Force majeure and international sale of goods
By: Ludovico Dezio
Force majeure and international sale of goods
Force majeure can be defined as an objective, extraordinary and unforeseeable event, occurring after the execution of the contract and having such force as to make its fulfilment impossible. Force majeure is not defined by the Italian Civil Code in relation to contracts, but it is not alien to our legal system. Actually, in the event of a situation of force majeure, the defaulting party is free from any liability.
If one raises her eyes from the Italian Civil Code, looking towards Italian regulations of international derivation, it is possible to see that, even if with reference to only a certain category of contracts, force majeure is directly regulated also by Italian law.
Regulation on force majeure is provided by the “United Nations Convention on Contracts for the International Sale of Goods ” (CISG), which applies in 93 countries, including Italy, following the ratification of the Convention occurred with Law no. 765 of December 11, 1985.
The Convention falls within the rules of private international law with direct application, i.e. regulations which – in the presence of relationships or cases characterized by elements of internationality – provide for immediately applicable rules. Their purpose is to provide instruments of secure application, even in cases where the contractual parties belong to different countries, thus preventing possible issues caused by the application of single countries regulations.
Firstly, it should be noted that the type of contract to which the CISG is applied – i.e. the sale of goods – is not the one provided by individual national law from time to time, but it is identified by CISG. Articles 30 and 35 of CISG provide that sale of goods is the contract under which the seller is obliged to deliver goods, transfer ownership and, if applicable, issue all documents related to them to the buyer. On the other hand, the buyer is obliged to pay the price and take delivery of the goods.
Furthermore, CISG identifies the requirements necessary to deem that a sale of good has international nature, such as to justify the application of CISG regulation. Under Article 1 of CISG, the latter applies when the parties agree to have their agreement regulated by CISG. In addition, unless differently agreed by parties, CISG applies to sale and purchase contracts between individuals and/or entities having their place of business in different countries, in case:
1. such States are CISG contracting countries; or
2. the rules of private international law trigger the application of the law of a CISG contracting country.
Among the rules contained in CISG, article 79 provides for the exclusion of liability of the party who does not properly perform his contractual obligations, because of an impediment. The exclusion of liability lasts as long as the impediment hinders the party and, in order for Article 79 to unfold its effects of full exclusion of liability for non-performance, the party whose performance is hindered by the impediment shall notify – within a reasonable time – the counterparty of the impediment and its effects on the contract fulfilment. Otherwise, the party shall be held liable for failure to send the communication to the other party in a timely manner.
However, not every impediment may exonerate the defaulting party. CISG identifies the requirements which must necessarily characterise an event for it to be relevant for the application of the exemption from liability under Article 79 at stake.
The first requirement consists in the non-foreseeability of the impediment, i.e. the circumstance that the event of impediment could not have been foreseen – and therefore taken into account – at the time of the execution of the contract. It is therefore an event beyond the control of the party suffering the impediment. In application of this principle, for example, a Belgian Court ruled out that the increase – occurred during the performance of the contract of sale – of the prices of the materials necessary for the seller to carry out his obligations was not an event of such unforeseeable circumstances as to justify the application of Article 79 of CISG. According to the Belgian Court, such event represents a typical risk to which the seller is necessarily exposed in the performance of his business.
The second requirement concerns the moment when the impediment occurs. It is required that the fact preventing the performance of the service occurs after the execution of the contract.
The necessary existence of this second requirement was highlighted in a decision of a Chinese Arbitral Tribunal, which dealt with a situation similar to the current one concerning the COVID-19 contagion. The matter concerned the supply by a Chinese company of pharmacological products to a Dutch company. During the execution of the contract, the seller was unable to supply all the agreed goods, but succeeded in providing only part of them. On the grounds of its default, the Chinese company stated that it was unable to supply all the agreed goods because of the SARS epidemic in the People’s Republic of China, where the company had its implants. However, the Arbitral Tribunal stated that the SARS outbreak was already in progress at the time the contract between the two companies was executed and, consequently, the circumstance claimed by the Chinese company did not constitute grounds for any exemption from liability under Article 79 of CISG.
Finally, it should be noted that, under the second paragraph of Article 79 of CISG, the occurrence of an impediment entails exemption from liability of the party not only when the party is directly affected by the impediment, but also when the performance of the obligation by third parties – i.e. individuals or entities which are not contractual parties – to whom the defaulting party has entrusted the performance of the contractual obligations agreed between the buyer and the seller is made impossible. In this case, should the impediment have the requirements mentioned above, the assumption that the contractual party is always liable for the activity carried out by third parties entrusted to fulfil the contractual obligations is overcome (ICC Decision 8128/1995).
In light of the above, it is therefore clear that there is, in general, an overlap between the requirements required by the jurisprudence of the Italian Courts and those indicated by CISG.
In an increasingly globally interconnected trade, where the circulation of goods is undergoing important limitations due to the emergency and the regulatory provisions adopted by individual governments, the provisions provided by the CISG on force majeure are of utmost importance. In order to understand whether, in a certain case, the impediments resulting from the current pandemic may be relevant for the application of Article 79 of CISG, it will be necessary to verify if the necessary requirements set out above are met. In doing so, first, it must be verified if the contract between the parties is an international sale of goods under CISG. After, the analysis of the facts that made impossible for one of the parties to perform its obligations shall follow, in order to verify whether these facts were unforeseeable at the time of the execution of the contract and occurred during its fulfilment.
Where a situation of impossibility under Article 79 of CISG is detected, the defaulting party may be considered exempt from any liability. However, such party shall be subject to all obligations to behave in good faith towards its counterparty, including the obligation to give prompt notice of the impediment and the effects of the latter on the performance of the contractual obligations.