CISG Advisory Council Opinion No. 7

Exemption of Liability for Damages Under Article 79 of the CISG

3.1       A change of circumstances that could not reasonably be expected to have been taken into account, rendering performance excessively onerous ("hardship"), may qualify as an "impediment" under Article 79(1). The language of Article 79 does not expressly equate the term "impediment" with an event that makes performance absolutely impossible. Therefore, a party that finds itself in a situation of hardship may invoke hardship as an exemption from liability under Article 79.
 
3.2     In a situation of hardship under Article 79, the court or arbitral tribunal may provide further relief consistent with the CISG and the general principles on which it is based.

Comments

26. Under a variety of legal doctrines, most of which can be traced back to the doctrine of rebus sic stantibus developed by the Roman preaetor, unforeseeable and extraordinary change of circumstances rendering a contractual obligation extremely burdensome though not absolutely impossible, may entail the avoidance or even the revision or "adaptation" of the contract or one of its clauses. The variety of national laws and legal doctrines (e.g., imprévision, frustration of contract, commercial impracticability, Wegfall der Geschäftsgrundlage, eccesiva onerosita sopravvenuta), coupled with the amplitude of the term "impediment" in Article 79, provides a fertile ground for judges and arbitrators to take divergent approaches to the question whether a party whose performance has turned extraordinarily burdensome (in economic terms or otherwise, hereinafter identified as "hardship").[27] Not surprisingly, scholarly opinions are divided on whether this situation of hardship, short of impossibility, is governed by Article 79. Whereas some consider that the wording of Article 79 is sufficiently flexible to include an extreme situation of unexpected hardship within the meaning of "impediment",[28] others opine that there is no place in the CISG for any relief on account of economic hardship.[29]

27. Concerns for the word "impediment" employed in Article 79 and its proper interpretation have been voiced by commentators from a broad spectrum of legal systems. According to one scholarly opinion the word "impediment" is "vague and imprecise,"[30] another pointed to several "contradictions and ambiguities" in the use of that term,[31] and a third characterized the word "impediment" as a "chameleon-like" example of "superficial harmony which merely mutes a deeper discord." [32] The legislative as well as the drafting history of Article 79 is not conclusive enough to warrant a conclusion that the hardship problem was meant to be excluded or included within its scope.

28. As to the legislative history of Article 79, there is ample support for the proposition that the Convention does not favor an easy exemption from nonperformance and that the notion of "impediment" under Article 79 points to an insurmountable obstacle that is unrelated to the more flexible notions of hardship, impracticability, frustration, or the like.[33] However, that background is insufficient to warrant the conclusion that CISG Article 79 cannot exempt a party from performing its obligations, in whole or in part, when the impediment is represented by a totally unexpected event that makes performance excessively difficult.

29. As to the drafting history of this provision, isolated discussion of proposals that were dismissed or the comments by some delegates may lead one to conclude that there was some type of consensus among the members of the Working Group against the doctrine of "hardship."[34] In fact, some passages of the travaux préparatoires appear to indicate that the choice of the word "impediment" was made for the purpose of adopting a unitary conception of exemption with the intention of setting aside the theory of rebus sic stantibus, imprévision, or hardship theories based on "changed circumstances." Thus, according to some legal commentators, the exclusion (rectius: rejection) of hardship from the scope of Article 79 would emerge from its drafting history.[35] Following the successive drafts preceding what finally became Article 79, the Working Group of UNCITRAL considered but rejected a proposal allowing a party to claim avoidance or adjustment of a contract whenever facing unexpected "excessive damages".[36] Yet, a closer look at this passage reveals that after briefly setting out the arguments in support of the proposal, the report simply stated that it was not adopted, not reappearing in subsequent discussions.[37]

30. Other commentators have seized upon the rejection of a Norwegian proposal linked to a passage of what later became Article 79(3) in order to infer a rejection of the position that Article 79 may extend its application to a situation of genuine hardship. Thus, when the issue of temporary impediment came up for discussion at the Diplomatic Conference, the Norwegian delegation suggested the inclusion of an additional provision to the effect that the temporary exemption from performing may turn into a permanent exemption if, after the impediment ceases to exist, the circumstances had so changed that performance would become manifestly unreasonable.[38] The proposal gained significant support from other delegations, but the French delegate raised his concerns that introducing such a provision may be regarded as an acceptance of doctrines such as imprévision, frustration of purpose, and the like. Although the recollection of the discussions among the participant delegates, or what should be made out of those discussions, is far from uniform, the rejection of the Norwegian proposal did not settle the issue of economic hardship because it was actually not discussed as such. If it is accepted that the drafting history has any controlling role to play - which is a debatable issue - such history evidences that the discussions were not conclusive on this question.[39]

31. Several court decisions have rejected the possibility that negative market developments constitute an impediment within Article 79(1). Indeed, as of the time of the drafting of this opinion, no court has exempted a party from liability on the grounds of economic hardship. As to noticeable case-law developments, a German court of first instance is reported to have stated in dicta that the German doctrine of Wegfall der Geschäftsgrundlage does not apply because the CISG "fills the field in this area" and therefore forces out the otherwise applicable domestic law.[40] An Italian court of first instance, in a decision reported in the same year, in a case that was not governed by the CISG, considered but ultimately refused to apply the doctrine of "supervening excessive onerousness," as adopted in Article 1467 et seq. of the Italian Civil Code.[41]

According to the Italian court in Monza, this variation on the doctrine of "hardship" could not conceivably find its way into the Vienna Sales Convention, because hardship is not expressly excluded under Article 4 of the CISG, thus being an issue left unsettled in the CISG.[42]

32. There are not many cases dealing with situations of hardship in which courts have found it fair to provide relief, and no cases have been found at the time this opinion is drafted in which a court has provided well-grounded reasons explaining why a change in circumstances was unpredictable or why one type of relief was more appropriate than others. To this date, there are no reported decisions whereby a court exempted a party from liability on the ground of hardship. This state of affairs is not inconsistent with the admission, by a majority of legal commentators, that a fair legal system should admit some flexibility within the general principle of pacta sunt servanda to account for a genuine situation of hardship. The question to be raised then is what type of factual scenario may be proposed for an exceptionally "hard" case of hardship that would merit relief.

33. Resorting to the type of scenarios designed in the comments accompanying UNIDROIT Principles Article 6.2.2, one may envision a situation where a buyer "A", domiciled in State X, concludes a contract of sale with a seller "B", domiciled in State Y. Payment is agreed to be made in State Z within three months, upon delivery of the goods, in the currency of State Z. Let us imagine that within a month of the conclusion of the contract a totally unpredictable political and economic crisis, which the parties could not have reasonably taken into account, leads to a massive devaluation of 80% of Z's currency. As a result of this totally unanticipated and massive devaluation of the currency, the sale turns out extremely burdensome for the buyer "A" and a gross windfall for the seller "B".[43]

34. Assuming then that the CISG applies to a contract subject to a situation of hardship such as the one previously described, the question is whether the aggrieved party should be entitled to find relief under the terms of the CISG by reading the word "impediment" in Article 79 to include hardship or by concluding that there is a gap within the CISG to be filled by some underlying general principle via the "governed-but-not-settled" gap-filling technique promoted by CISG Art. 7(2). If the CISG applies, then it naturally preempts other, potentially applicable domestic rules dealing with hardship. But if the hardship question cannot be thus settled, there is no alternative other than resorting to domestic legal rules, hoping that the applicable law would provide for some risk-share allocation of remedies.

35. The alternative of resolving the hardship problem within the four corners of the CISG is more palatable than the other, because leaving the question to the conflict of law rules of the forum leads to a great diversity of potentially applicable legal doctrines. It is submitted that the interpreter who takes seriously the CISG's confessed purpose of unifying the law of sales, as articulated in Article 7(1), will probably exhaust all technically available means to respond to the hardship problem within the "four corners" of the Convention, rather than resorting to the application of potentially disparate domestic legal rules and doctrines.

36. Before proceeding to examine the type of relief that may be found under the CISG for a true hardship problem, it is important to recall that termination or adjustment of a contract on grounds of hardship may be regarded in some legal systems as a validity-related issue, so that it may be argued that the hardship issue is excluded from the scope of application of the CISG by virtue of Article 4.[44] The argument deserves careful consideration, because it has been reported that in some Scandinavian legal systems the issue of hardship is approached as an issue of validity.[45] In this case, there is something to be said in favor of granting the defaulting party the benefit of finding appropriate relief by choosing among competing domestic doctrines of hardship. But this approach does not sound convincing or persuasive. Unlike a situation of unconscionability (usury, lésion or gross disparity of the performances at the time the contract is concluded), which clearly falls under the rubric of validity, the hardship problem tends to be associated in most legal systems with force majeure or impossibility of performance, that is, a situation of exoneration or mitigation of liability due to events subsequent to the conclusion of the contract, more than as a case of nullity or avoidance due to infirmities or flaws affecting the contract from its inception.[46] Moreover, every benefit potentially obtained from allowing national doctrines of hardship to compete for its application is more than offset by the high price in terms of uniformity that is to be paid under this approach.

37. If it is accepted that a situation of genuinely unexpected and radically changed circumstances, in truly exceptional cases, may qualify as an "impediment" under Article 79(1), it deserves a legal response under the Convention that would preempt the application of domestic rules on hardship.

38. It is certainly not possible or even convenient to attempt a definition of hardship, beyond accepting that the impediment may entail a situation of "economic impossibility" which, while short of an absolute bar to perform, imposes what in some legal systems is conceptualized as a "limit of sacrifice" beyond which the obligor cannot be reasonably expected to perform.

39. In most cases market fluctuations are not to be considered an "impediment" under CISG Article 79, because such fluctuations are a normal risk of commercial transactions in general. Whether wild and totally unexpected market fluctuations in goods or currency could ever become an "impediment" is another matter. Indeed, the theoretical possibility of such radical and unexpected changes admits the application of Article 79 in those rare instances as the one exemplified above.

40. The next issue to tackle is to ascertain the contours of the remedial guidelines that may be followed to grant the most appropriate remedy or relief after hardship has been found to exist. One may infer from the obligation to interpret the Convention in good faith a duty imposed upon the parties to renegotiate the terms of the contract with a view to restore a balance of the performances. In case negotiations fail, there are no guidelines under the Convention for a court or arbitrator to "adjust," or "revise" the terms of the contract so as to restore the balance of the performances. Even if one were not ready to stretch the principle of good faith buried in CISG Article 7(1) in order to find a balance of the performances,[47] CISG Article 79(5) may be relied upon to open up the possibility for a court or arbitral tribunal to determine what is owed to each other, thus "adapting" the terms of the contract to the changed circumstances. 

FOOTNOTES

 25. John O. Honnold, Uniform Law for Inernational Sales Under the 1980 United Nations Convention 546-46 (Kluwer International, 2d ed., 1999).

26. BGH 9 January 2002, available in English translation at <http://cisgw3.law.pace.edu/cases/020109g1.html>.

27. See Tallon, Article 79, in Commentary on the International Sales Law. The 1980 Vienna Sales Convention § 3.1 at 592 (1987), available at <http://cisgw3.law.pace.edu/cisg/biblio/tallon-bb79.html> ; Hans Stoll & Georg Gruber, in Schlechtriem & Schwenzer, Commentary on the U.N. Convention, op. cit. supra, Article 79, § 39, at 822-26. See also Honnold, Uniform Law, op. cit. supra, at 434 (suggesting the adoption of a "comparative law approach" towards the notion of impediment under Article 79, taking into account the "prevailing patterns and trends of modern domestic law").

28. See, e.g., Denis Tallon in Commentary on the International Sales Law Article 79 at § 3.2 (1987) ("[T]he judge will have a natural tendency to refer to similar concepts in his own law. Thus, the judge of a socialist country will have a restrictive approach to force majeure... On the contrary a common lawyer will feel inclined to refer to the more flexible notions of frustration and impracticability. In the Roman-German system, the judge will reason in terms of force majeure..."). See also M. J. Bonell, Force majeure e hardship nel diritto uniforme della vendita internazionale, in Diritto del commercio internazionale 590 (1990) (observing that by requiring that the obligor "could not reasonably be expected ... to have avoided or overcome [the impediment] or its consequences" suggests that, at least in principle, the possibility should be entertained that performance has become so onerous that it would be unreasonable to enforce it).

29. See, e.g., Barry Nicholas, who observed that exemption of liability on account of unexpected and excessive economic hardship was "out of place" in a sales law. Progress Report of the Working Group on the International Sale of Goods on the Work of its Fifth Session (A/CN.9/87, Annex III, reprinted in UNCITRAL YEARBOOK V:1974 (1975) at 66.


30. B. Nicholas, Impracticability and Impossibility in the U.N. Convention on Contracts for the International Sale of Goods, in International Sales: The United Nations Convention on Contracts for the International Sale of Goods § 5.02 at 5-4 (Parker School of Foreign and Comparative Law, Columbia University, ed. Nina M. Galston & Hans Smit, 1984), available at <http://cisgw3.law.pace.edu/cisg/biblio/nicholas1.html>.

31. D. Tallon, Commentary to Article 79, in Commentary on the International Sales Law. The 1980 Vienna Sales Convention 594 (Giuffre, Milan, 1987), available at <http://cisgw3.law.pace.edu/cisg/biblio/tallon-bb79.html>.

32. E. A. Farnsworth, Perspective of Common Law Countries, in La vendita internazionale 19 (Congress at S. Margherita Ligure, Sept. 1980, Giuffre, 1981).

33. Article 79 was drafted in response to the criticism of Article 74 of the 1964 Uniform Law on International Sales, to the effect that "a party could be too readily excused from performing his contract." But the criticism that ULIS Article 74 was insufficiently clear and subjective lead to the substitution of the word "impediment" for "circumstances," so that the conditions for exemption are more narrowly and objectively identified. It is on record that one of the reasons for the UNCITRAL's Working Group's adoption of the term "impediment" in Article 79 was to exclude the scenario, envisioned under Article 74 of ULIS, in which the obligor could escape liability when performance had become unexpectedly difficult for reasons beyond his control.

34. See the discussion in John Honnold, Documentary History of the Uniform Law for International Sales 185, 252 (1989) (hereinafter Honnold, Documentary History).

35. See Honnold, Documentary History, at 252.

36. See Honnold, Documentary History, op. cit. supra, at 350, recalling that a proposal aimed at incorporating an article allowing 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.

37. Report of Committee of the Whole I Relating to the Draft Convention on the International Sale of Goods (A/32/17, annex I, paras. 458-60), reprinted in UNCITRAL YEARBOOK VIII:1977 (1978), 57. See also John Honnold, Documentary History at 350.

38. See A/Conf.97/C.1/SR.27 at 10. The Norwegian proposal lead to the deletion of the word "only" in Article 79(3), so that even if the initial and temporary impediment vanishes, the resulting change of circumstances, which may well be of an economic nature, may turn into another impediment leading to that party's exemption from liability.

39. Speculation about what the intention of the drafting group might have been with regard to the scope of application of CISG Article 79 is unlikely to be too accurate, especially when we are left to our inferences from fragments in the travaux préparatoires. Indeed, the dismissal of a proposal which did not even address whether hardship should be given any space within the Convention is no proper foundation upon which to build an argument on the "intention of the legislator".

40. LG Aachen, Germany, UNILEX, No. 43 0 136/92 (May 14, 1993) (the case involved a German seller of acoustic prosthetics against an Italian buyer who refused to take delivery of the goods under the contract).

41. Nuova Fucinati, S.p.A., v. Fondmetall International A.B., Tribunale di Monza, Italy, 14 January 1993, Clout No. 54, reproduced in English translation 15 J.L. & Com. 153 (1995), available at <http://cisgw3.law.pace.edu/cases/930114i3.html>. In this case, the Italian seller's (Nuova Fucinati) failed to deliver 1,000 tons of metal that a Swedish buyer, Fondmetall, had contracted to purchase. Faced with a court-imposed injunction sought by Fondmetall, Nuova Fucinati alleged that delivery of the 1,000 tons of metal was impossible due to Fondmetall's refusal to take delivery of another load of metal ordered at the same time. The Italian seller also sought to avoid its obligation to the Swedish buyer arguing that, prior to delivery of the 1,000 tons of metal, the price of the goods on the international market had risen so swiftly and unexpectedly that the fundamental equilibrium of the performances had been significantly altered, to the point of justifying the termination of the contract under Article 1467 of the Italian Civil Code.

42. The Italian court's discussion as to the applicability of Article 79 to an "impediment" that makes performance short of impossible was pure dicta, because the court decided that CISG was not applicable. According to the court of Monza, the CISG could not apply under Article 1(1)(a) because the CISG had not entered into force in Sweden at the time the contract was concluded and it was not applicable under Article 1(1)(b) because, in the opinion of the court, such a provision applies only in the absence of an express choice of law by the parties. For a critical view on this approach to applicability of the CISG, see Ferrari, Uniform Law of International Sales: Issues of Applicability Under Private International Law, 15 J. L. & Com. 159, 161 (1995), available at <http://cisgw3.law.pace.edu/cisg/biblio/ferr1.html>.

43. Admittedly, it is not easy to ascertain whether the change in circumstances could not have been reasonably foreseen. It is not an easier task to distinguish between the risk of loss that every contracting party should be deemed to have assumed and the extraordinary disastrous economic disadvantages amounting to a "limit of sacrifice" (because there is indeed such a limit), beyond which the obligor should not be expected to perform the contract as written. For an enlightening discussion of a "true hardship problem" based on a factual scenario in which a deal unexpectedly turned into a "nightmare" for one party and a "steal" for the other, see Joseph Lookofsky, Walking the Article 7(2) Tightrope Between CISG and Domestic Law, 21 Journal of Law and Commerce 87 (2005).

44. See J. Lookofsky, Understanding the CISG in the USA (2d ed., 2004) § 2.6 and Joseph Lookofsky, The Limits of Commercial Contract Freedom Under the UNIDROIT 'Restatement' and Danish Law, 46 Am. J. Comp. Law 485, 496 (1998), also available at <http://cisgw3.law.pace.edu/cisg/biblio/lookofsky6.html>, referring to the hardship provisions in the General Clause of the Danish Contracts Act, authorizing a court to refuse enforcement or to adjust "any unreasonable contract or term, and that includes a term which becomes unreasonable after the contract is made". Professor Lookofsky also refers to Dutch Civil Code Article 6.258(1) as an illustration of a provision that appears to question the "validity" of a contract ("Upon the demand of one of the parties, the court may modify the effects of a contract or it may set it aside; in whole or in part, on the basis of unforeseen circumstances of such a nature that the other party, according to standards of reasonableness and fairness, may not expect the contract to be maintained in unmodified form. The modification or setting aside may be given retroactive effect.").

45. See, e.g., Tom Southerington, Impossibility of Performance and Other Excuses in International Trade, Publication of the Faculty of Law of the University of Turku, Private law publication series B:55, available at <http://cisgw3.law.pace.edu/cisg/biblio/southerington.html>. Southerington refers to Section 36(1) of the Finnish Contracts Act, which the author considers as a rule of validity akin to unconscionability.

46. A much criticized 1993 decision by the Tribunale Civile di Monza entered (unnecessarily for the purposes of the case before the court) to examine the legal nature of hardship under Italian law and its relationship with the CISG. The Italian court stated that "... hardship is not a matter expressly excluded in Article 4 of the CISG. Dissolution of the contract for supervening excessive onerousness affects neither the validity of the contract nor ownership over the goods ..."). Tribunale Civile di Monza, 14 January 1993, CLOUT Case 54, reproduced in English in <http://cisgw3.law.pace.edu/cases/930114i3.html>.

47. A suggestion by Peter Schlechtriem to this effect may be found in Transcript of a Workshop on the Sales Convention, in 18 Journal of Law and Commerce 191-258, 236-37 (1999), available at <http://cisgw3.law.pace.edu/cisg/biblio/workshop-79.html>.

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