Force Majeure: a New Analysis Post Local Enactment of the United Nations Convention on Contracts for the International Sale of Goods (“CISG”)
Reporter: Samantha Lau, Barrister-at-Law, Denis Chang’s Chambers, Tara Liao, Barrister-at-Law, Denis Chang’s Chambers
This article first appeared in the July 2022 issue of Hong Kong Lawyer, the official journal of The Law Society of Hong Kong
As supply chains continue to be disrupted by COVID-19 related events, force majeure clauses which may have the effect of excusing parties from performing their obligations are coming into sharp focus. As the Sale of Goods (United Nations Convention) Ordinance (Cap. 641) which implements the United Nations Convention on Contracts for the International Sale of Goods (“CISG”) takes effect in the third quarter of 2022, Article 79 of the CISG which provides for force majeure events introduce changes to the legal analysis of unforeseen events under Hong Kong law.
Article 79 will apply where (1) the sale of goods contract is between entities whose places of business are in different contracting states, and (2) where the contract is governed by Hong Kong law whether by express provision of the contract or by application of rules of private international law.
Force Majeure under CISG
Under Article 79, a party may be exempted from liability in damages for non-performance for the period in which the impediment preventing performance persists. The burden is on the nonperforming party to establish that: (1) an impediment beyond the party’s control, (2) the party could not reasonably be expected to have taken the impediment into account at the time the contract was concluded, and (3) the party cannot have reasonably avoided the impediment.
Impediment beyond a party’s control
Natural disasters, epidemics, acts of war and state interventions preventing performance (such as export/ import/trade bans) are recognised categories of impediments under Article 79 (Schlechtriem & Schwenzer’s Commentary on the UN Convention on the International Sale of Goods (4th Ed.), Art. 79, paras 17-18). For example:
- a change of domestic law which rendered obtaining corn export license in Ukraine impossible was considered a force majeure event under Article 79 (International Commercial Arbitration Court at the Ukrainian Chambers of Commerce and Industry);
- In Hilaturas Miel SL v Republic of Iraq (SD NY, 20 August 2008, CISGonline 1777, 573 F Supp 2d 781), the Iraqi war in 2003 and the removal of United Nations personnel from Iraq rendered the compliance with the payment precondition (the inspection and payment assurance of United Nations personnel) impossible. The New York District Court held this to be an impediment beyond the seller’s control under Article 79.
The causation test is the “but for” test.
A party seeking to rely on Article 79 must serve a notice to the other party within a reasonable time.
What constitutes a reasonable time depends on the circumstances. A party is expected to give notice swiftly especially in a situation where time is of the essence for the other party to take steps to avoid/alleviate the consequences of non-performance. Absent such circumstances, a period of 14 days after the party becoming aware of the impediment is usually sufficient (Force Majeure and Hardship under General Contract Principles: Exemption for Nonperformance in International Arbitration at p. 343).
The content of the notice is critical. Article 79(4) requires notification of the impediment and its effect on the party’s ability to perform. It is good practice to describe the nature, gravity and duration of impediment to enable the other party to determine what (if any) action it should take to mitigate loss (Schlechtriem & Schwenzer’s Commentary on the UN Convention on the International Sale of Goods, Art. 79, para 45). The nonperforming party would be liable for damages unless and until a valid notice is delivered.
If a party successfully invokes Article 79, it exempts the party from paying damages for such period as the impediment persists. However, it does not preclude the other party from seeking other remedies, such as terminating/avoiding the contract and/or reducing the contract price.
Alternative to Article 79
In practice, it is possible for parties agree on an alternative force majeure clause and opt to deviate from Article 79.
One frequently adopted force majeure clause is the International Chambers of Commerce 2003 Force Majeure Clause. It makes interesting contrast with Article 79 in that, the burden of proof of the ICC Clause is somewhat shifted to the advantage of the non-performing party– once it is shown that the impediment in question falls within a fixed list of events (i.e. war, act of authority, act of good, epidemics and labour disturbance), it is presumed that the failure to perform was caused by an impediment beyond the party’s reasonable control and contemplation.
With the local implementation of the CISG, practitioners should take care to analyse Article 79 and/or any alternative force majeure clauses and in particular comply with the notice requirements in substance and form to take full advantage of the mechanism.