CISG Advisory Council Opinion No. 7

Exemption of Liability for Damages Under Article 79 of the CISG

To be cited as 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, N.Y., USA. Adopted by the CISG-AC at its 11th meeting in Wuhan, People's Republic of China, on 12 October 2007. Reproduction of this opinion is authorized.

This opinion is dedicated to the memory of Professor Peter Schlechtriem, our dear friend, colleague and teacher, who passed away on 23 April 2007.

JAN RAMBERG, Chair

ERIC E. BERGSTEN, MICHAEL JOACHIM BONELL, ALEJANDRO M. GARRO, ROY M. GOODE, JOHN Y. GOTANDA, SERGEI N. LEBEDEV, PILAR PERALES VISCASILLAS, INGEBORG SCHWENZER, HIROO SONO, CLAUDE WITZ, Members

LOUKAS A. MISTELIS, Secretary [1]

OPINION

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COMMENTS

Introduction and scope of this opinion

1. Article 79 grants buyers and sellers an exemption from performance if they can establish that nonperformance was due to an "impediment" beyond their control which they could not reasonably have been expected to take into account when the contract was made and which, or the consequences of which, they could not reasonably have been expected to avoid or overcome. The second paragraph of Article 79 provides that a third person's failure to perform may constitute grounds for exemption when the requirements for exemption under the first paragraph are satisfied with respect to both the party claiming exemption and the third person. A party failing to perform is required under the fourth paragraph of Article 79 to provide timely notice of the impediment and its effect on his ability to perform and, according to the previous third paragraph, the effect of the exemption is limited to the period of time during which the impediment subsists. The fifth and last paragraph of Article 79 does not restrict either party from claiming relief other than damages.

2. At the time this opinion is issued, Article 79 has been invoked in litigation and arbitration by sellers and buyers with limited success. Overall, sellers made only slightly more claims of exemption than buyers. The types of "impediments" claimed as an exemption by sellers have been as varied as those claimed by buyers, a variety matched by the types of goods involved in the transactions.

3. Any survey of reported decisions is to be read with caution, because the number of cases decided at this point do not allow but a few tentative conclusions regarding interpretative trends on CISG Article 79. Thus, whereas sellers have succeeded in claiming an exemption in some cases,[2] in many others their claims were denied.[3] Reported decisions also indicate that buyers were granted exemptions under Article 79,[4] their excuses having been rejected in many other cases.[5] There is considerable room for judicial appraisal and divergent interpretation of several words used in, and issues raised by, Article 79. However, the decisions reported to date do not bear out concerns that courts or arbitral tribunals might too readily excuse a party to perform, or initial fears that some civil law judges may reintroduce the requirement of fault by allowing a seller to show that defects were beyond its control,[6] or that some courts would rely too much on their domestic legal systems' concepts of force majeure and hardship with resulting diverging interpretations.[7]

4. Quite to the contrary, the bulk of judicial decisions and arbitral awards touching on Article 79 focus, by and large, on the standards for exemption that may qualify as excuses under the guise of "impediments". However, not every decision identifies facts that may become relevant to draw some tentative conclusions (e.g., the nationality of the parties, the type of goods involved or other details of the transaction), while others are incomplete in the sense that they merely state that the conditions of Article 79 have not been met. For example, a court finding a party exempted under Article 79 may be presumably satisfied that the alleged impediment was beyond the control of that party, yet one finds not much discussion in the available judicial decisions as to when that requirement should be deemed to have been met. Similarly, few cases have focused expressly on the requirements to be met for a party to claim successfully that the impediment could not have been reasonably taken into account at the time the contract was concluded. In the absence of decisions providing these type of guidelines it is not possible to assess whether courts and arbitral tribunals are relatively in harmony in their interpretation of Article 79. However, that at this point in time courts and arbitral tribunals have failed to provide firm guidelines does not make those requirements less important for an excuse to be found under Article 79. But this state of affairs explains why this opinion focuses on a limited number of issues that are likely to provoke differences in interpretation in different jurisdictions.

5. There are issues under Article 79 that, either as a result of flexibility in the language of the provision and an unusual level of ambivalence in its drafting history, leave courts and arbitrators with significant leeway when applying Article 79 to the facts before them. This opinion focuses on those issues because they are the most likely to be treated in light of the arbitrator's or judge's national law; or at least the most susceptible to provoke divergent approaches. One of those issues is whether a seller that has delivered non-conforming goods is eligible to claim an exemption under Article 79. A second issue, this time with a rather confusing drafting history, concerns the requirements to be met under the first and second paragraph of Article 79 by a seller that claims to be excused due to an impediment suffered by a third-party supplier or manufacturer to whom the seller looked as a source for supplying the goods. A third issue that is likely to reveal divergence in the approaches of judges and arbitrators is whether hardship may qualify as an "impediment" under Article 79 and, if so, what type of relief may be granted to the aggrieved party. Divergent interpretations on or about Article 79 may be discerned and continue to come up, but those issues may be the subject of future advisory opinions.

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Comments

6. Whether a seller delivering non-conforming goods may claim exemption of liability for damages under CISG Article 79 was an issue addressed at the Hague Conference in 1964, in connection with the drafting of Article 74 of ULIS (the counterpart to CISG Article 79). At that time, some delegates from common-law jurisdictions favoring a "warranty-based" liability in contract law raised concerns that the prevailing view in civil law jurisdictions, to the effect that contractual liability is based on proof of fault, might unduly influence civil-law judges or arbitrators too ready to allow sellers to escape liability for defective performance, pleading events beyond their control that could not have been taken into account.[8]

7. Concerns with filtering in a fault-based concept of liability prompted some legal commentators to question whether delivery of defective goods may ever qualify as an impediment under Article 79. Thus, it has been argued that the choice of the word "impediment" was intended to denote an event external to the seller and to the goods, excluding the possibility that the seller's liability for defects in the goods could ever be excused under Article 79.[9] In contrast, for those who approach liability for non-conforming goods from the standpoint of fault, a defect present in the goods at the time of the conclusion of the contract may conceivably constitute an impediment to the seller's obligation to deliver conforming goods under CISG Article 35. Indeed, to the extent that delivery of conforming goods is expressed as a contractual obligation under the CISG (rather than in terms of warranties or guarantees), it stands to reason that a breach of the obligation to deliver conforming goods amounts to a seller's failure to perform "any of his obligations." Accordingly, this type of breach may conceivably be excused due to an impediment of the kind described in Article 79.[10]

8. Cases in which a seller may be exempted of liability for delivering non-conforming goods are extremely rare. For example, goods that are unique and the subject of the contract may have already perished at the time of the conclusion of the contract and before the risk of loss passed to the buyer. In this exceptional case, Article 79 may apply as long as the seller had no knowledge of the prior destruction and could not reasonably have been expected to take the destruction of the goods into account at the time of the conclusion of the contract.[11] Indeed, sellers have invoked Article 79 to claim exemption from liability for their failure to deliver conforming goods and for late delivery -- but with very limited success.[12] More importantly, fear that extending the exemption to delivery of non-conforming goods might reintroduce the principle of liability for fault through the "backdoor" has been allayed by the German Federal Supreme Court.

9. In the "Vine wax case," a seller agreed to supply vine wax to be used by the buyer to protect grafts of grape vines from drying out and from the risk of infection.[13] The seller had acquired the wax from his supplier, which manufactured the wax in part with raw materials provided by a Hungarian supplier the seller had not used in previous years. The seller forwarded the wax from his supplier without opening the package, the wax did not protect the vines as it was supposed to, and the buyer brought suit against the seller. The intermediate appellate court found the seller liable for delivering goods below prevailing industry standards. Stating that in principle a seller could claim exemption when delivering non-conforming goods, the Regional Appeal Court of Zweibrücken held the seller liable on the ground that he failed to inspect the wax before sending it to the buyer. Affirming the seller's liability on different grounds, the Federal Supreme Court Germany ("BGH") did not find it necessary to make a general pronouncement on whether a seller could ever be exempt when delivering non-conforming goods. Disagreeing with the reasoning of the lower appellate court, the BGH held that, unless the parties otherwise agree (and in this case they did not), the seller undertakes the risk of acquiring conforming goods when he does not manufacture them himself. This line of reasoning suggests that the seller's liability under the CISG is one of guarantee, irrespective of fault, hence the irrelevance of the seller's failure to inspect.[14]

10. The BGH did not find it necessary to expressly address whether a party's failure to perform "any of his obligations" under the contract might include the failure of the seller or any of his suppliers to deliver conforming goods. Yet, resorting to an explanation why the seller could not be exempted from his failure to deliver conforming goods suggests that, in the opinion of the German Supreme Court, Article 79 might conceivably be applied to excuse a seller's failure to deliver conforming goods.[15] This reading of Article 79 conforms to what appears as the "plain meaning" of Article 79. Both the language ("... any of his obligations...") and the location of this provision in the CISG (Chapter V: "Provisions Common to the Obligations of the Seller and of the Buyer") suggests that the delivery of non-conforming goods amounts to a failure to perform an obligation within the meaning of Article 79 and Chapter V. Thus, there is no reason to exclude this obligation from the broad range of obligations whose failure to perform may be excused under Article 79.

11. In a subsequent case decided by the BGH, the "Powder milk case",[16] a buyer of powdered milk found the milk spoiled by lipase. The seller sought refuge in Article 79 arguing and even establishing that inactive lipase could not have been detected by application of any of the available and current testing techniques. The BGH was not satisfied with this excuse, holding that it was not enough for the seller to prove that properly administered testing techniques would not have detected lipase. The case was remanded to the lower court, which was instructed to ascertain whether the introduction of the lipase could have actually escaped the seller's control during the whole manufacturing process of the powdered milk (i.e., either by the seller's whole milk suppliers or during the seller's own processing of that milk). Thus, although recognizing that finding an excuse remains theoretically possible for a seller failing to deliver conforming goods, this judicial decision stresses once again the extremely heavy burden of proof faced by a seller seeking an excuse under Article 79 for delivering non-conforming goods.

12. Even if those decisions by the BGH fall short of an express pronouncement as to whether the seller may be exempt for delivering defective goods, the possibility for sellers to be exempted from liability under Article 79 for delivering non-conforming goods is reduced to a few marginal circumstances. Assume, for example, the case of a seller bound to deliver frozen goods which, due to a blackout or power failure occurring before the transfer of risk to the buyer but after the seller parted with the goods, arrive in a decomposed state at the place of delivery. Article 79 may apply in this case only if the seller succeeds in establishing that he did not know of the blackout and that the power failure was totally beyond his control. The seller would not be exempted of liability for damages if he reasonably could have been expected to take the possibility of a power failure into account at the time of the conclusion of the contract.

13. There are indeed very few chances for the seller to find an excuse for delivering non-conforming goods, for it is generally and correctly considered that sellers implicitly assume the risks involved in the procurement of the goods they sell. However, in the absence of an express or implicit warranty, the seller should not be deemed to guarantee, absolutely and unconditionally, that the goods are free from defects. Article 79 will gain in certainty and fairness if this straightforward interpretation is adopted, thus precluding dubious distinctions between excuses for failure to comply with the obligation to deliver conforming goods and those that may exonerate a party's failure to comply with other obligations arising out of the contract (e.g., failure to pack the goods in accordance with the contract under Article 35(2)(d)).

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Comments

14. The exemption under Article 79 would hardly become operative to relieve the seller from the obligation to deliver conforming goods in those cases in which the goods were produced, manufactured, and delivered by the seller or his own personnel, or in those cases where the buyer is to take delivery and pay without relying on any intermediate agent. But when the failure to deliver conforming goods, pay the price, or undertake any of the obligations arising under the contract result from the activities or omissions of the seller's secondary suppliers and sub-contractors, or by intermediate agents engaged by the buyer to take delivery or pay the price, the question arises whether such failure should be imputed to contracting parties under paragraph (1) or paragraph (2) of Article 79. Although Article 79(2) applies to both sellers and buyers seeking an excuse on account of a third person's failure to perform, this part of the opinion focuses on the conditions under which a seller could claim an exemption due to failure to perform by a third person.

15. Several courts and arbitral tribunals have addressed the question whether the seller may be excused due to an impediment allegedly beyond the control of a supplier to whom the seller looks to procure or produce the goods. In a handful of cases, the seller's plea to be excused has been granted, but in the majority of cases it has been held that the requirements of Article 79 have not been satisfied, even when the supplier's failure to deliver conforming goods was totally unforeseeable to the seller. Decisions vary, however, as to the analysis used by the courts to reach their conclusions. Some courts place the analysis of whether the seller qualifies for such an exemption under paragraph (1) of Article 79;[17] other tribunals prefer to examine the seller's exoneration under paragraph (2);[18] and still others opt for deciding the issue on the basis of Article 79 in the abstract.[19] Whether the sel