The unremitting pandemic has had a considerable impact on the performance of the contract for international sale of goods. International traders had to confront situations such as “delay in performance” and “impossibility to perform”. Regarding the difficulties in contract performance under the current situation, some argue that parties can invoke force majeure, changed circumstances, or contract frustration (under the common law system) as grounds for exemption from liability. However, in judicial practice, whether the pandemic (including its prevention and control measures) is force majeure will be comprehensively determined based on whether there is a direct causal link between the pandemic and the performance of the contract, whether it is indeed impossible to perform contractual obligations, and so forth. This article put forward the author’s analysis on these issues, combined with judicial cases, precedents, international conventions, and legislation in other countries, in the hopes that it would shed some light on this issue.

I. Civil Code of the People's Republic of China on force majeure

Article 180 of the Civil Code of the People's Republic of China stipulates that “force majeure means any objective conditions which are unforeseeable, unavoidable, and insurmountable”. To invoke force majeure as the ground for exemption from liability, “it must be the cause of the damage. Only when the damages are entirely caused by force majeure, can it be clearly shown that there is no causal link between the defendant’s behavior and the damages and that the defendant is not at fault and therefore should be exempt from liability.”

According to Article 590 of the Civil Code of the People's Republic of China, “where a party is unable to perform the contract due to force majeure, he shall be exempt from liability in whole or in part according to the impact of the force majeure, unless otherwise provided by law. The party unable to perform the contract due to force majeure shall promptly notify the other party to mitigate the losses that may be caused to the other party, and shall provide proof of the force majeure within a reasonable period of time”. Furthermore, according to Article 563 of the Civil Code, “the parties can rescind the contract if the purpose of a contract is not able to be achieved due to force majeure.

From the provisions mentioned above, there are two parts to force majeure under China’s civil law system. The first part is the constitutive requirements of force majeure itself, i.e., what force majeure is. The second part is its application as a ground for exemption from liability, i.e., when the relevant thresholds for force majeure are   satisfied. Therefore, from a legal standpoint, in order to achieve the effect of exemption from liability through force majeure, the following conditions should be met:

Firstly, as far as force majeure itself is concerned, it must meet the “unforeseeable, unavoidable, and insurmountable” requirement;

Secondly, there is a direct causal link between force majeure and impossibility to perform;

Thirdly, the party unable to perform the contract due to force majeure must honor the obligation to notify the other party and provide proof within a reasonable period of time.

Only when all the conditions mentioned above are met, force majeure can be accepted as a ground for exemption from liability. Otherwise, even if there is force majeure, a party’s failure to perform its contractual obligations cannot be excused.

II. Other countries’ legal provisions on force majeure (contract frustration)

1. Korea, Japan, Germany

Force majeure is also a ground for exemption from liability in Korea, Japan, and Germany, but none of them has specified its definition and the conditions for its application in the Civil Code. The specific application and interpretation of force majeure are determined by legal theories and judicial practice. For instance, a Korean Court held that “an event that is beyond the control of the debtor, who has exhausted conventional means to prevent the occurrence of the result but still cannot prevent it, should be deemed as force majeure”. Although these countries do not specify force majeure in their Civil Code, they provide some exemption from liability articles which can be directly applied when the performance of the contract is influenced by the event not attributable to any party.

Article 390 of the Civil Code of the Republic of Korea provides, “If an obligor fails to effect performance in accordance with the tenor and purport of the obligation, the obligee may claim damages: Provided, That this shall not apply to where performance has become impossible and where this is not due to the obligor's intention or negligence”.

Article 360 of the Civil Code of Japan provides, “Except in the cases providing for in the preceding two Articles, if the performance of any obligation has become impossible due to reasons not attributable to either party, the obligor shall not have the right to receive performance in return”.

Article 275 of the Civil Code of Germany provides, “(1) A claim for performance cannot be made in so far as it is impossible for the obligor or for anyone else to perform. (2) The obligor may refuse to perform in so far as performance requires expenditure which, having regard to the subject matter of the obligation and the principle of good faith, is manifestly disproportionate to the obligee’s interest in performance. When determining what may reasonably be required of the obligor, regard must also be had to whether he is responsible for the impediment”.

2. the United Kingdom

Force majeure is not a statutory cause for exemption from liability under the common law system. If a party wishes to invoke force majeure as the ground for exemption from liability, it must be clearly stipulated in the contract, and the scope of force majeure as well as the conditions for exemption must be specified in detail. If the contract does not expressly stipulate a “force majeure clause” or the stipulated “force majeure clause” is unclear, under the common law system, theories such as “doctrine of frustration” or impracticability will be used to solve the issue of liability exemption.

Frustration of contract means that after the conclusion of the contract, the contract is to be unenforceable due to some unexpected events beyond the control of the parties. The contracting party can refer to this principle to rescind the contract. Frustration of contract is a remedy with a higher threshold than force majeure. Frustration generally applies to situations such as the loss of the subject matter of the contract, cancellation and delay of anticipated events, changes in the law, death or incapability of a contracting party, etc.

III. CISG on force majeure (impediment)

Article 79 of the United Nations Convention on Contracts for International Sale of Goods (hereinafter referred to as “CISG”) stipulates that:

(1). A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.

(2). If the party's failure is due to the failure by a third person whom he has engaged to perform the whole or a part of the contract, that party is exempt from liability only if:

    (a). he is exempt under the preceding paragraph; and

    (b). the person whom he has so engaged would be so exempt if the provisions of that paragraph were applied to him.

(3). The exemption from liability provided by this article has effect for the period during which the impediment exists.

(4). The party who fails to perform must give notice to the other party of the impediment and its effect on his ability to perform. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, he is liable for damages resulting from such non-receipt.

(5). Nothing in this article prevents either party from exercising any right other than to claim damages under this Convention.

CISG is the product of negotiation and compromise between civil law system and common law system. Most of the provisions in the CISG incorporate the principles and provisions of contracts under both legal systems. The CISG does not directly use the expression of “force majeure” or “frustration of contract”. Instead, it uses a neutral word "impediment". But this also causes the problem that the definition of "impediment" in Article 79 of the CISG is not clear enough. Therefore, the legal background of the judicator may affect the interpretation and application of the Article. For example, judicators with a common law background may unconsciously adopt the "frustration of contract" principle in their interpretation and application of the Article. This has occurred in many CISG cases.

IV. Relevant cases on force majeure or “frustration of contract”

1. Can a party claim force majeure as the ground for exemption from liability when it is unable to deliver goods on time due to government ban?

Adjudicating Body: American Arbitration Association

Applicable Law: CISG

Case Name: Macromex Srl. v. Globex International Inc.

Abstract

A US seller (Globes) and a Romanian buyer (Macromex) entered into a contract for the sale of chicken leg quarters. When the time came for the goods to be delivered, an avian flu outbreak prompted the Romanian government to bar all chicken imports not certified as of June 7, 2006. The seller postponed delivery. The Romanian buyer suggested that the seller ship to an alternative port for receipt, but the seller refused, arguing that the Romanian government’s ban constituted a force majeure event under Art. 79 of CISG. Ultimately, the seller sold the undelivered goods to another buyer at a substantial profit.

The Arbitrator found that the Romanian government's decision was beyond the seller's control and that it could not have been reasonably contemplated at the time of conclusion of the contract. However, the seller could have reasonably avoided the ban by shipping to the alternative port proposed by the buyer. For this reason, the Arbitrator concluded that the seller could not exempt from liability based on Art. 79 of the CISG.

Analysis

Art.79 of the CISG does not stipulate the “unforeseeable, unavoidable, and insurmountable”requirement as China’s Civil Code does. But in terms of application, there is no essential difference. Courts and Tribunals have adopted the principle of strict liability to confirm exemption from liability. When invoking Art.79 of CISG, it must be proved that there is a "sole" or "exclusive" causal link between the impediment suffered and the impossibility to perform, and the impediment cannot be overcome or avoided. If the obstacle can be overcome by other effective means, it will not be deemed to satisfy Art.79.

2. Did the closure of the Suez Canal fundamentally change the contract and cause frustration of contract?

Case Name: Tassioglou & Co Ltd v Noble Thorl GmbH

Case Number: [1962] A.C. 93

Applicable Law: British law

Abstract

On October 4, 1956, the parties contracted regarding the sale of Sudanese nuts. The customary route from Sudan to Hamburg was via Suez Canal. However, the Canal was closed due to the Suez Crisis in 1956. The alternative route then was around the Cape of Good Hope in South Africa but taking this route would have made the journey twice as long and subsequently much costly for the vendor. As a result, the seller refused to ship the nuts.

The Court held that the vendor was bound to ship the agreed goods by either the usual and customary route or a reasonable alternative route if no such route was available at the time of shipping. Shipping around the Cape of Good Hope remained a viable option at the time, and it did not render the contract fundamentally different. Therefore, the Court held that there was no frustration of contract.

Analysis

In fact, both parties had agreed on a “force majeure clause” in the contract, specifically, “after the occurrence of force majeure, the contract can be extended for two months, and if force majeure persists after two months, the contract can be terminated”. But the seller in this case chose to directly refuse the delivery, which did not conform with the contract. If Chinese law had been the applicable law in this case, the seller could have invoked the "changed circumstances" provisions. If shipping around the Cape of Good Hope was obviously unfair, the seller could request to rescind or modify the contract.

3. Does defective goods supplied by a third-party certainly exempt the seller from liability?

Adjudicating Body: Tribunal de Commerce de Besançon

Applicable Law: CISG

Case Name: Christian Flippe v. Sarl Douet Sport Collections

Abstract

A Swiss buyer and a French seller concluded a contract for the sale of judo-suits. After having received complaints from its customers for excessive shrinking after washing, the buyer gave notice to the seller of the defect and asked for an amicable settlement of the dispute. Not having received any reply from the seller, the buyer had the goods examined by an expert, who certified their non-conformity, and commenced a legal action, claiming reimbursement of the payment for goods and damages.

In determining the amount of damages, however, the Court observed that the buyer had not proved that all goods received were defective and that it had made a profit out of at least a part of the goods. It further pointed out that the seller's failure to perform was due to an impediment beyond his control, since the goods had been manufactured by a third-party, and there was no evidence that the seller had acted in bad faith (Art. 79 of CISG). Thus, the Court ordered a reduction of the purchase price (by 35%) and that the seller reimburse the buyer accordingly.

Analysis

The case is similar to the "Vine Wax" case heard by the German Court applying CISG, but the two cases received diametrically opposite judgments. In the “Vine Wax” case, the German Court dismissed to recognize that the defective goods delivered by the third-party supplier were factors beyond the seller's control, thus denying the seller's claim of force majeure. However, in this case, the French Commercial Court recognized the third party's supply of defective goods as an “impediment”. Still, it did not completely exempt the seller from liability. Instead, it ordered the seller to compensate the buyer by reducing the sales price.

4.  Can the shortage of raw materials caused by the COVID-19 pandemic which resulted in failure to deliver goods on time be considered force majeure?

Adjudicating Body: People’s Court of Bao’an District, Shenzhen City, Guangdong Province

Applicable Law: Chinese law

Case Name: Dongguan Youxiang Company v. Shenzhen Daohe Company

Case Number: No. 25132 Yue 0306 [2020], First, Civil

Abstract

On February 24, 2020, the parties concluded a “Product Sales Contract”, stipulating that the seller (Shenzhen Daohe Company) would supply 200,000 temperature sensors and deliver the goods before 24:00 on March 31, 2020. After the seller supplied 25,000 sensors, the main raw material for the sensors could not be supplied due to the closure of factories and national borders in Malaysia caused by the COVID-19 pandemic, which led to the complete shutdown of the production of the sensors. The seller asked to terminate the contract due to force majeure. The Court held that it was lawful for the seller to terminate the sales contract on the grounds that the complete shutdown of the production was caused by Malaysia’s closure of its factories and national borders, which made it impossible for the seller to obtain the main raw material needed to produce the sensors. As the objective circumstance (the shortage of raw materials) did occur due to the influence of the pandemic in March 2020, it should be considered force majeure. Thereby, the seller had the right to terminate the contract without being held liable for compensation.

Analysis

Whether there was a direct causal link between the closure of factories and national borders under the influence of the COVID-19 pandemic and the impossibility to perform the contract is worth investigating. The seller should justify its inability to obtain “raw material” from other sources. If it was only that the seller’s failure to deliver the goods on time was caused by the shortage of the main raw material needed for production due to Malaysia’s closure of its factories and national borders, the requirements of force majeure were clearly not met. In addition, the pandemic had already begun when the contract involved was concluded, and the seller would have already recognized the subsequent risks. If the cost of purchasing raw materials from other channels would increase sharply due to the shortage of raw materials and cause an unfair situation, it would be more reasonable to seek the termination or amendment of the contract based on “changed circumstances” rather than exemption from liability based on force majeure.

5. Can the delayed delivery of goods caused by the system upgrade of the Indian Customs be exempted from liability based on force majeure?

Adjudicating Body: Higher People’s Court of Beijing

Applicable Law: Chinese law (agreed upon after negotiation)

Case Name: State Develop & Investment Corp, China v. SRV Company, India

Case Number: No. 1246, [2014], Final, Higher, Civil

Abstract

On February 24, 2011, SRV Company (hereinafter referred to “SRV”) concluded the “Sales Contract” with State Develop & Investment Corp (hereinafter referred to “SDIC”). It was agreed that SRV would sell cotton linters to SDIC, including 100 tons of linters of first-class cotton and 200 tons of linters of second-class cotton. The unit price of the goods was CIF at 1,365 USD/ton, and the total amount was 409,500 USD. The condition of payment was an irrevocable letter of credit issued within 3 working days after the conclusion of the contract. The POL was Chennai Port, India, and the POD was Shanghai Port, China. The final shipment date was March 18, 2011. SDIC applied to the Industrial and Commercial Bank of China (hereinafter referred to “ICBC”)  for a letter of credit according to the agreement. Due to the upgrade of the system software of the Chennai Port Customs, the import and export procedures of the Port were interrupted. To this end, 300 tons of cotton linters had to be shipped in two batches, of which the first batch of 100 tons of cotton linters was shipped on March 16, and the second batch of 200 tons of cotton linters could only be shipped on March 21. After the second batch of cotton linters was shipped, SRV asked SDIC to revise the latest shipment terms in the letter of credit. However, SDIC failed to modify the letter, nor did it notify ICBC to accept the discrepancies in the documents. On April 5, 2011, ICBC refused to pay USD 273,000 for the second batch of cotton linters on the grounds that the documents did not match. Therefore, SRV required SDIC to compensate for the losses caused by its breach of contract.

The Court held that SRV claimed that its delayed delivery was caused by the system upgrade of the Indian Customs, but the evidence submitted by SRV could not prove that there was causality between its failure to ship the goods before March 18, 2011 and the upgrade. Therefore, SRV’s claim that its delayed delivery was caused by force majeure could not be established. Additionally, although the seller SRV had delayed the delivery, its delivery time was only four days later than the time agreed in the contract, and the goods in this case were not goods with a short shelf life or were easily deteriorated, SRV’s delayed delivery did not constitute a fundamental breach of contract.

Analysis

According to the “Sales Contract” concluded by both parties, the seller SRV’s latest shipment date should be before March 18, 2011. There was no evidence to prove a close connection and causality between the system upgrade and the delayed shipment. System upgrades are neither natural disasters nor social emergencies. Even if there was causality, it would remain doubtful whether such an event could be considered force majeure.

In light of the outcome of this case, SRV made a wise choice to agree to apply Chinese law in this case. The principle of good faith runs through China’s Civil Code, so it will also be reflected in the performance of the contract. The principle of good faith is also the empire provision of the civil law. Therefore, the Court found that SRV’s 4-day delay in loading the ship did not constitute a fundamental breach of contract and was not sufficient to overturn the contract in this case, and it also did not further pursue SRV’s liability. If the law of a common-law country were applied herein, the case could have had the opposite outcome. Because under the common law system, the principle of good faith does not have a guiding role in the contract. Instead, the common law system places a higher value on autonomy and strict liability.

V. How to prevent contract performance difficulties caused by the pandemic and avoid losses

1. Fulfilling the obligation of notification as well as actively consulting and negotiating with the other party to resolve the issues

If a party is suffering from contract performance difficulties, it should first review the contract content to confirm whether there are provisions such as force majeure, exemption from liability from liability, applicable law, and so forth. Then, based on specific terms, the party should assess that whether the incident or pandemic prevention measures currently experienced should be considered force majeure. Secondly, the party should collect the evidence and proof of force majeure and notify the other counter-party of the contract. During this period, the situation of the obstacles should be continuously updated and sent to the counter-party, so as to reduce the increase of losses. Otherwise, in the event of a dispute in the future, the party will still be liable for the increased loss. Finally, after the notice is sent, if the other party does not acknowledge the defense of force majeure, it can try to negotiate to amend, supplement, or terminate the contract. If an agreement cannot be reached, the notice, the evidence, the proof of force majeure and other contents should be retained, and the party can seek assistance from professionals such as lawyers to further resolve the dispute.

2. “Autonomy of will” is the primary principle of the contract and should be made full use of.

No matter whether in the CISG or legal provisions of various countries, if there is an agreement in the contract, in principle, the agreement takes priority over legal provisions, which is the manifestation of the “autonomy of will” principle in the contract. Regardless of the civil law system or the common law system, only by specifying the causes for exemption from liability in the contract rather than relying on force majeure or frustration of contract after unexpected events such as natural disasters can contracting parties’ legitimate rights and interests be protected. If there is no explicit agreement in the contract, it is highly unlikely that claims for exemption from liability by directly invoking force majeure clauses, contract frustration, impossibility to perform, and impediment, etc., would be supported by the courts.

Therefore, it is necessary to strictly distinguish between force majeure and exemption clauses. Force majeure is only one of the conditions for exemption from liability, and it may not result in 100% exemption. Force majeure itself is a statutory matter. In China, if an event meets the “unforeseeable, unavoidable, and insurmountable” requirement, it would be recognized as force majeure. Therefore, two parties stipulating what force majeure is (or expanding or narrowing its scope) in the contract through the “autonomy of will” may render the agreement invalid. However, the exemption clause is within the scope of the “autonomy of will”, and more detailed exemption clauses can be made based on force majeure or other unexpected events, including the rescission, termination and amendment of the contract, which can also be stipulated in the contract in detail.