20.7 EFFECTS

20.7.1 In General

It is of particular importance to consider the fate of the contract in cases of force majeure. If the tribunal finds an impediment sufficient to excuse one or both of the parties from the non-performance, it will have to address the particular consequences and the question will arise upon to what extent the legal effects of force majeure on the aggrieved party's remedies may be determined.

It is said that questions relating to force majeure are considered ones of fact, and, thus, their legal effects very much depend on the circumstances of each case.  ¹¹⁸⁹  In this connection, a leading illustration is Sylvania Technical Systems, Inc. v. Iran, where the Tribunal emphasizes that force majeure defenses "must always be analyzed in the context of the circumstances causing force majeure, taking into account the particular part affected by those circumstances and the specific obligations that party is prevented from performing."  ¹¹⁹⁰  Thus, Sylvania and like cases involved careful analysis of particular factual circumstances and particular legal obligations in determining the consequences of force majeure. Such analyses now seem characteristic of the Tribunals approach.  ¹¹⁹¹  For instance, the Tribunal in Amoco International Finance Corporation v. Iran states: "As force majeure arises out of and depends on factual circumstances, it will affect a contract as soon as the circumstances emerge which create the obstacle to performance. The factual effect of force majeure depends on the extent to which these circumstances, practically and objectively, render performance impossible."  ¹¹⁹² 

Generally speaking, an impediment to performance which fulfils the conditions just set out above relieves the party which has not performed from liability. But again it is necessary to define just what is meant by this rather general expression, which may be ambiguous. Here the approach is a pragmatic one: one must start with the remedies that are available to the aggrieved party, namely damages, specific performance (including repair and substitute replacement) and termination.

20.7.2 Effect on Right to Damages

It seems of no doubt that the three texts exempt the non-performing party from the liability for damages, respectively in Art. 79(5) CISG, Art. 7.17(4) UPICC and Art. 8:101(2) PECL.

However, it is to be noted that, the excuse granted in Art. 79 CISG exempts only the breaching party from liability for damages. All the other remedies of the other parties are not affected by this excuse, i.e. demand for performance, reduction of the price or avoidance of the contract.  ¹¹⁹³  Rimke therefore believes that: "Paragraph (5) restrains the effects of the exemption to one remedy alone and reserves to the party who did not receive the agreed performance all of its remedies except damages. These remedies include the right to reduce price (Article 50), the right to compel performance (Articles 46 and 62), the right to avoid the contract (Articles 49 and 64) and the right to collect interest as separate from damages (Article 78)."  ¹¹⁹⁴  Nonetheless, this laconic formulation in Art. 79(5) offers many tough nuts to crack in regard to interpretation. First of all, it will have to be clarified how far the notion of damages under the CISG Art. 79(5) reaches. In particular, the following two aspects must be made clear.

On the one hand, the question arises on whether the "damages" under Art. 79(5) include penalty or liquidated damages. In this respect, a proposal by the former GDR to expressly include penalties under the contract in their different manifestations (penalties and liquidated damages) was rejected without being put to a vote, but above all because penalties under the contract are not a claim following from the Convention and the shaping of contracts in that respect should not be influenced. Eiderlein and Maskow submit that this objection is not realistic insofar as penalties are agreed frequently without the question of possible exemptions being touched upon. If the latter happens, the contractual agreement will in any way supersede the Convention. The reasons given for the rejection do not exclude that, other contractual clues lacking, the grounds for exemption will also be extended to penalty claims.  ¹¹⁹⁵  The Secretariat Commentary states in this respect that: "It is a matter of domestic law not governed by this Convention as to whether the failure to perform exempts the non-performing party from paying a sum stipulated in the contract for liquidated damages or as a penalty for non performance or as to whether a court will order a party to perform in these circumstances and subject him to the sanctions provided in its procedural law for continued non-performance."  ¹¹⁹⁶  By contrast, the issue of liquidated damages or agreed payment for non-performance is expressly dealt with both in the UNIDROIT Principles (Art. 7.4.13) and in the European Principles (Art. 9:509) (see Chapter 16). Therefore, it is clear that under the two sets of Principles, no damages of any kind, including "liquidated damages" and penalties, will apply where the non-performance has been excused by the qualifying impediments, unless the parties have agreed otherwise;  ¹¹⁹⁷  or unless the claimed damages are those entitled to the aggrieved party by the non-receipt of the impediments notice from the non-performing party (supra. 21.6).

On the other hand, the question arises as to whether the right to interests is restricted by such qualifying impediments. In this respect, there are voices who, assuming that interest is a part of the damages, want to permit an exemption on the ground of impediments. Eiderlein and Maskow submit differently that: "The impediments under Article 79, however, do not free from the obligation to pay interest [see also Schlechtriem, Nicholas, and Stoll]. A point in favour of this is that the entitlement to interest is not mentioned in Article 79, paragraph 5, but could be explained with the genesis of the Convention. We believe, however, that the economic background is also justification for such a solution. The party who does not pay a debt that is due, disposes of the sum of money required for it and/or does not have to procure it. He thus has an advantage vis-à-vis the other party which is compensated by the entitlement to interest of that party."  ¹¹⁹⁸  This applies, in particular, to restrictions in the transfer of currency, often cited as an example. Thus, if the impediment relates to the payment of money, as by governmental currency controls, interest accrues on the debt, the payment of which is impeded. It is the case for the PECL Art, 8:107(2), since the entitlement to interest is not mentioned there, either. This is also confirmed by Art. 7.1.7(4) UPICC, which expressly states: "Nothing in this article prevents a party from exercising a right to ... request interest on money due." (For more details in this respect, see the discussion in Chapter 18.)

20.7.3 Effect on Right to Performance

Another nut offered from Art. 79(5) to crack in regard to interpretation is the effects of such qualifying impediments on the right to performance. As stated above, Art. 79 CISG exempts only the breaching party from liability for damages. All the other remedies of the other parties are not affected by this excuse. The Secretariat Commentary clearly states: "Even if the impediment is of such a nature as to render impossible any further performance, the other party retains the right to require that performance under article 42 or 58 [draft counterpart of CISG article 46 or 62]."  ¹¹⁹⁹  Thus, even in case of impossibility, the other party could ask for specific performance -- a result that is hardly convincing.

It is argued that para. (5) entails unrealistic results. It would allow an action for specific performance in a case where the goods are destroyed and thus, the performance is physically impossible.  ¹²⁰⁰  Some proposals to extinguish the obligor's obligation to perform if the grounds for exemption existed was, however, rejected at the Vienna Conference. The foremost reason for the rejection was the fear that a release from the obligation to perform could also extinguish collateral rights and secondary claims such as interest. It was also argued that, in cases where obligations are physically impossible to fulfill, the domestic legal doctrine of impossibilium nulla est obligatio (applicable according to Art. 28) would generally prevent a demand for performance anyway.  ¹²⁰¹  Stoll, in turn, states that upholding the right to require performance is sensible as a basic rule and acknowledges the fact that the right to require performance is not settled by Art. 79. He adds, however, that in a case of impossibility of performance the right to claim performance would be absurd.  ¹²⁰² 

Therefore, it is suggested that in such extreme situations where performance has been rendered impossible, a teleological interpretation should be adopted and a "limit of sacrifice"  ¹²⁰³  should be admitted beyond which the promisor of the obligation could not reasonably be expected to perform his obligation. Such a solution would be rational, especially in a situation where the performance of the promisor has subsequently become illegal. An example of such a situation is where the seller cannot provide the agreed quality of a chemical substance, which is the subject matter of the sale contract, since a ban has been imposed on its use and a penalty is threatened for any related trading. Arguably, in the latter situation the buyer could, in accordance with CISG Art. 79(5), require delivery of the agreed quantity of the chemical substance from the seller. However, under a teleological interpretation of CISG Arts. 46(1) and 28, the buyer should not be able to require the seller to deliver the goods, since in performing such act, he would break the ban thus bearing the risk of paying a penalty or losing his trading license. This interpretation is supported by the fact that a similar solution is given under English law, where it is accepted that in the absence of any express terms regulating the rights of the parties, the contract would be treated as frustrated, if, as a result of a ban, the performance is rendered impossible or tender of performance would involve violation of the local law.  ¹²⁰⁴ 

In some cases, on the other hand, the problem can be solved in that it is assumed that the right to performance is aimed to deliver a commercially reasonable substitute. Of course, it should be mentioned that where the contract does not specify an "origin of goods" and a ban is local, then the seller will not be absolved from his obligation to procure the goods from "other possibly more expensive" available sources. The rights to delivery of substitute goods (Art. 46(2)) or repair (Art. 46(3)), persist where there are grounds for exemption.  ¹²⁰⁵  Furthermore, if the party who is required to overcome an impediment does so by furnishing a substitute performance, the other party could avoid the contract and thereby reject the substitute performance only if that substitute performance was so deficient in comparison with the performance stipulated in the contract that it constituted a fundamental breach of contract.  ¹²⁰⁶ 

Nonetheless, Eiderlein and Maskow submit that: "We believe that the party affected by impediments can only be obligated to deliver such substitute in exceptional cases because this otherwise could lead to a far-reaching and, above all, undefined modification of his obligation to perform. When, for instance, payment in the agreed freely convertible currency is prohibited, but can be made in other such currencies, it will have to be assumed that the buyer has the obligation to switch to those currencies. By contrast, it may be too far-reaching when the seller in the event of a prohibition of fluorocarbons as propellant is obligated to use other propellants because he might lack the technological prerequisites for it. When the party concerned, because of the performance requirement offers substitutes, the other party would contradict his own behaviour and thus violate the principle of good faith in international trade (Article 7) were he to reject them, even though they are commercially equivalent. This offers in our view a basis for permanent objection to the claim for performance. The same applies when the seller offers the substitute on his own and its rejection would be considered as an harassment (Article 7)."  ¹²⁰⁷ 

After all above, it seems clear that Art. 79 only concerns exemptions from damages. It has no direct significance in relation to the right to require performance. The CISG seems to leave this question to be solved by the domestic laws of the court deciding the case according to CISG Art. 28. Above all, it may be hoped that the general belief expressed in Vienna that a judgment for a physically impossible performance would be neither sought nor obtained should lead to a reasonable limitation to Art. 79(5).  ¹²⁰⁸  By contrast, Art. 8:101(2) PECL specifies that where there is an impediment which fulfils the conditions set by PECL Art. 8:108, the aggrieved party may resort to any of the remedies set out in PECL Chapter 9 except claiming performance and damages. Any form of specific performance(Article 9:101 and 9:102) is by definition impossible.  ¹²⁰⁹  However, this rigid solution might lead to some unreasonable situations particularly in case of temporary impediments. Although as discussed above it seems to amount to an obvious contradiction because it is supposed that performance is not possible, it has become clear at least that the right to performance continues to exist in the event of temporary grounds for exemption and that auxiliary claims that are related to it, like interest, continue to accumulate thus stimulating.  ¹²¹⁰ 

In this respect, the UNIDROIT Principles seems to find a flexible answer to the question of what is to become of the right to performance. As mentioned above, unlike both the CISG and the PECL which specify, though differing from each other slightly, the remedies which the aggrieved party can't resort to in case of exemption, the UNIDROIT Principles adhere to the principle that the excuse is general, but in Art. 7.1.7(4) they make important exceptions in determining certain claims which are not affected by force majeure, namely the right to terminate the contract or withhold delivery or request interest on money due. The Official Comment makes some of its dispositions clear: "In some cases the impediment will prevent any performance at all but in many others it will simply delay performance and the effect of the article will be to give extra time for performance. It should be noted that in this event the extra time may be greater (or less) than the length of the interruption because the crucial question will be what is the effect of the interruption on the progress of the contract."  ¹²¹¹ 

20.7.4 Effect on Right to Termination

The existence of grounds for exemption without any doubts does not preclude the right to avoid the contract. According to the express provisions of CISG Art. 79(5), nothing in the Article prevents either party from exercising any right other than to claim damages under the Convention. This means that even if the non-performance is exempted, the aggrieved party retains his right to declare the contract avoided. Consequently, restitution for any portion of the price paid or goods delivered can be demanded, as well as any benefit accruing to the party who received the part performance. That right is given above all when there is a fundamental breach of contract or if there is no delivery within the Nachfrist. The two sets of Principles both follow the approach in the CISG in not restricting in case of exemption the rights of the party who has not received performance to terminate if the non-performance is fundamental. However, however, the question of the terminating of the contract is more complex.

On the one hand, it follows from the discussion stated previously that the existence of an "impediment" does not automatically terminatethe contract, and it is left to the other party to determine what remedies he wishes to pursue (other than in respect of damages) in the light of the supervening circumstances. The general system as applies in the three instruments concerning termination is: the aggrieved party may put an end to the contract by a unilateral declaration provided the non-performance is fundamental. It follows that in principle it will be for the creditor to exercise this right by giving notice of termination to the debtor even in such cases where the debtor has been exempted. However, as it would be pointless to give the aggrieved party the right to keep in force a contract which has become totally and permanently impossible to perform, it follows that in such a case it is unnecessary to require a declaration of termination.  ¹²¹²  Hence, Art. 9:303(4) PECL follows the approach which is of the same result as in those legal systems under which force majeure brings automatic termination of the contract, and it reads: "If a party is excused under Article 8.108 through an impediment which is total and permanent, the contract is terminated automatically and without notice at the time the impediment arises." However, no similar rule is found either in the CISG or in the UNIDROIT Principles.

On the other hand, it is to be noted that, although there are some differences among the three texts with regard to temporary impediment, the doctrine of temporary force majeure in the three texts does not inhibit the other party's ability to terminate the contract, it merely forgives damages and/or performance. If the promisee is not justified in terminating the contract immediately or chooses not to, obviously the obligor may suspend performance. Temporary impediment gives rise to prospective inability to perform. Although the obligor may be excused by temporary impediment, the prospective inability will normally give the promisee a power to suspend performance and demand assurance of due performance. However, if the obligor is not able to provide assurance of due performance, the promisee may terminate the contract despite the impediment that may provide a defense in an action for damages. When the impossibility ceases, the obligor is usually expected to perform in full and is entitled to an appropriate extension of time for performance, but this is not a universal rule. When the delay will make performance substantially more burdensome, the rules on hardship must he consulted, which is to be discussed separately in next chapter.