The coronavirus has significant impact on the whole world economy, including the sale of goods. Whether the epidemic is considered as a force majeure event, which automatically exempts from liability to perform an international sale contract? We answer this question under the Vienna Sales Convention and its judicial practice.
1. Chain reaction in the sale of goods
An epidemic like the coronavirus may seriously affect all levels of sales of goods.
The operation of raw material suppliers or logistic providers may slow down or stop completely due to the disease of employees or protection measures taken by employers or governments. Disruption of raw material supply can slow down or paralyse the processing industry, at the same time the factories relying mostly on human resources are exposed to the virus even in the absence of such supply problem.
Problems arising at the manufacturing level then spread to the level of trade, where the sellers cannot deliver the end-product to the purchaser, which can be a component of another, more complex product. The list could be continued, but the knock-on effect of the epidemic on the sale of goods is already obvious based on the above examples.
2. Vienna Sales Convention
The United Nations convention on the Contracts for the International Sale of Goods, which is known in legal jargon as Vienna Sales Convention[1] (“Convention”) is one of the success stories of the commercial law unification that took place within the framework of the United Nations Commission on International Trade Law, as it has been ratified since its entry into force on 1st January 1988 by nearly 100 countries, including the majority of the developed countries.
As the Convention on the one hand establishes a uniform law (loi uniform) in the contracting States, which may not be modified by the national lawmaker, furthermore its provisions are applicable automatically, without any reference in case of concluding an international sales agreement, save if expressly excluded by the Parties, the role of the Convention in international sales of goods is indisputable.
Furthermore, the Convention had an effect on the national civil law codifications in many countries, including Hungary, thus its basic definitions have been fertilized the law governing not only international transactions but also purely domestic ones.[2]
3. Force majeure and the Convention
Based on the above the question arises whether the coronavirus can be considered as “force majeure” under the Convention, allowing one of the parties of a sale contract to be exempted from the liability for non-performance?
As a starting point, it is important to highlight that the Convention does not use the term of “force majeure” at all, because the aim of its drafters was to establish an international source of law, which is independent from the national laws, in order to avoid being interpreted by the courts of different countries based on their domestic law, to achieve its uniform application in various jurisdictions.
In view of this, the Convention deliberately avoid the expressions used for similar situations by different jurisdictions, and this is the reason why its drafters rejected the expressions of “Act of God” or “frustration” used by common law countries, or the term “force majeure” used in the civil law jurisdictions.
4. The concept of Impediment
In light of the above, the Convention uses the neutral expression “impediment” which exempts the contracting party from the liability for breaching the sales contract in case the following 3 (three) conditions are met:
- the failure was due to an impediment beyond his control;
- he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract and;
- he could not reasonably be expected to have avoided or overcome it or its consequences.
It is important that in case the above conditions are met the party affected by the impediment is not exempted from the performance of the contract, it means merely that he is not liable for the non-performance until the impediment ceases to exist. The existence of the impediment should be proved by the party, who relies on that.
Taking into account that it is an exemption from the basic principle of performance of contracts, called “pacta sunt servanda” the existence of the impediment shall be interpreted strictly. In the following we overview some cases from the judicial practice of the Convention, to see under which circumstances found judges and arbitrators that the following conditions are met, to can establish the above conditions.
5. Cause beyond his control
In general, it shall be pointed out that in international trade the parties’ control shall be understood quite broadly. Accordingly, the so-called “acquisition risk” is always within the control of the Seller, therefore he generally cannot rely on the delay or non-performance of his supplier.
The same goes for the risks of payment, which belongs to the buyer’s control, who cannot invoke the failure of foreign bank of transferring the purchase price to the buyer because of theft.[3]
The judicial practice qualifies mainly those administrative rules and governmental actions or decision as cause beyond the parties’ control which prevents that the party can perform the contract. For example, a Russian arbitration tribunal exempted the Russian buyer from liability for the destruction of the shipment, who could not import the product already paid to the German seller, because the government officer failed to issue a food security certificate.[4]
6. Foreseeability at conclusion of contract
Courts applying the Convention also follow a strict interpretation regarding the issue, whether the impediment was foreseeable at the conclusion of the contract or not.
For example, a Russian arbitral tribunal held that the Russian seller could not validly rely on unforeseeable impediment against a German buyer in a case, where he could not deliver the product on time, because of the emergency shutdown of its supplier’s factory.[5]
Another arbitral tribunal seated in Bulgaria established the coal exportation limitations, which were effect at the time of the conclusion of the contract, could not be considered as unforeseeable impediments.[6]
7. Unavoidable, unsurmountable nature
Courts tend to set the bar high, when it comes to the unavoidable, unsurmountable nature of the impediment.
In a litigation in front of a German court, the French seller argued that he delivered lesser tomato concentrate than the agreed quantity, because there was a radical price increase of the product, due to market shortage, emerging because of heavy rains in France.[7] The court dismissed this argument on the basis that the severe weather conditions had not destroyed the entire tomato crop, so the seller could have overcome the impediment.
In another case the German seller relied on impediment because the used equipment the contract called for had not been manufactured with the components that the contract specified. The German court denied exemption because the seller regularly renovated used equipment therefore he was capable of supplying goods equipped with components not offered by the original manufacturer.[8]
Based on the judicial practice, parties shall take into account the requirement of the “commercially reasonable substitute”, so in case it is possible, they have to procure a similar product which is fit for purpose of the contract.
8. The coronavirus as impediment?
In the light of the above case law, it is obvious that the coronavirus can be invoked under limited circumstances in order the seller of an international sales contract to be exempted from liability.
In case the counter-measures taken by government authorities (quarantine, curfew, etc.) directly affect the performance of a contract, then it is possible that as long as they are in force, the seller can be exempted from its obligations.
For example, in case of the closure of a factory manufacturing a highly labour-intensive product, the manufacturer may be temporarily exempted from delivering the product within the agreed deadline, on condition that he does not have other factory, which could substitute the lost capacity.
Furthermore, even in the absence of the closure of a whole factory, in case highly-qualified key-employees are involved in the manufacturing of a given product, who are affected by the counter-measures, this can be an impediment in case they cannot be substituted by other workforce.
At the same time, on the next level of the supply chain the question arises: whether the seller can procure the product from another commercial source? This question can be answered based on the nature of the product, whether it is an individual or rather a mass product.
In case it is a mass product, the commercial substitutability is possible, so the seller will not be able to successfully rely on the delay of the supplier, since he could have procured the product elsewhere.
It is another issue, that the product procured from a different source will presumably cost more, however based on the above court practice this cannot be a valid ground to be exempted from liability for delayed or non-performance.
9. Summary
As the old adage goes, devil is always in the details.
The question, whether the coronavirus can be invoked by a seller under the Vienna Sales Convention as a valid ground to be exempted from the delayed performance of an international sales contract can be answered only on a case-by-case basis, in the light of the details of each individual case.
[1] Law Decree No. 20 of 1987 on the promulgation of the United Nations Convention on Contracts for the International Sale of Goods signed in Vienna on 11th April 1980
[2] See.: P.Schletriem: Basic Structures and General Concepts of the CISG as Models for a Harmonisation of the Law of Obligations. In: Juridica International X/2005.
Professor Schletriem stresses the effects of the Convention in the Scandinavian and Central and Eastern European countries.
[3] Judgement of High Arbitration Court of the Russian Federation of 16th February 1998 http://cisgw3.law.pace.edu/cases/980216r1.html
[4] Judgement of Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry of 22th January 1997 of
http://cisgw3.law.pace.edu/cases/970122r1.html
[5]Judgement of Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry of 16th March 1995
http://cisgw3.law.pace.edu/cases/950316r1.html
[6] Judgement of Bulgarian Chamber of Commerce and Industry of 24th April 1996 http://cisgw3.law.pace.edu/cases/960424bu.html
[7] Judgement of Provincial Court of Appeal Hamburg of 4th July 1997
http://cisgw3.law.pace.edu/cases/970704g1.html
[8] Judgement of Provincial Appellate Court Zweibrücken of 2th February 2004 http://cisgw3.law.pace.edu/cases/040202g1.html
