journal of International Commercial Law and Arbitration Vol. 9: 199-208. Maggi, M. (2004) Review of the Convention on Contracts for the International Sale of Goods. Kluwer Law International. Maskow, D. (1992) “Hardship and Force Majeure.” The American Journal of Comparative Law Vol. 40(3): 657-669. Nicholas, B.(1984) “Impracticability and Impossibility in the U.N. Convention on Contracts for the International Sale of Goods.” Cited in Galston and Smit (eds) International Sales: The United Nations Convention on Contracts for the International Sale of Goods. Juris Publishing Ch. 5. Scgkecgtriem, P and Schwenzer, I. (2005) Commentary on the UN Convention on the International Sale of Goods (CISG). Oxford University Press. Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry 155/1994. UNIDROIT Principles. Read More