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Part XI Remedies for Breach of Contract, 45 Exemption

From: Global Sales and Contract Law

Ingeborg Schwenzer, Pascal Hachem, Christopher Kee

Content type:
Book content
Product:
International Commercial Law [ICML]
Published in print:
26 January 2012
ISBN:
9780199572984

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 06 June 2023

Subject(s):
Exemption from liability — Breach of contract

(p. 649) 45  Exemption

  1. A.  General 45.01

    1. I.  Constellations 45.03

    2. II.  Liability Systems 45.06

    3. III.  Conceptual Approach 45.08

      1. 1.  Impediment and Hardship Distinguished 45.10

      2. 2.  Unitary Approach 45.13

      3. 3.  Impact of Non-Breaching Party 45.15

  2. B.  Impediments 45.16

    1. I.  General 45.16

    2. II.  Contractual Allocation 45.17

      1. 1.  Typical Clauses 45.18

      2. 2.  Construction and Effect 45.22

    3. III.  Default Provisions 45.24

      1. 1.  Different Concepts 45.25

        1. (a)  Impossibility, Frustration 45.25

        2. (b)  Force Majeure 45.32

      2. 2.  Initial v Subsequent Circumstances 45.34

      3. 3.  Relevant Threshold 45.37

        1. (a)  General 45.38

        2. (b)  Examples 45.44

      4. 4.  Non-Conformity 45.55

      5. 5.  Consequences 45.57

        1. (a)  Impact on Remedies 45.58

          • (i)  Specific performance 45.58

          • (ii)  Damages 45.60

          • (iii)  Avoidance 45.64

          • (iv)  Reduction of purchase price 45.66

        2. (b)  Temporary Impediments 45.67

        3. (c)  Partial Impediments 45.70

        4. (d)  Duty to Give Notice 45.73

  3. C.  Hardship 45.76

    1. I.  General 45.77

    2. II.  Contractual Allocation 45.79

      1. 1.  Typical Clauses 45.80

      2. 2.  Construction and Effect 45.83

    3. III.  Default Provisions 45.87

      1. 1.  Different Concepts 45.87

      2. 2.  Initial v Subsequent Imbalance 45.96

      3. 3.  Threshold 45.99

        1. (a)  General 45.99

        2. (b)  Examples 45.101

      4. 4.  Imbalance Not Known or Foreseeable 45.107

      5. 5.  Notice Requirements and Limitations 45.108

      6. 6.  Consequences 45.110

        1. (a)  Duty to Renegotiate 45.111

        2. (b)  Adaptation of the Contract 45.113

        3. (c)  Avoidance 45.118

  4. D.  Obligee’s Behaviour 45.120

    1. I.  General 45.121

    2. II.  Prerequisites for Exemption 45.124

      1. 1.  Acts or Omissions by Obligee 45.124

      2. 2.  Both Parties Contributing 45.125

    3. III.  Consequences 45.128

A.  General

45.01  All legal systems envisage some possibility to relieve the obligor from the obligation to pay damages after a breach of contract has occurred. However the manner in which legal systems arrive at this position varies considerably. Whereas civil law systems find natural solutions centred around the absence of fault, the strict liability approach of the common law has led to quite different solutions.

45.02  This chapter does not address contract clauses which purport to exclude or limit liability as these are dealt with in Chapter 44.1 The delineation between the clauses considered in this chapter and exclusion of liability is a relatively comfortable one in the civil law again because of (p. 650) the notion of fault. For the strict liability common law jurisdictions it is not such an obvious distinction.2

I.  Constellations

45.03  The scenarios in which questions of exemption typically arise usually involve one or more of three circumstances. In the first instance there may be some event which directly affects the goods themselves. It concerns events which cause damage, injury, loss, or destruction of the goods. In the second circumstance the purpose of the contract may be affected. This may or may not coincide with an event which has, for example, damaged the goods. The destruction of goods would certainly affect the purpose of a contract, but so would, for instance, an import ban which effectively prevents the buyer from receiving the goods. Finally, the third circumstance is one where the equilibrium of the contract has been affected. This is the situation where the economic position of one of the parties has changed (usually for the worse) following the conclusion of the contract but prior to the completion of performance, such that continuing to perform the contract may in fact be injurious to that party.

45.04  As may be apparent from the examples above, these circumstances occur before the passing of risk to the buyer. If risk has passed the buyer must still pay the purchase price. It is therefore important to consider the different approaches legal systems take to the passing of risk.3

45.05  A variation on the scenarios above occurs where due to an impediment the conformity of the goods is affected. As discussed below there are varying views as to whether the seller can obtain protection in this situation.4

II.  Liability Systems

45.06  As has been noted above5 and on numerous other occasions throughout this text, legal systems can be typically divided into those which are fault-based systems and those which are strict liability systems.6 At one time the division was easily drawn between civil law and common law as fault and strict liability respectively. However, some of the more recent codifications have opted for strict liability but not completely abandoned the concept of fault. In the Nordic systems fault is required for damages caused by delay.7 Furthermore the Nordic Sale of Goods Acts appear to only give the buyer a claim to indirect losses in cases of non-conformity, where that non-conformity is due to the fault of the seller.8 At the international level a strict liability approach but with the possibility for exemption is adopted both by uniform law9 and projects.10

45.07  It is also useful to recall that the civil law and common law also differ with respect to the primary remedy. Whereas civil law preferences the remedy of specific performance, common law preferences damages. As a consequence, discussions regarding exemption in civil law systems generally consider the availability of an exemption from performance and/or an exemption from damages; in common law thinking, the question is usually only whether there is protection from damages. Although in probably the majority of cases the practical outcome is the (p. 651) same in all legal systems, this difference undoubtedly colours the dogmatic approaches of the two legal families to this topic.

III.  Conceptual Approach

45.08  Legal systems conceptualize issues of exemption in a number of different ways. One basic difference can be found in the way legal systems categorize the issue. The vast majority of civil law legal systems, and the uniform projects, draw a distinction between those situations where an impediment renders performance impossible, and those situations where there has been a change of circumstances such that performance, while still possible, is severely economically injurious to a party.11 These situations are termed in this work as ‘impediment’ and ‘hardship’ respectively. This is not limited to civil law systems however, as the USA also applies this distinction.12

45.09  Other legal systems, most notably the common law jurisdictions following the English model, and the CISG adopt a unitary approach.13

1.  Impediment and Hardship Distinguished

45.10  The terms ‘impediment’ and ‘hardship’ are used here to describe different concepts. Not all jurisdictions recognize the notion of hardship but where they do so it is typically distinguished from cases of impediment, often in separate provisions of the civil codes.14 This is also true of the uniform projects.15

45.11  The term impediment is used to describe a supervening event which ‘impedes’ performance of a contractual obligation. Naturally, not all events will be impediments. As a general proposition it can be said that only those events which render performance impossible will be considered impediments for the purpose of exemption.16 However, this statement is not sufficiently nuanced as, for example, legal systems differ on the meaning of impossibility. The criteria to determine whether the event is an impediment and will give protection to the non-performing party are addressed below.17

45.12  The term hardship is used here to broadly encompass the legal doctrines known as clausula rebus sic stantibus, imprévision, change of circumstances, and commercial impracticability.18 (p. 652) Just as not every event is an impediment, not every change in circumstances will amount to hardship. The change must make performance of the contract significantly harder. The extent of hardship necessary is considered below.19 But the critical distinction which can be drawn between impediment and hardship is that performance does not need to be impossible under hardship.

2.  Unitary Approach

45.13  The common law systems following the English model do not know the concepts of impediment or hardship as principles of law.20 Thus the approach adopted by these systems is to address both concepts under the one test for frustration.21 This is possible because the test for frustration considers whether circumstances, be they a specific event or circumstances in general, have affected the contract in such a way so as to make it radically different from that which was originally concluded.22 Despite criticism, typical hardship scenarios, such as a significant increase in expense, will not amount to a frustrating event.23 It seems conceivable, however, that at least some instances of hardship could be encompassed within the accepted common law notion of ‘frustration of purpose’.24

45.14  At the international level, it is now generally accepted that Article 79 CISG also applies to cases of hardship and thus pre-empts any domestic notions that might otherwise have been applicable.25 However, the boundaries of exactly what constitutes hardship for the purposes of Article 79 CISG are not settled.26

3.  Impact of Non-Breaching Party

45.15  A distinct and conceptually different notion of exemption can be found in circumstances where a party failed to perform properly because of the actions of its co-contractant. This may be the case where, for instance, a buyer is late in its obligation to provide specifications to the seller, and consequently the seller is late in delivering the goods. In such an instance the seller will not be liable for late delivery (or have its liability reduced) but not typically for reasons of exemption such as described in this chapter. Rather there are a number of different ways legal systems appear to address this situation. In some cases the buyer’s ability to rely on the breach is reduced according to the extent which it contributed to the seller’s breach.27 Alternatively, the seller’s obligation to deliver at the original delivery date may be conditional on the buyer’s provision of the specifications, and accordingly in the narrower common law sense of the word breach, the seller would not be considered in breach at all.28 In yet other instances, the matter may be addressed in the context of causation of damages.29

(p. 653) B.  Impediments

I.  General

45.16  As noted above,30 this text uses the term impediment to describe an event which ‘impedes’ performance of a contractual obligation. This terminology is found in the CISG31 and the uniform projects.32 Domestic legal systems use a variety of other expressions, perhaps most recognizably the French ‘force majeure’. However the drafters of the CISG moved away from that term and others because of the varying domestic connotations they carried.33 For comparative purposes it is also more appropriate to use this term.

II.  Contractual Allocation

45.17  It is regularly observed throughout this text that it is first upon the parties to provide solutions in their contract. From a practical perspective this is perhaps even more important in the context of exemption due to an impediment. As noted above, common law systems, particularly those following the English model, do not know the concept of force majeure as a principle of law.34 They are however naturally familiar with it in contract clauses, and so the term force majeure does have a recognized meaning.35

1.  Typical Clauses

45.18  The manner in which clauses covering exemption due to impediment are typically drafted varies considerably and has been the subject of detailed study.36 It has been noted that these may range in length from a few lines to 27 pages.37 There are also a number of well-known model clauses which appear to be regularly used by parties. A particularly prominent example is the ICC Force Majeure Clause 2003.38

45.19  Despite the wide variety of drafting styles, in a very broad way two approaches can be discerned. The first are those clauses which simply refer to notions of force majeure or impediment without explaining what these are intended to mean. Such clauses must be interpreted, and this would be typically done with reference to the governing law of the contract.39 There appear to be inherent difficulties with this approach given the different manner in which legal systems address the issue of exemption due to an impediment. However, as noted above, although force majeure is not a principle of the common law, it is a term which has a definition.40

45.20  The second approach often utilized in exemption clauses is to define the circumstances which will trigger the protection of the clause, such as an unforeseeable event beyond the control of the parties, and to then list by way of example specific impediments or to circumscribe types of impediments. Examples of the types of categories often enumerated include: natural phenomena (p. 654) and catastrophes, state interventions, labour disputes, change of law and transport, and (or) procurement difficulties.41

45.21  Contractual exemption clauses also often contain other various instructions and information regarding their operation. In particular, such clauses will often spell out notice requirements, the manner in which the occurrence of the event is to be proved, and the consequences of the event.42 In particular, suspension of performance appears to be the normal solution in force majeure clauses.43

2.  Construction and Effect

45.22  Where the parties have included a clause exempting liability due to certain impediments to performance, it is naturally necessary to interpret this clause to ascertain whether its protection is available in any given instance. If, for example, the clause has been drafted following the second approach noted above,44 it may be necessary to determine whether the enumerated list of events is exhaustive or indicative. If it is exhaustive then the impediment relied upon by the party seeking the protection of the clause must clearly be addressed by that clause.

45.23  A second important reason for interpreting the clause is to ascertain its impact on the default rules that would be otherwise applicable. While this may seem self-evident, it can be a particularly important step, especially in common law systems. Where the parties have included a force majeure clause, this may indicate their intention to exclude the operation of the common law doctrine of frustration.45 The following example demonstrates the significance. A seller agrees with a buyer to sell ten container-loads of bananas. The contract is governed by Australian law and contains a very narrow force majeure clause which provides the seller with an exemption only in the event of a cyclone. A tropical storm—usually considered to be one category below a cyclone—destroys all the seller’s bananas. The force majeure clause does not protect the seller. If the force majeure clause is interpreted as also having the effect of excluding the possibility of frustration, the seller will be left with no protection at all. On the other hand if frustration is still applicable, it is likely that the contract will have been frustrated by the tropical storm and thus avoided at the very moment crops were destroyed, consequently protecting the seller. It has been suggested that a force majeure clause will rarely operate to exclude frustration altogether.46

III.  Default Provisions

45.24  As legal systems adopt different approaches to the questions of exemption it is evident that there will be also be different concepts utilized. There is however significant convergence in the manner in which these differing concepts are applied,47 but again major differences in their consequences.48

1.  Different Concepts

(a)  Impossibility, Frustration

45.25  As noted in the context of avoidance,49 impossibility is a typical feature of traditionally structured civil law legal systems, and has its roots in Roman law. Impossibility as a concept itself does not typically provide a full exemption for a (p. 655) non-performing obligor. While impossibility will extinguish performance obligations, exemption from damages is dependent on fault. Consequently if the impossibility is self-induced then the obligor will still be liable for damages.

45.26  Within the broader category of impossibility further subcategories exist which may entail different consequences for the contract. The first main distinction must be made between initial and subsequent impossibility. Where there is initial impossibility a number of civil law legal systems declare the contract invalid.50 However, this is only the case where the initial impossibility is permanent and objective in nature which means that no one in the world could perform the contract.51 The classic example is that of a painting that is destroyed by fire shortly before the conclusion of the contract. Where, however, the seller has already sold the painting and transferred title to a third party before conclusion of the contract, that impossibility is subjective in nature, as it is still objectively possible—although very unlikely—that the third party gives the painting to the buyer.

45.27  Civil law legal systems typically do not treat cases of subsequent impossibility as one of validity. Rather, the parties are discharged from performing their respective obligations and are entitled to recover what has already been performed.52 Hence, the contract comes to an end in these situations, either retrospectively or prospectively.53 As is also discussed below, many civil law legal systems provide for an ipso facto avoidance in these situations,54 as do the PECL55 and the DCFR.56

45.28  The traditional approach in civil law legal systems is that impossibility operates retrospectively; that is, the contract is considered to never have come into existence.57 This has consequences relating to the recovery of what has been performed.58 However, this question does not relate to exemption itself. Whether the obligor is exempted is rather dealt with under the issue of fault.59

(p. 656) 45.29  Common law jurisdictions originally took a very hard line in that there was no excuse from liability where the breach was caused by something beyond the control of the breaching party. However, this position was softened to consider contracts terminated where performance was impossible.60 Since then it has evolved into the doctrine of frustration. Frustration occurs where without fault of either party a contractual obligation has become incapable of being performed because circumstances have changed resulting in a radically different outcome to that envisaged by the contract.61

45.30  The differences between the traditional common law understanding of frustration and that adopted by the USA are discussed elsewhere.62 For present purposes it is sufficient to note that the principle distinction is that frustration as it is understood in the USA does not appear to avoid contracts ipso facto. In contrast it appears to offer protection against damages to the party seeking to rely on frustration, and gives the co-contractant a right to avoid the contract if it so wishes.63

45.31  Just like some civil law systems noted above,64 common law systems following the English model, similarly treat a contract as void if unknown to the seller at the time of conclusion of the contract the specific goods had already ceased to exist.65 Thus the seller is effectively exempted under this concept.

(b)  Force Majeure

45.32  When translated literally into English force majeure means ‘superior force’. This already gives a good indication of what the concept encompasses. However it is not the only term found in the French Civil Code, or those jurisdictions following the French model that deal with this subject. Within the French Civil Code itself expressions like cause étrangère66 (unimputable cause) and cas fortuit 67 (fortuitous event) are used. Similar terms are found in the Ibero-American jurisdictions.68 Although technically and dogmatically different,69 the terms are now generally treated synonymously and most commonly known by the force majeure term.70 When the term force majeure is used in this text it is intended to apply in the broader synonymous sense.

45.33  Force majeure is a concept known to many civil law systems.71 For a   force majeure exemption, the following four prerequisites must be met. The failure to perform is due to an impediment (p. 657) which is beyond the control of the obligor. This means, only objective circumstances, external to the promisor’s sphere, can be considered as such impediments. The distinction between objective circumstances and the promisor’s sphere must primarily be made by means of the contractual risk allocation.72 That impediment must have been unforeseeable. This means, the obligor is also responsible for impediments which lie outside his sphere of control if it could reasonably have been expected to have taken into account such impediment at the time of the conclusion of the contract. The relevant test is the one of a reasonable third person in the shoes of the promisor under the actual circumstances at the time of the conclusion of the contract. In particular, an impediment is not unforeseeable when the obligor has contractually assumed the risk of the occurrence of that impediment.73 Further, the impediment and its consequences must have been unavoidable: an impediment does not exempt the promisor as long as overcoming the impediment or its consequences is possible and reasonable for him.74

2.  Initial v Subsequent Circumstances

45.34  The time at which the impediment preventing performance occurs is relevant as it may in effect remove the situation from one of exemption to one of validity. As explained above in certain cases of initial impossibility both civil law and common law systems treat the contract as invalid.75

45.35  The question of initial impossibility is also relevant in civil law systems when it comes to the finding of fault.76 There may be a higher duty to make sure that one is able to perform as concerns initial impediments compared to later ones.

45.36  At the international level the prevailing view is that Article 79 CISG deals with all situations of impediments, initial and subsequent, and that therefore the matter is not one to be determined by the otherwise applicable domestic law on the validity of the contract.77

3.  Relevant Threshold

45.37  As noted above, although there is divergence amongst legal systems with respect to concept and consequences, there is convergence with respect to the manner in which the concepts are applied.78

(a)  General

45.38  By and large the requirements for exemption due to impediment, as conceived by all jurisdictions, at both the domestic and international levels, can be summarized on the basis of four components. In the first instance there must be an event, that is an impediment, beyond the control of the ‘breaching’ party which prevents proper performance.79 (p. 658) Secondly, the contract must have been formed on the basis that the supervening event would not take place.80 Thirdly, the party seeking to be excused must not be at fault.81 In civil law jurisdictions exemption requires that the impediment and its consequences cannot be overcome. If an impediment and its consequences cannot be overcome, performance of the contract is impossible.82 As cases of natural impossibility become less relevant in modern times, the main question is nowadays which efforts the obligor is required to undertake in order to fulfill its contractual obligations. In the common law jurisdictions following the English model, the test used is one of ‘radical change’,83 essentially a consideration of whether the obligor contractually assumed the risk.84 However, the results are roughly the same as in civil law countries.

45.39  The requirement that the consequences of the impediment could not be avoided or overcome is expressly stated in Article 79(1) CISG.85 Although slightly different because it specifically addresses the consequences of the impediment rather than the impediment itself, in many respects this is implicit in the first and second components noted above.

45.40  The determination of whether the impact of the supervening event is sufficient to provide an exemption is described differently by legal systems. Although there are similarities, there are some significant differences. As a starting point it can be said that all legal systems focus on the obligation which has been effected; in sale of goods cases this will almost always (but not necessarily)86 be the delivery obligation. It can also be said that all legal systems treat the situation where performance has become objectively impossible for all time as triggering exemption. However thereafter the differences in approaches taken by the legal systems play out in varying ways.

45.41  The differing species of impossibility were explained above.87 In brief, a distinction is drawn between objective impossibility (that is absolutely no one could perform) and subjective impossibility (it is impossible for that particular obligor to perform). In some jurisdictions, notably France and its followers, an exemption by reason of impediment is generally thought to only be available where performance was objectively impossible.88 In contrast in Germany exemption may be available where the impossibility is either objective or subjective. This is appears true in most, if not all, of the Germanic systems.89

45.42  In common law systems following the English model of frustration the threshold for its establishment is probably higher than the comparatively adopted tests for exemption by impediment.90 This seems naturally connected to the ‘all-or-nothing’ consequences of frustration; (p. 659) as noted below the common law does not know the idea of a temporary impediment.91 Under civil law systems and on the international level, a temporary impediment relieves the obligor from the duty to pay damages as long as the impediment exists. However, when the impediment ceases to exist, the obligor must go on performing the contract.92 Frustration under common law seems to work differently. If time is not of the essence, delay is unlikely to give rise to frustration. Thus, in case of temporary impediment, the seller usually is not exempted from liability even for the time during which the impediment existed.

45.43  The issue of foreseeability finds its way into exemption due to impediment cases either by express reference in the civil codes,93 or in other instances because of contract interpretation. If the impediment was foreseeable, then it is most likely that the parties will be found to have allocated the risk.94 The presence of a force majeure clause in a contract will be informative when determining whether an event was foreseeable by the parties. However, merely because something is foreseeable does not, in and of itself, mean that the parties have reached a contractual agreement on it.95 Furthermore in a limited number of cases it may be that the event was actually unforeseen despite being foreseeable and as such exemption may still be available.96

(b)  Examples

45.44  As exemplified by the fact that the enumerated lists in force majeure clauses are usually indicative rather than exhaustive,97 it is not possible to describe every potential impediment. Nevertheless some examples can be identified.98

45.45  The typical examples of impediments may be classified in several categories, such as natural phenomena and catastrophes. This includes events such as earthquake, flood, storm, drought, fire, frost, landslide, lightning, tidal waves, washout, freezing of lines,99 as well as epidemics.100 Terrorist 101 or pirate attacks and sabotage can also constitute impediments.102

(p. 660) 45.46  Armed conflicts and acts of war may amount to an impediment as well.101 This includes inter alia preparation for war, blockade, revolutions and the like, insurrection, mobilization, civil commotions, riots, invasion, act of a foreign enemy, and act of civil disobedience.102

45.47  Additionally labour disputes, such as strike, lock-out, boycott, go slow, occupation of factories and premises103 may amount to an impediment. In such situations, it needs to be carefully examined whether or not such event is to be qualified as beyond the control of the obligor.104 A strike or lock-out within the obligor’s business solely concerning the conditions of employment is part of the general personnel and business risk that the obligor typically has to bear.105 But it is also argued that the personnel risk is limited by the employer’s rights of management over his employees.106 On the contrary, general strikes, particularly those of a political nature may, may exempt the obligor.107

45.48  States may take interventions which could amount to an impediment as well, for example the imposition of an import or export ban. This example is however quite difficult to generalize, and there are differing views on whether such circumstances should trigger the exemption projection.108 It is the case that import and export bans are beyond the control of the parties, but the exemption may be denied on other grounds such as forseeability, or the contractual assumption of the risk.

45.49  A very similar situation arises where rather than imposing a ban, a government requests national producers to hand over to the government a particular quota for the goods for domestic use. At one time this occurred in Bolivia with respect to crude oil. The seller would have been legally able to perform its contract with the buyer; however it did not have sufficient quantities of crude oil to satisfy both the Bolivian government and the buyer. Furthermore, the option existed to pay a very severe penalty of USD 1,000,000.00 per day rather than comply with the government order. In this case an international arbitral tribunal exempted the seller from both its obligation and liability for non-performance.109

45.50  A related but slightly different situation is the denial or delay of import or export licences.110 While this issue would usually follow the analysis for import or export bans, occasionally legal systems provide specific code provisions excluding the denial of a licence from the exemption regime.111

(p. 661) 45.51  While the above examples have addressed particular types of events, in a sale of goods contract in particular, it is also necessary to have regard to the actual goods required under the contract. This is of specific importance when the goods contracted for are generic goods. As a general proposition the seller will bear the ‘procurement risk’.112 Again as a general proposition a seller will not be exempted for non-performance, if non-performance is simply due to the failure of a supplier, an increase in the procurement price, or even the circumstance where the goods originally chosen to fulfil the buyer’s order are accidentally destroyed.113 Where substitute goods can be obtained albeit at a higher cost to the seller, then the seller will not receive an exemption for its failure to perform. Naturally there are limits on the lengths a seller can be expected to go to—sometimes called the ‘limits of sacrifice’.114 The crude oil case referred to above is such an example.115 A seller is also likely to be able to obtain an exemption where the parties have agreed on a specific source of supply.116 Where that source is destroyed and thus the goods cannot be supplied, exemption could be expected assuming neither party is responsible for the destruction of the goods.117

45.52  A very similar situation to the one just described can be demonstrated by reference to two Singaporean decisions.118 In both cases the same concrete manufacturer was to sell concrete to different buyers. Sand, a necessary ingredient in ready-mix concrete, was in very limited supply. Indonesia had placed a ban on the export of sand to Singapore, and the Singaporean authorities then sought to regulate the distribution of what sand there was within Singapore. Although the exact facts of each case were far more complex than implied here, in essence the seller was able to rely on a force majeure clause in one instance,119 but was not exempted under an identical force majeure clause in the second case.120 The difference was the seller’s conduct in each case. In the case where the seller did not obtain the exemption, the buyer had offered to assist the seller to obtain the necessary sand from the government stockpile, but the seller decided not to take that assistance. As a consequence it was the seller’s conduct rather than the restrictions on sand which caused the breach.

45.53  As can be seen from these examples, obligors will very rarely be able to rely on an exemption due to an impediment which is within its control.121 In particular an obligor is responsible for the organization of its own operational sequences taken to perform the contract. Only where disturbances in these sequences themselves are caused by an impediment will the obligor be excused. For example, illness, imprisonment, or death of the obligor122or its employees, all lie within the sphere of the obligor. Acts of sabotage or other acts contrary to the instructions of the obligor by its employees also fall within its sphere of risk.123 Where the alleged impediment is an industrial strike the matter may turn on whether the strike is limited to the obligor (that is, an internal dispute and thus within its sphere of risk), or a general, national, or political strike affecting commerce more generally. If it is the latter, exemption may be available.

(p. 662) 45.54  Closely related to these scenarios is the circumstance where a third party engaged by the obligor to perform part of the contract has failed to do so. This is distinct from the simple failure of a supplier who would not typically be actually performing the contract on the obligor’s behalf.124 Nor would it include the obligor’s employees.125 This scenario has been specifically addressed at the international level by Article 79(2) CISG. The solution adopted there is to provide the obligor with an exemption, where both the obligor and the third person satisfy the exemption test laid out in Article 79(1) CISG.

4.  Non-conformity

45.55  The above discussion of examples has focused on instances where an impediment has affected performance of the delivery obligation, as in a sale of goods contract this is the classic circumstance. However, it is also conceivable that an obligor may seek to rely on an exemption for non-conforming goods. Under a fault-based liability systems, it is clear that the seller is only liable for non-conformity, if there is fault on its part. Under the modern approach, it has been disputed whether exemption may also relate to liability for non-conformity. It is difficult to conceive good reasons to deny a seller exemption due to force majeure in cases of defective goods.126 At the international level this is also considered to be true within the scope of Article 79 CISG.127

45.56  More difficult questions arise where there is a combination of scenarios—that is, where an impediment affects performance of the delivery obligation, but at the time of the impediment the goods were already non-conforming. It seems clear that in domestic strict liability systems, a seller would not be able to claim an exemption in such a case.128 However at the international level the prevailing opinion is that a seller may still be able to obtain an exemption under the CISG, although the circumstances in which this will occur in reality are limited.129

5.  Consequences

45.57  When considering the consequences of an exemption due to an impediment it is important to bear in mind the different dogmatic basis from which legal systems approach remedies.130 Whereas in civil law jurisdictions the primary remedy is specific performance, common law jurisdictions first turn to damages. This naturally impacts on the manner in which the different legal system approach the consequences of exemption. The differences are highlighted below with respect to each remedy. Furthermore the basic structure of the approach taken by a legal system may preclude certain consequences; for example, as explained below, the doctrine of frustration in common law jurisdictions following the English model cannot recognize temporary impediments.131

(a)  Impact on Remedies

(i)  Specific performance

45.58  In civil law jurisdictions the primary exemption typically given due to an impediment is an exemption from specific performance. This exemption is logical as the very nature of an impediment is that it renders performance impossible.132

(p. 663) 45.59  At the international level the wording of Article 79(5) CISG appears to indicate that the article only encompasses an exemption from damages, and as such the remedy of specific performance remains intact.133 However, it seems undisputed that wherever the right to claim performance would undermine the obligor’s exemption, performance cannot be demanded.134 The uniform projects expressly include specific performance within the exemption. The PICC while adopting almost all the wording of Article 79 CISG, specifically varied the equivalent to Article 79(5). Article 7.1.7(4) PICC states: ‘Nothing in this Article prevents a party from exercising a right to terminate the contract or to withhold performance or request interest on money due.’ Similarly the Comments to both the PECL and DCFR suggest specific performance is not available.135

(ii)  Damages

45.60  The impact an exemption due to an impediment has on damages is relatively straightforward in practice although the strict legal reasons used to arrive at essentially the same outcome differ. As a general rule exemption by impediment will provide an exemption from damages. This must immediately be qualified by noting that this exemption may be limited to the extent of the impediment136 and by the period of the impediment in some legal systems.137

45.61  As noted above civil law systems consider liability for damages in the context of fault, and thus where the obligor can not be imputed with causing the impediment an exemption will normally be available. In common law systems following the English model, the frustrating event terminates the contract immediately and thus there is no breach on the part of the obligor for which damages could be due.

45.62  Difficult questions can arise in the context of fixed sums.138 Whether or not a contractually stipulated fixed sum due upon a breach of contract is payable despite an impediment appears not to be addressed in default rules. In any case, the first step must be to interpret the parties’ contract. The parties may have provided a solution for this situation in either the fixed sums clause or a force majeure clause. This may be expressly stated but it seems more likely that the scope of the force majeure clause will need to be interpreted.139

45.63  Where the contract is silent on this issue, the general view, at least at the international level, is to grant an exemption from payment of the fixed sum where an exemption from damages would ordinarily be given.140 A complicating factor where the contract is one governed by the CISG concerns the validity of such agreed sums clauses. Questions of validity are excluded from the CISG;141 however, there appears little doubt that where valid these clauses are addressed by Article 79 CISG.142

(p. 664) (iii)  Avoidance

45.64  When considering the impact of exemption due to an impediment on avoidance it is necessary to make an initial important distinction. With respect to frustration, as it is understood by those common law jurisdictions following the English model, and in other systems some instances of force majeure,143 the contract is terminated ipso facto. This situation is addressed in the chapter on avoidance.144

45.65  The issue here concerns the impact an exemption due to an impediment has on the right of the co-contractant to avoid the contract. Where the exempted non-performance would also give the co-contractant a right to avoid the contract, that right remains intact and exercisable. In this circumstance the exemption, however, only applies to specific performance145 and damages. The mere existence of the exemption does not mean that the co-contractant will have a right to avoid the contract. This is the position in many civil law jurisdictions and at the international level.146

(iv)  Reduction of purchase price

45.66  As noted elsewhere many legal systems allow a reduction of the purchase price, or effectively achieve that result by allowing partial avoidance.147 Where that remedy is available it remains intact despite an exemption due to an impediment. At the international level this remedy is specially reserved by operation of Article 79(5) CISG.148

(b)  Temporary Impediments

45.67  All legal systems except for those common law jurisdictions following the English model recognize the possibility of exemption due to temporary impediments. This is typically done by granting the exemption for the period of the impediment.149 The contract is essentially suspended for this period.150

45.68  It is evident though that a temporary impediment may have such significant impact so as to warrant a permanent exemption. Some legal systems consider this issue directly151 whereas in others it is addressed by case law152 and can be inferred.

45.69  As noted above the common law jurisdictions following the English model do not recognize temporary exemptions.153 This possibility is precluded by the all-or-nothing approach of the doctrine of frustration. Consequently it is only when the temporary impediment warrants a permanent exemption that any exemption will be provided in these systems.

(c)  Partial Impediments

45.70  As a first step in all legal systems it must be established whether the partial impediment impacts only a corresponding part of the contract or the whole. In essence this is the same analysis to be applied in cases of partial avoidance.154 For example, where a (p. 665) machine is the subject of the contract and the partial impediment affects a critical component of that machine such that it is inoperable without it, then the impediment in fact affects the whole contract and would be treated accordingly. In contrast, where the impediment only affects the ability to deliver a certain proportion of fungible goods, then the impediment is far more likely to genuinely apply to only a part of the required performance.

45.71  Where the impediment is genuinely a partial impediment, the available exemption in civil law jurisdictions,155 the USA,156 and at the international level157 will only be to the extent performance is actually impaired. In common law jurisdictions there is some authority for the notion of a partial frustration;158 however, despite its apparent commercial practicality this appears very difficult to reconcile with the doctrine of frustration.

45.72  A particularly complicated situation may arise where a seller has contracts with multiple buyers but, owing to an impediment, no longer has sufficient supplies to perform all contracts in full. In such an instance the seller appears to be faced with a choice of fully performing only some contracts, or partially performing all contracts. Stark differences appear in the manner in which legal systems address this circumstance. In civil law systems,159 the USA,160 and at the international level161 the seller would (assuming the criteria for an exemption due to an impediment are met) be able to perform the contracts on a pro-rata basis and obtain an exemption for the respective partial non-performance of each. In contrast, common law jurisdictions following the English model place the seller in an invidious position. The mere fact that the seller has an option means that the case cannot be one of frustration. This is sometimes described as ‘self-inflicted frustration’ as it is the seller’s own decision which is the cause of the failure to perform.162

(d)  Duty to Give Notice

45.73  Consistent with the general requirement to maintain communication between parties that pervades particularly civil law systems, the exemption due to an impediment includes a notice regime. A duty to give notice appears to be rarely explicitly stated in domestic civil law codes,163 but it can be inferred from a general obligation of good faith.164 An explicit duty is found in the USA165 and at the international level.166 The notice must be given within a reasonable time after the party seeking the exemption became aware of the (p. 666) impediment or its consequences.167 In common law systems following the English model there is no notice requirement as in situations of frustration the contract is avoided ipso facto.

45.74  As the purpose of the notice is clearly to enable the co-contractant to react to the impediment and do what it can to also minimize the effects of the impediment’s consequences, the notice should describe the nature, gravity, and duration of the impediment in detail.168

45.75  The legal consequences of a failure to give notice will not generally affect the availability of the exemption, but rather subject the party seeking the exemption to liability for the damage that arises as a consequence of the failure to give the notice itself. This may for example be damages for the loss of an opportunity to obtain a replacement.169

C.  Hardship

45.76  As the following discussion reveals, hardship exists where the equilibrium of the contract has been fundamentally altered; in other words performance of the contract has become excessively onerous. It may also exist where there is also an initial imbalance.

I.  General

45.77  When parties enter into contracts that are to be executed almost immediately, they are, to a very large extent, masters of their own destiny—that is, they are the ones who can control whether the contract is actually performed. However, especially when parties enter into long-term contracts, they lose some of this control. The circumstances in which parties find themselves may change and impact upon their ability to continue to perform the contract. A number of legal systems recognize that circumstances may change so significantly that at some point, the parties should be relieved of their obligations.

45.78  The term hardship is used here to encompass the legal doctrines known as clausula rebus sic stantibus, imprévision, Wegfall der Geschäftsgrundlage, change of circumstances, and commercial impracticability.170 As explained below, some of these terms have slightly different dogmatic foundations and reasoning.171 As a term, hardship is not laden with any particular domestic understanding and is used at the international level by the PICC172 as well as the ICC Hardship Clause 2003.173

II.  Contractual Allocation

45.79  It was noted above in the context of impediments that, particularly with respect to exemption, it can be important that parties provide solutions in their contract. The statement is arguably even truer for situations of hardship given the relatively fewer jurisdictions which recognize it as part of the default system. Furthermore in those jurisdictions which do supply default solutions, these solutions may be considered inappropriate.

(p. 667) 1.  Typical Clauses

45.80  It has been observed that hardship clauses always contain two parts.174 The first part sets out, often in broad terms, the situations which will trigger the clause. The second part usually addresses both the mechanisms and consequences of the hardship.

45.81  In the context of the first part of a hardship clause, despite great variety, there are consistent aspects which can be identified.175 In the first instance there must be a change in circumstances from those which existed at the time of the contract. Secondly, the change in circumstances must have been unforeseeable.176

45.82  One of the most recognized model hardship clauses is the ICC Hardship Clause 2003. This clause begins by restating the general proposition that a party is bound to perform its obligations even where those obligations have become more onerous than expected. The second paragraph of the clause then provides an exception to that rule where the performance has become excessively onerous and unavoidable. Finally the third paragraph allows for avoidance of the contract where circumstances matching the second paragraph exception are present, but only if a renegotiation of the contract fails.

2.  Construction and Effect

45.83  When a party seeks to rely upon a hardship clause within a contract, it must first be determined that the clause is in fact a clause which encompasses hardship. While this may seem self-evident it is not necessarily as clear cut in practice.

45.84  Where the clause in question on its plain words clearly identifies itself as a hardship clause, the determination is easy. It is more difficult, however, when the party seeks to rely on a force majeure clause arguing that it encompasses hardship. Although both force majeure and hardship can arise in similar fact situations, for example as a result of an unforeseen event, this will not in and of itself mean that instances of hardship are regulated by the force majeure clause. A force majeure clause may include hardship but this will always be a matter of interpreting the particular clause in question.177

45.85  Similarly, just as it may be necessary to distinguish a hardship clause from a force majeure clause, so too it may be necessary to distinguish a hardship clause from clauses such as index clauses, review clauses, exchange clauses, and adaptation clauses.178 The distinction between these clauses can be quite subtle. Whereas hardship clauses tend to refer generically to a change in circumstances, the other clauses address quite specific events and often set out equally specific consequences such as the particular manner in which the contract is to be adapted. An index clause is a useful example; under such a clause the price payable is linked to an index to ensure that the relative burden of the obligation always remains the same.

45.86  As a final observation regarding the construction and effect of hardship clauses, it can be noted that parties may in fact attempt to exclude the possibility of hardship from their contracts where it would otherwise be available in the default law. In this circumstance it will be necessary to determine whether the governing law permits such a derogation. This is true for civil law as well as common law, to the extent that the latter recognizes the concept.179

(p. 668) III.  Default provisions

1.  Different Concepts

45.87  As noted above,180 the concept of hardship is not known to all legal systems and among those that do know it, there are different dogmatic bases. However, common among all legal systems, at both the domestic and international levels,181 is the starting point of pacta sunt servanda— agreements must be kept. This is a foundation principle of contract law, and provides the certainty and confidence around which contract law operates.

45.88  However, it is evident that there may be harsh consequences to holding parties to their bargains in absolutely every single instance. Just as certainty is craved by commerce, the unremitting strict enforcement of obligations may dissuade parties from entering into commercial agreements in the first place—particularly those to be performed over a long period. Thus it was clear a balance must be struck. Precisely where and how that balance is found differs among legal systems. The following discussion moves from those jurisdictions strongly emphasizing the importance of pacta sunt servanda, to those that are more willing to accept notions of hardship.

45.89  In France these questions are famously addressed under the notion of ‘imprévision’. However, equally famous, is the fact that this theory is for the moment at least restricted to matters of administrative law and does not apply to civil law matters.182 Strong arguments have been made against the practice of limiting the application of imprévision to administrative law183 and there are suggestions that the Cour de Cassation is heading towards recognizing the principle in civil law matters.184 This movement can be seen in the increased importance of Article 1134(3) Code Civil which requires that contracts are performed in good faith.185 Similarly, although adopting slightly different approaches, reform projects such as the Avant-projet Catala include hardship provisions.186 However, until such time as hardship is officially recognized, it appears relatively clear that Article 1134(1) of the Code Civil prevents its application.

45.90  The above analysis would seem equally applicable in those jurisdictions following the French model which have not included a specific hardship article in their codes, for example Belgium and Luxembourg. It also encompasses Mexico, although a number of Latin American jurisdictions do have specific hardship provisions187 as indeed do many Middle Eastern and Arabic jurisdictions.188 The French position would also be applicable to most, if not all, of the sub-Saharan civil law jurisdictions, except to the extent that the concept of hardship may be found in OHADA Art 294 AUDCG by analogy to Article 79 CISG.189

(p. 669) 45.91  An only marginally less restrictive approach is taken in common law jurisdictions following the English model. These jurisdictions address these questions with the doctrine of frustration. Frustration has been explained above.190 In this context it can be said that a contract will be frustrated where circumstances have affected the contract in such a way so as to make it radically different to that which was originally concluded.191 It is conceivable, although extremely rare, that hardship will cause the frustration of a contract.

45.92  The USA has moved away from the potentially harsh traditional position of the common law and developed a doctrine of commercial impracticability.192 The Official Comment to § 2-615 UCC explains that it is not a mere price increase or market collapse that would excuse performance, but rather an event such as a severe shortage of raw materials due to war which then caused a marked increase in cost.

45.93  The Latin maxim clausula rebus sic stantibus193 (or variations of it) is found in a number of legal systems. In essence this maxim suggests that parties entering into long-term contracts can be assumed to have contracted with each other on the basis that the existing circumstances will remain the same. In German jurisprudence this idea is known as Wegfall der Geschäftsgrundlage (contractual-basis doctrine). Imposing an assumption of this kind into contracts allows for the adaptation or even termination of contracts without offending the notion of pacta sunt servanda.

45.94  As may be evident from the description of clausula rebus sic stantibus above the rationale used also lends itself to a mistake analysis. Thus in Switzerland there is ample case law where contracts could be rescinded on the basis of a fundamental mistake as to future circumstances, although the concept of clausula rebus sic stantibus is also applied there.194

45.95  At the international level there has been broad acceptance of the concept of hardship. The prevailing view is that cases of hardship can be considered as a particular group of cases falling under the notion of force majeure, and thus encompassed by Article 79 CISG.195 The uniform projects all have specific provisions on hardship,196 which in and of itself goes to legitimizing the broad concept.

2.  Initial v Subsequent Imbalance

45.96  The archetypal hardship scenario involves a change of circumstances which causes an imbalance subsequent to contract conclusion. Indeed, this follows from the very terms that are being used such as clausula rebus sic stantibus, Wegfall der Geschäftsgrundlage, or change of circumstances. Thus this sequence is the only sequence in which numerous domestic systems will acknowledge hardship.197 In a factual scenario where a gross imbalance in performance obligations already exists unknown to at least the disadvantaged party at the time of contract conclusion, a number of other solutions usually present themselves. Such a situation would usually (p. 670) lend itself to a validity analysis under the notions of unconscionability, gross disparity, or mistake.198

45.97  On the international level PECL199 and DCFR200 follow this approach that is prevailing in domestic legal systems. The official commentary to the PECL does specifically refer such a situation to the rules on mistake.201 However, the PICC do not impose the requirement of a change of circumstances that occurred after the conclusion of the contract. Article 6.2.2(a) PICC indicates that hardship is possible either where events cause an imbalance post contract conclusion, or where those events already exist at the time of the conclusion of the contract but only become known to the disadvantaged party afterwards.

45.98  It has been argued that the CISG similarly permits an initial imbalance hardship,202 to the extent that hardship is found to be encompassed within Article 79 CISG. The policy reasons for doing so in the context of the CISG are several and differ somewhat from those which may concern a domestic legal system. If initial imbalance were not governed by the CISG one would have to resort to domestic remedies. A first disadvantage with this approach is that in many legal systems a mistake gives a right of rescission,203 with no obligation or incentive to renegotiate. Furthermore this solution would seem undesirable in contracts governed by the CISG. As matters such as mistake are not dealt with by the CISG, regard would need to be had to the applicable domestic law. This could result in unpredictable results and runs counter to the Convention’s motive of uniformity. These arguments mirror those that militate for the equal treatment of initial and subsequent impediments. Finally, in many cases it may be difficult to assess whether the imbalance already existed at the time of the conclusion of the contract or not. A consistent construction of both impediment and hardship under Article 79 CISG is itself a further policy reason in favour of recognizing the possibility of initial imbalance.

3.  Threshold

(a)  General

45.99  It is again almost trite to o