THE CONCEPT OF NO-FAULT LIABILITY IN CONTRACTS FOR THE SALE OF

GOODS

Soumyadipta Chanda & Rohit Tiwari

The concept of no-fault liability has its roots in the law of torts. However, this concept has been
intricately associated with the modern laws of contracts and sale of goods. It basically means that a party
can be held liable irrespective of whether it was at fault or not when it fails to perform its obligations
under the contract. The UN Convention on Contracts for the International Sale of Goods, 1980 (CISG)
considers no-fault liability as an inherent principle under Article 79 which deals with exemption of a
party. Similarly the Indian Contract Act, 1872 under Sections 56 and 65 lay down in express terms that a
party need not be at fault for it to be held liable for non-performance of its obligations under the contract.
Essentially having its origin in common law, no-fault liability is considered to be a vital part of
compensation systems concerning sales contracts and is designed to overcome alleged deficiencies of
fault based compensation systems prevalent in civil law systems. The purpose of this paper is to analyze
the fairness and the rationale of no-fault liability in the context of sale of goods both in India as well as in
the international context and its relevance as regards determining appropriate remedies during an event
of force majeure or a frustration of the contract. Apart from presenting a picture of the common law and
civil law systems on the question of fault analysis, this paper will also present an in depth analysis of the
relevant provisions in the CISG and the Indian laws on the concept of no-fault liability.

1. INTRODUCTION

Oliver Wendell Holmes, the charismatic Chief Justice of the US Supreme Court proposed a no fault
theory of contract law when he said that,

“A contract is an option to perform or pay, and a “breach” is therefore not a wrongful act, but merely
triggers the duty to pay liquidated or other damages1.”

However, this view has not found favour with the drafters of contract legislations across the world that are
of the opinion that liability arises as soon as there is a non-performance by any party to the contract. In
other words, the performance of a contract is not considered to be optional and a definite fault arises if
either party fails to perform its obligations arising out of the contract. The consideration of "fault" arises
from the fact as to whether failure to perform was due to an impediment beyond the control of a party
which he could not have reasonably foreseen.

There are primarily two types of obligations. In the case of an obligation to achieve a specific result, a
party is bound simply to achieve the promised result, failure to achieve which amounts in itself to non-
performance, subject to the application of force majeure. In case of assessment of performance of an
obligation of best efforts the test is less severe and is based on a comparison with the efforts a reasonable
person under similar circumstances. The non-performing party under such an obligation needs to only
show that it was not negligent or a fault in its non-performance.

1
O.W. Holmes Jr., The Path of the Law, 10 HARV. L. REV. 457, 462 (1897)

Electronic copy available at: http://ssrn.com/abstract=1898289

Under contract and sale of goods legislations around the world the right to damages, like other remedies,
arises from the sole fact of non-performance. It is not necessary for the aggrieved party to prove in
addition that the non-performance was due to the fault of the non-performing party2. Where a party’s
obligation is to produce a given result, its failure to do so entitles the aggrieved party to damages despite
the exercise of all reasonable care and skill on its part, i.e., regardless of any fault, except where
performance is excused by an express contract to the contrary. In case of an obligation of best efforts, the
obligor will be liable only if it has not exercised the care and skill required under the circumstances,
regardless of whether a desired (but not promised) result has occurred. This is the concept of no-fault
liability, wherein a party is liable for breach of obligations even though it might not have any fault in such
obligation being breached.

General contract principles follow the concept of no-fault liability for breach of contract. Generally, the
obligor is liable for non-performance if he fails to perform any of his contractual obligations, unless he
proves that there is a ground for exemption from liability due to an external event beyond his sphere of
risk and control. This essentially implies the occurrence of a force majeure or the like as a justification or
excuse for non-performance, because force majeure is characterized as unforeseeable, insurmountable,
and irresistible in nature3.

Absence of fault may only exempt the non-performing party if the force majeure or hardship exemption
applies. The exemption is in the form of a force majeure or a hardship clause in the contract between the
parties.

2. THE COMMON LAW AND CIVIL LAW APPROACH TO THE CONCEPT OF

FAULT

Common law and civil law systems differ a great deal when it comes to assessing the fault of a party as
regards non performance. Common law in principle treats every contract as containing a guarantee: if the
obligor breaches any of its obligations under the contract, the aggrieved party is entitled to claim
damages, regardless of a fault by the non-performing party4. The obligor is only exempt from
performance if there is an express exemption clause in the contract exempting him from certain obstacles
that may arise during the course of performance. Therefore, it is no defense for a party to say that it has
tried its best to perform under the contract and that it was not its fault that it could not perform, as nothing
short of performance is the required standard.

2
United Nations Convention on Contracts for the International Sale of Goods (CISG), Art. 45, 61, 74 (1980); Indian Contract
Act, § 65 (1872); UNIDROIT Principles of International Commercial Contracts (UPICC), Art. 7.4.1; Principles of European
Contract Law, Arts 8:101, 9:501 (1999) and Lando/Beale, Comment B. on Art. 9:501 PECL (p. 434). See also Comment b. on §
234 Restatement (2d) of Contracts
3
NICHOLAS, BARRY, Impracticability And Impossibility In The U.N. Convention On Contracts For The International Sale Of
Goods, in THE INTERNATIONAL SALES: THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE
INTERNATIONAL SALE OF GOODS, 5-1, 5-24 (Matthew Bender, Galstosn & Smit ed., 1984)
4
ZWEIGERT, KONRAD & HEIN KÖTZ (Tony Weir trans.). AN INTRODUCTION TO COMPARATIVE LAW. 503 (3rd ed.
Oxford 1998)

Electronic copy available at: http://ssrn.com/abstract=1898289

1. The Common Law Scenario

Law recognizes certain instances where the non-performing party, although strictly liable in principle, is
nevertheless exempted from liability for a breach of contract. This is primarily achieved by implying
limits of the non-performing party's contractual guarantee in the contract5. Where obstacles to
performance arise subsequently to the contract, the non-performing party may be relieved from its
guarantee liability on the basis of frustration of the main purpose of the contract6.

The obligor’s failure to perform may therefore not be excused even though the obligor is not at fault in
the sense of want of care or diligence. As pointed out by Treitel7:

“Although deliberate and careless conduct is thus generally sufficient to prevent a party from relying on
the doctrine of discharge, it is not necessary for this purpose. It has, for example, been held that a seller
whose goods are taken in execution, and who therefore cannot deliver them under a contract of sale, is
not excused as he is considered to be at ‘fault’8. Yet the execution may be due to his inability to perform a
previous contract because his source of finance or of generic goods has failed without any fault on his
part.”

In the United States, the common law development was synthesized in § 2-615 UCC, ‘Excuse by Failure
of Presupposed Conditions’, referred to as the doctrine of impracticability. A party to a contract governed
by Article 2 UCC regarding sales contracts must answer in damages for its failure to perform in the
absence of an excuse for its non-performance under § 2- 615 UCC (‘Impracticability’), § 2-613 (‘Casualty
to Identified Goods’)9, or some doctrine or rule from common law, such as frustration of purpose10. Both
under § 2-613 UCC and the doctrine of impracticability, it is required that the ‘casualty’ or
‘impracticability’ must have resulted without the fault of the party seeking to be excused.

2. The Civil Law Scenario

Many civil law systems endorse the principle that breach of contract presupposes fault of the non-
performing party11. Thus conceptually, the Anglo-American principle of strict liability for breach of
contract is fundamentally opposed to the traditional civil law approach. However, if the situation is
examined more closely, the opposition between these two basic approaches is considerably mitigated by
concessions on both sides.

5
DROBNIG, ULRICH, General Principles of European Contract Law, in INTERNATIONAL SALE OF GOODS:
DUBROVNIK LECTURES (Sarcevic & Volken. ed., 1986)
6
SIR WILLIAM REYNELL ANSON, ANSON’S LAW OF CONTRACT (J. Beatson ed., 28th Edition, Oxford University Press,
2008); Taylor v. Caldwell (1863) 3 B.&S. 826;
7
TREITEL GUENTER, THE LAW OF CONTRACT 35 (11th ed., Sweet and Maxwell, London, 2003).
8
Western Drug Supply etc. & Co. v. Board of Administrators of Kansas, 187 p. 701 (1920).
9
Uniform Commercial Code, § 2-613 (1952) ((‘Casualty to Identified Goods’) states: ‘Where the contract requires for its
performance goods identified when the contract is made, and the goods suffer casualty without fault of either party before the risk
of loss passes to the buyer, or … then (a) if the loss is total the contract is avoided.
10
Jenkins, Sarah Howard, Exemption for Nonperformance: UCC, CISG, UNIDORIT Principles – A Comparative Assessment, 72
TUL. L. REV, 2015-2030 (1998).
11
French Civil Code Art 1147; Swiss CO Art 97(1); Italian Codice Civile Art. 1218; German BGB §§ 280(1), 276(1).
Under the objective standard of negligence, the obligor’s conduct is not to be assessed by reference to its
own capabilities, but to the standard of care which generally prevails in its trade or profession12. The
consequence of such an objective standard is that to a very large degree, the obligor may only succeed in
proving that it is not at fault if there is an exemption for non performance due to a force majeure event or
interference by the obligee. An important limitation of the fault principle lies in the fact that the obligor
usually bears the evidentiary burden of proving the absence of fault. As a result, fault is presumed, so that
the obligee may limit itself to proving the breach of an obligation, damages and a sufficient causal link
between the breach and the alleged damages13. Most civil law systems allow considerations of equity
and good faith to influence whether performance is excused due to hardship. The French doctrine of
imprevision and the German doctrine of Wegfall der Geschaeftsgrundlage allow for the readjustment of
the contract based on changed economic circumstances14.

Under French law, a claim for damages will only succeed if the circumstances which prevented the
performance of the contract are ‘imputable’ to the obligor. Article 1147 of the French Code civil provides
that an obligor in default is freed from liability in damages if the failure comes from an external cause
that cannot be imputed. Case law and legal writers are of the opinion that absence of fault and exemption
for non-performance due to force majeure are virtually equivalent15. As a consequence, it has been noted
that any non-performance of a contractual obligation, when arising from the obligor, is a ‘fault’, whether
the breached obligation is one of best efforts or one to reach a specific result, subject only to an
exemption (force majeure, interference by the obligee) which must be proven by the obligor. Thus, fault
is not a condition different from that of the non-performance of the contract16. In effect, the French system
appears to follow the concept of no-fault liability in spirit wherein however, the obligor is only freed from
liability in damages if the non-performance is excused.

In contrast, Swiss law makes in principle a clear distinction between the fault requirement and the
requirement of non-performance. The obligor is at fault when it is responsible for the non performance
because it has not observed the required diligence to comply with its obligations, whether intentionally or
by negligence17. However, where the non-performance of an obligation to achieve a specific result is
established, the obligor if he succeeds in proving that it is not at fault in case of a force majeure event or
interference by the obligee can only claim exemption from damages and not any other remedy similar to
the French position18.

12
JONES, GARETH H. & PETER SCHLECHTRIEM. Breach of Contract (Deficiencies in a Party's Performance) in
INTERNATIONAL ENCYCLOPEDIA OF COMPARATIVE LAW 146 (Vol. VII (Contracts in General), Chapter 15. Tübingen,
1999)
13
CHRISTOPHE BRUNNER, FORCE MAJEURE AND HARDSHIP UNDER GENERAL CONTRACT PRINCIPLES 64
(Kluwer Law Publishers, The Hague, 2009)
14
NAGLA NASSER, SANCTITY OF CONTRACTS REVISITED: A STUDY IN THE THEORY AND PRACTICE OF
LONG-TERM INTERNATIONAL COMMERCIAL TRANSACTIONS 199 (1995)
15
SCHLECTRIEM, supra note 12
16
CHAPPUIS, CHRISTINE, LES CLAUSES DE BEST EFFORTS, REASONABLE CARE, DUE DILIGENCE ET LES
RÈGLES DE L'ART (Provisions for best efforts, reasonable care, due diligence and standard practice) 288 ( RDAI 2002)
17
BGE 120 II 248, s. 2 (1994); BGE 117 II 563 s. 2a (1991); BGE 105 II 284 s. 1 (1979);
18
WEBER, ROLF H. Die Folgen der Nichterfüllung, Art. 97-109 in BERNER KOMMENTAR, BD. 6, ABT. 1, TEILBD. 5.
BERN (2000)
3. Comparative Analysis

A comparative analysis of the different concepts from which the civil law systems and the common law
start out, shows that despite the theoretical differences, the practical results are very similar. Although the
civil law systems are based on the so called fault principle wherein a party is only held liable for breach of
obligations if it is at fault either intentionally or through negligence. However, it is subject to numerous
restrictions as has been shown by the French system. In principle common law recognizes a unitary
concept of non-performance without regard to fault. However, such a strict view is undergoing a radical
change especially because of the emergence of the principle of good faith in national and international
sales contracts. Therefore, to achieve a common ground between these two radically divergent principles
a party can be held discharged of his obligations to some extent owing to occurrence of a force majeure,
interference by the obligee and frustration of the main purpose of the contract. Uniformity of laws as
regards sales contracts have been achieved to a great extent by the enactment of the Convention on
Contracts for the International Sale of Goods (CISG) by the United Nations.

3. THE CONCEPT OF NO FAULT LIABILITY IN THE CISG

1. Brief History

The United Nations came out with the Convention on Contracts for the International Sale of Goods
(CISG) in the year 1980. Even though the CISG was signed in the year 1980, it came into force as a
multilateral treaty only after it was ratified by eleven countries on 1st January, 198819. Since then it has
been ratified by more than 70 countries which account for more than 2/3rd of the world's trade. The
purpose of this convention is basically to create a uniform law for sale of goods taking place over national
boundaries. The CISG solved a lot of problems regarding conflict of laws in case there is a breach of
contract. However, for the CISG to apply, the individuals trading should belong to countries which have
ratified the CISG or the parties in their choice of law clause in the contract have expressly specified the
CISG to apply as the applicable law20.

2. Articles Concerning No-Fault Liability

With regard to the concept of fault, the CISG has sought to achieve a balance between the common law
and the civil law approach. Although the CISG follows the principle of no-fault liability considering non
performance as the only requirement for imputing liability on a party, it does take into account the
concept of force majeure expressed as impediments beyond the sphere of control of a party. Articles
45(1) and 61(1) of the CISG deal with the concept of unilateral no fault liability of the buyer and the
seller under the Convention. These are however subject to exemptions available to either party under

19
United Nations Convention on Contracts for the International Sale of Goods (CISG), 1980, UN Document No. A/CONF/97/19,
1489 UNTS 3, http://www.uncitral.org/uncitral/en/uncitral_texts/sale_goods/1980CISG.html
20
Schelchtriem Peter, Requirements of Application and Sphere of Applicability of the CISG, 36 VUWLR 781 (2005).
Article 79 of the CISG, which tends to be the harmonizing factor in the common law and civil law
approaches as stated earlier. It provides a limited exception to the no-fault liability principle set forth in
Articles 45(1) and 61(1). Article 79(1) of the CISG lays down the ground rule for exemption for non
performance of obligations. It states that:

“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.”

Thus, there are three things which the party claiming exemption under from non performance under
Article 79 of the CISG has to prove:

(i) The non-performance must be “due to an impediment”;

(ii) The impediment must have been “beyond his control”;

(iii) It must be one which he could not reasonably have been expected to take into account when the
contract was made and which (or the consequences of which) he could not reasonably have been
expected to avoid or overcome.

Furthermore, according to the test of Article 79, subjective elements, i.e., the elements of fault, are also to
be considered, especially in connection with the question as to whether the impediment was beyond the
obligor’s control and whether the impediment was reasonably foreseeable and could have been avoided or
overcome21. The burden of proof as regards exemption from liability is on the party who seeks an
exemption, which means that the non-performing party remains liable unless he proves that the above
conditions are fulfilled.

3. Essentials Of Article 79(1): Impediment Beyond Control

In simple terms, a party can never be granted an Article 79 exemption unless he manages to prove that the
‘impediment’ in question lies ‘beyond his control’. This in general sense would imply exemptions arising
out of force majeure. For one thing, since a party should always be deemed to be ‘in control’ of his/her
own business and financial condition in general, internal ‘excuses’ connected with business operations
(poor quality control, etc.) or financial management are never as such considered to be ‘beyond’ a party’s
control. However, the German Supreme Court in a landmark decision has widely interpreted Article 79
does not alter the basic CISG allocation of risk, the seller must assure that his supplier provides defect-
free goods. However, in case where the seller in the contract is the intermediate who gets his goods from
a manufacturer and in case he has no reason to check whether the goods are in proper condition or not or
if the defect is not discoverable, then he is not liable to the buyer for the non-conformity so caused and he

21
STOLL, HANS. Vorteilsausgleichung bei Leistungsvereitelung In FESTSCHRIFT FÜR Peter Schlechtriem zum 70.
Geburtstag. Edited by Schwenzer Ingeborg et al. Tübingen, 2003, 677 ff, para 9
is exempted under the purview of Article 79 of the CISG22. This is against the interpretation of Article 79
of the CISG as prevailing in common law countries23.

Secondly, the non-performing party who seeks an Article 79 exemption must demonstrate that he or she
could not reasonably be expected to have taken the impediment into account at the time of the conclusion
of the contract. However, a party may be exempt from an impediment which arises after the conclusion of
the contract although chances of that are very remote because the party is expected to take into account all
general risks arising in connection with the contract. This was the opinion expressed in the Powdered
Milk Case of Germany decided under the CISG24. This is the foreseeability requirement under this
Article. Also, because virtually all potential impediments to performance are ‘foreseeable’ to some
degree, this element like the ‘control’ element is very difficult to prove25. At some point however, the
sacrifice threshold may be reached, wherein in some extreme cases even an economic impediment like a
price rise may entail exemption under Article 79, but generally economic causes like price inflation are
considered to be within the limits of foreseeability and not exempted26.

Article 79(1) requires that the non-performing party demonstrate that he or she could not reasonably be
expected to have ‘avoided or overcome’ the impediment or its consequences. For example, in case if it is
possible for a seller to acquire goods from an alternative source but it would cause immense financial and
physical hardship for him to do so, then it will not allow him to apply for the exemption under Article 79.
The threshold is absolute impossibility of overcoming the impediment and even a minor chance of saving
the obligation would go against the party claiming exemption27. However, it has been established that
when the defect in the goods cannot be detected by the party after thorough inspection by the best
possible methods of testing, in the rarest of rare cases he might be allowed an exemption under Article 79
of the CISG28. In this respect, the Court in the interest of justice may consider that the party was not at
fault and it would be a grave detriment to hold the non conformity against the party and thereby allowing
Article 79 to take effect.

22
See the decision of Bundesgerichtshof (Germany), 23 March 1999, CLOUT Case No. 271 [reported at
http://www.cisg.law.pace.edu/cisg/text/casecit.html]
23
See, HONNOLD, JOHN O., UNIFORM LAW FOR INTERNATIONAL SALES. 477-478 (3rd ed.. The Hague, 1999)
contending that the Article 79 exemption cannot apply to defective performance).
24
Bundesgerichtshof 9 January 2002, Docket Nr. VIII ZR 304/00, available at
http://cisg.law.pace.edu/cisg/wais/db/cases2/020109g1.html.
25
Secretariat Commentary to Article 79; Available at http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-79.html.
26
See, the decision of Rechtbank van Koophandel, Hasselt (Belgium). 2 May 1995. No. AR 1849/94, reported [at
http://cisgw3.law.pace.edu/cases/950502b1.html (significant drop in market price of the goods/strawberries after the conclusion
of the contract did not constitute 'force majeure' exempting the buyer for non-performance under Art. 79, in that price
fluctuations are foreseeable events in international trade which do not render performance impossible but result in economic loss
well within the normal risk of commercial activities); Also, the decision of the Tribunal of Int'l Commercial Arbitration at the
Russian Federation Chamber of Commerce, 17 October 1995, reported as CLOUT Case 142 [reported at
http://www.cisg.law.pace.edu/cisg/text/casecit.html].
27
See decision of OLG Hamburg (Germany), 28 February 1997, reported [at http://cisgw3.law.pace.edu/cases/970228g1.html
and] (seller not exempt from liability under Art. 79 or under 'force majeure' clause in standard terms, since seller's risk covers
non-delivery caused by its supplier; seller only exempt from liability if impossible to find goods of similar quality on market);
See, e.g., the arbitral award rendered by Schiedsgericht der Handelskammer, Hamburg (Germany), 21 March 1996, reported [at
http://cisgw3.law.pace.edu/cases/960321g1.html] (difficulties in delivery due to financial problems of seller or seller's supplier,
even when connected to the act of public authority, not impediment beyond seller's control, but rather part of seller's area of risk).
28
Tribunal de Commerce de Besancon 19 January 1998 Docket Nr. 97 009265, available at
http://www.cisg.law.pace.edu/cisg/wais/db/cases2/980119f1.html.
4. Interpretation Laid Down By Courts And Tribunals

Tribunals and Courts across the world interpreting the CISG have held that it is unlikely that a mere
market change could impose the kind of physical impossibility required under Article 79. Commentators
have so far looked upon market failure defenses put forward by a party without much sympathy, but have
allowed them to be heard, despite indications that Article 79 was not meant to cover this defense at all.
CISG commentators have suggested that increased costs of one hundred percent may offer a basis
for excuse, and that even less than that might be considered under certain circumstances29. They
also argue that the word “impediment” was chosen to limit the application of Article 79 to cases
where a physical hindrance makes performance impossible, and economic hardship is not covered at all
by the section at all30.

An interesting case to consider in this regard is Societe Romay AG v. SARL Behr France31 wherein the
Appellate Court of Colmar declined to excuse the Buyer’s performance despite the fact that a
collapse of the automobile market had reduced prices for the parts it was contracted to buy by about half
on the open market. The Court agreed that this was a “significant drop in prices,” but not one that
was unforeseeable. It added that price fluctuations are predictable, and that the Buyer who is “an
experienced professional acting in the international market,” should have addressed this possibility in the
contract. Having failed to do so, it must bear the risk. What is interesting here is that the Court allowed
the excuse of market change to be heard as part of an Article 79 defense, although it declined to grant
it. It used the foreseaability analysis to determine the outcome of the case. It implies that a severe drop in
prices caused by an unforeseeable event might bring the contract within the purview of Article 79(1).
Thus it implies that a market risk cannot prima facie be dismissed as being a fault of a party which should
have been taken into account. It also to a great extent depends on the foreseaability aspect and to what
extent the impediment was foreseeable to a party even though it might be an internal risk. It thus lays
down a very liberal perspective on Article 79. However, this interpretation has not found favour with a lot
of Tribunal’s across the world which still maintain that any manner of impossibility other than which
arises out of force majeure cannot be pleaded by a party to claim exemption under Article 79 of the
CISG32.

5. Article 79(2): Impossibility On Account Of Non-Performance By Third Party

A seller can also be exempted from liability on account of not being at fault if under Article 79(2), he
delegated the work to a third person to perform whole or part of the contract. The same conditions for

29
ENDERLEIN, FRITZ & DIETRICH MASKOW. International Sales Law: United Nations Convention On Contracts For The
International Sale Of Goods; Convention On The Limitation Period In The International Sale Of Goods (1992), Available at
http://www.cisg.law.pace.edu/cisg/biblio/enderlein1.html
30
DIONYSIOS FLAMBOURAS, Comparative Remarks on CISG Article 79 and PECL Articles 6:111, 8:108, available at
http://www.cisg.law.pace.edu/ ; MAGNUS ULRICH, ‘Force Majeure and the CISG’. In The International Sale of Goods
Revisited. Edited by Sarcevic & Volken. The Hague, 2001, 1-33.
31
France 12 June 2001 Appellate Court Colmar, available at http://cisgw3.law.pace.edu/cases/010612fl.html
32
Russia 11 June 1997 Arbitration 255/1994, available at http://cisgw3.law.pace.edu/cases/970611rl.html.; Bulgaria 12
February1998 Arbitration Case 11/1996, available at http://cisgw3.law.pace.edu/cases/980212by.html.; ICC Court of Arbitration-
Paris, Arbitration 6281, available at http://cisgw3.law.pace.edu/cases/896281i1.html.
exemption apply to paragraph (2) as they do for paragraph (1)33. Like 79(1) the burden of proof on the
seller is extremely great because of the no-fault approach of the CISG. The Arbitral Tribunal of Hamburg
had refused to excuse the seller who failed to deliver goods due to financial difficulties of its
manufacturer under Article 79. The Tribunal held that such eventualities were within the risks the Seller
was expected to bear34.

With respect to third party failure under Article 79, no-fault liability seems to operate which is in
consonance with the article’s language. A Federal Supreme Court of Germany ruling reflects this
strictness in a landmark case involving a contract for the sale of vine wax35. The wax in question was a
newly developed type of wax, and was sent directly from the manufacturer to the Buyer in the original
packaging, as the Seller had requested. It turned out to be defective, and damaged the vines it was used
on. The lower court found that the Buyer had a valid claim, and the Supreme Court agreed with the
decision of the lower court. It rejected the Seller’s argument that, as a mere intermediary, it had no
control over the wax. This is in stark contrast to the position endorsed by some civil law countries as
regards failure to perform by third parties. The CISG again endorses no-fault liability and ruled that,
under Article 79, the risk of non-conformity is allocated to the promissor which in this case is the Seller
unless the contract specifies otherwise.

6. The Theory Of Damages Under Article 79

However, the most important feature of the Article 79 exemption is prescribed in Article 79(5) which
states that nothing in Article 79 prevents a party from exercising any right other than to claim damages
under this Convention. It means that unlike some legislations36, the CISG still keeps open all other
remedies for a party other than that of claiming damages.

The remedies, in case of non-performance by the seller are the avoidance of the contract in case of a
fundamental breach of the contract, to compel performance or, in case of non-conformity, a proportionate
reduction in the price. It is the right to compel performance that presents the difficulty. Of course insofar
as the impediment makes performance actually impossible, there can be no specific enforcement; but if
performance is physically possible, but impracticable within the meaning of paragraph (1), we have the
curious result that the seller is not liable in damages for not performing and yet can be compelled to
perform37.

Thus, the CISG tries to achieve a certain degree of fairness as regards the consideration of fault is
concerned. On one hand, it does not normally consider whether a party is at fault or not and considers a
defaulting party liable in any case. On the other, it gives the defaulting party exemption only from

33
See the award of the ICC Court of Arbitration (Paris), No. 8128/1995, (seller not exempted pursuant to Art. 79(2), in that non-
delivery caused by seller's supplier was deemed 'part of seller's risk').
34
Arbitration Tribunal Hamburg 21 March 1996, available at http://www.cisg.law.pace.edu/cisg/wais/db/cases2/960321g1.html.;
Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry 12
January 1998, Docket Nr. 152/1996, available at http://www.cisg.law.pace.edu/cisg/wais/db/cases2/980112r1.html.
35
Federal Supreme Court of Germany 24 March 1999, Docket Nr. VIII ZR 121/98, available at
http://www.cisg.law.pace.edu/cisg/wais/db/cases2/990324g1.html.
36
Uniform Commercial Code, § 2-615 (1952) declares that the non performing party is not in breach, forecloses all remedies.
37
PETER SCHLECHTRIEM, INTERNATIONALES UN-KAUFRECHT 97 (2nd ed. Tübingen, 2003)
damages and thus it does not completely overlook the fact that the party was not at fault. It gives a healthy
balance thus ensuring the progress of the CISG as a uniform sales law38.

4. NO-FAULT LIABILITY IN THE INDIAN CONTEXT

1. The Concept Of Impossibility And Frustration And Contrasts With The CISG: Allocation Of
Fault

India being a common law country follows the concept that non-performance does not require a fault of
the non-performing party. The common law doctrine of no-fault liability is followed in letter and spirit in
India. In India, the exemption from force majeure excuse is not defined as something where there was an
‘absence of fault’, of a party. India is not a signatory to the CISG and the principles applying as regards
liability for non-performance of a party owing to an impediment are somewhat different from that of the
CISG. In CISG, the concept of an impediment is something which is impossible to perform and in very
rare cases can impracticability of performance be taken into account. Such events should be beyond the
control of the party and it is impossible for it to overcome it. However, Section 56 of the Indian Contract
Act, 187239, dealing with an impossible act, provides that apart from the criteria laid down in the CISG as
stated above, it also includes frustration of the purpose of the contract. The CISG does not include or
provide for frustration of contract as a ground for claiming exemption under Article 7940.

Inherent impossibility and the doctrine of frustration are both contemplated for through the words of
Section 56. It provides that a contract to perform an act which after the contract was concluded becomes
impossible would be void. The question of impossibility of performance in most general cases arises
when there is a force majeure or an Act of God. The Indian Contract Act does not talk in detail about an
impossible impediment, rather it interchangeably uses the terms impossibility and frustration. It can be
presumed from the commentaries to Section 56 that all instances of impossibility of performance due to
some impediment results in a frustration of the contract. The threshold here is absolute impossibility of
performance and not impracticability of the performance or any hardship which still does not frustrate the
purpose of the contract as it can be practically performed. However, in a situation where such
impracticability is not foreseeable at all by either party, it might lead to a frustration of the contract.

In the landmark decision of Satyabrata Ghose v. Mugneeram Bangur & Co.41 the Supreme Court of India
has observed that even though various theories have been propounded regarding the juridical basis of the
doctrine of frustration, yet the essential idea upon which the doctrine is based is that of the impossibility
of performance of the contract. In fact the impossibility of performance and frustration are often

38
See collected views with Secretariat Commentary on Article 79. Available at
http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-79.html.
39
Indian Contract Act, § 56 (1872): Agreement to do impossible act - An agreement to do an act impossible in itself is void.
Contract to do act afterwards becoming impossible or unlawful – A contract to do an act which, after the contract is made,
becomes impossible, or, by reason of some event which the Promisor could not prevent, unlawful, becomes void when the act
becomes impossible or unlawful.
40
NICHOLAS, BARRY, Impracticability And Impossibility In The U.N. Convention On Contracts For The International Sale Of
Goods, in THE INTERNATIONAL SALES: THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE
INTERNATIONAL SALE OF GOODS, 5-1, 5-6 (Matthew Bender, Galstosn & Smit ed., 1984)
41
AIR 1954 SC 44: 1954 SCR 310.
interchangeable expressions. The changed circumstances make the performance of the contract
impossible and parties are absolved from the further performance of it as the subject matter for which the
parties had contracted for has changed substantially. In the same case, the Supreme Court also explained
the term ‘impossible’ in Section 56. The Supreme Court made it clear that unlike English law the word
‘impossible’ has not been used in the sense of physical or literal impossibility. The performance of an act
may be impracticable and useless from the point of view of the object and the purpose which the parties
had in view and if an untoward event or change of circumstances totally upsets the foundation upon
which the parties rested their bargain, it can well be said the promisor is absolved from performing the
same. In another case Sushila Devi v. Hari Singh42 observed that the impossibility contemplated by
section 56 of the Contract Act is not confined to something which is not humanely possible. In this case,
the plaintiff sought to take on lease some properties for personal cultivation or sub-leasing them to others.
The properties were situated in Tehsil Gujranwala. As a consequence of the partition of India on August
15, 1947, Tehsil Gujranwala became a part of Pakistan. The Supreme Court, therefore, held that the
object became impossible because of the supervening events. Besides this, the terms of the agreement
between the parties relating to taking possession also became impossible of performance.43

The threshold here is absolute impossibility of performance and not impracticability of the performance
or any hardship which still does not frustrate the purpose of the contract as it can be practically
performed. In Alopi Parshad & Sons Ltd v Union of India44, the Supreme Court observed that because of
the mere fact that the circumstances in which the contract was made were altered; the contract cannot be
held to be frustrated. It further held that the courts have no power to absolve a party from liability to
perform a contract merely because the performance became more onerous; and the express covenants in a
contract could be ignored only on account of the unexpected turn of events after the contract.

It is established that the impossibility referred to in the second clause of Section 56 does not include
commercial impossibility, namely, extreme or unforeseen cost or difficulty of performance.45 However,
where supervening events not due to default of either party, render the performance of a contract
indefinitely impossible, and there is no undertaking to be bound in any event, frustration ensues, even
though the parties may have expressly provided for the case of a limited interruption.46 Thus frustration
fundamentally goes against the principle of no-fault liability in the sense that frustration brings the
contract to an end. It does not place liability on any party and therefore it is irrelevant as to whether it
places fault on any party or not. The court will excuse performance if according to a reasonable prudent
person it is impracticable to perform47.

The rule in Section 56 exhaustively deals with the doctrine of frustration of contracts and it cannot be
applied to analogies borrowed from common law48. The court can give relief on the ground of subsequent

42
AIR 1971 SC 1756: (1971) 2 SCC 288.
43
Ibid; See also Basanti Bastralya v. River Steam Navigation Co. Ltd., AIR 1987 Cal 271, 274.
44
[1960] 2 SCR 793 : AIR 1960 SC 588
45
Keshavlal Brothers & Co. v Diwan Chand & Co., AIR 1923 PC 105; Suresh Narain Sinha v Akhauri Balbhadra Prasad AIR
1957 Pat 256
46
Firm Laxmi Dutt Roop Chand v. Union of India AIR 1971 All 479.
47
Bansilal Fomra v Thadava Co-op Agricultural and Industrial Society Ltd. (1976) 1 Mad LJ 39
48
Raja Dhruv Dev Chand v. Raja Harmohinder Singh (1968) 3 SCR 339; Rajendra Nath Sharma v Ramdhin Rajbhor AIR 1971
Assam 160; U.P. State Electricity Board v. Kanoria Chemical, 1986 SC 156
impossibility when it finds that the whole purpose on the basis of which the contract has been frustrated
was not taken into account by either party on the date of formation of the contract49.

2. Non Discharge Of Obligations Under Frustration

In India, the general rule is that the impossibility of performance discharges the party of all its obligations
under the contract. This is in stark contrast to the CISG wherein impossibility does not discharge the party
of any obligation other than payment of damages. However there are some situations where a contract
would not be discharged by impossibility even though the supervening events make its performance
impossible if:

a) The contract is absolute and covers the frustrating event in its ambit50.

b) The contract makes full provision for a given contingency.

c) The impossible event was foreseeable to some degree by the parties to the contract51.

d) Where the event could have been foreseen with reasonable diligence.

e) If a portion of the contract becomes impossible or difficult to perform52.

f) If in spite of the supervening events, the object and purpose of the contract is not rendered useless and
it can be performed in accordance with the original intentions of the parties53.

3. Force Majeure And Impossibility

Many contracts expressly provide for performance to be excused, if rendered impossible by unavoidable
cause such as force majeure, vis major, acts of God, or the enemy. However, it has been established that
such a stipulation is ineffective, if uncertain. In such cases there is no fault of the party leading up to its
non performance but then the existence of a definite force majeure does serve as a valid excuse for
frustration of the contract under Article 56. Thus the concept of no-fault liability to a certain extent again
gets compromised with as regards force majeure is concerned as all the remedies that a party has against a
non-performing one is lost owing to frustration.

Where reference is made to force majeure, the intention is to save the performing party from the
consequences of anything over which he has no control. A force majeure clause, as such a stipulation is
usually called, must be construed in each case with due regard to the nature and general terms of the
contract, and, in particular, with regard to the precise words of the clause.54 Where reference is made to

49
Naihati Jute Mills v Khyaliram Jagannath (1968) 1 SCR 821; Sushila Devi v. Hari Singh AIR 1971 SC 1756; Sunnam Sataiah
v. State of A.P. AIR 1980 AP 18
50
Ganga Saran v. Firm Ram Charan Gopal AIR 1952 SC 9
51
Firm Rampratap Mahadeo Prasad v. Sasansa Sugar Works AIR 1964 Pat 250
52
Section 13 of the Specific Relief Act, 1963
53
Satyabrata Ghose v. Mugneeram Bangur & Co. (1954) SCR 310
54
Podar Trading Co Ltd, Bombay v Francois Tagher, Barcelona [1949] 2 All ER 62.
force majeure, the intention is thus to save the performing party from the consequences of anything of the
nature stated above or over which he has no control.55

The expression force majeure has been construed extensively and the meaning has been held to include
things which are not normally included in the expression ‘vis major’ like strikes and break down of
machinery, shortage of supply owing to war, war-time difficulty with shipping, refusal of export license,
etc. The clause, in its proper construction, may also allow the court to take account of the promisor’s
obligations under other contracts (namely, seller’s commitment to other buyers) despite the fact that as a
rule, it is no excuse that contracts with third parties prevent the fulfillment of the contract in question.

4. Restitution And Damages Under Section 56: The Difference With CISG

The liability for paying damages is also another important distinction as far as the CISG and the Act is
concerned. Under CISG, the party seeking an exemption for impossibility of performance is entitled to
not pay damages to the other party while all the other remedies remain intact for the non-breaching party.
Normally under the doctrine of frustration, the remedy exercisable is the restitution of any advantage that
a party might have gained from the contract which after discharge has to be nullified. However, the
application of this principle could lead to injustice, i.e., unjust enrichment. For example, parties were
sometimes unable to recover the pre-payment which they had made before the frustrating event.
Similarly, where one party's performance under the contract became due before the frustrating event,
while that of the other was only to be rendered thereafter, the former party would still have to perform,
without getting what it had bargained for in return56.

However, Section 56 also contemplates a situation wherein a contract may be void and yet compensation
may be payable by a person who is unable to perform it, whether the impediment is impossibility or
unlawfulness and whether the impediment existed at the time of the contract or supervened.57 In the same
case, the Court elucidated upon the principles of compensation as follows:

(1) Section 56 contemplates that a contract may be void under its provisions and yet compensation may
be payable by the person who is unable to perform it, whether the impediment is impossibility or
unlawfulness, and whether the impediment existed at the time of the contract or supervened;

(2) The question whether compensation is payable or not depends not merely on:

(i) Whether it can, in an abstract manner, be said that the act agreed upon to be done is impossible
(in itself) or unlawful, but upon;

(ii) The knowledge as to the act being impossible or unlawful, as well as the promisor using
reasonable diligence in obtaining that knowledge; but this knowledge or absence of diligence
must be coupled with;
55
Serajuddin v State of Orissa AIR 1969 Ori 152; overruled on another point in Raisahab Chandanmull Indrakumar Pvt. Ltd. v
State of Orissa AIR 1972 Ori 40 (FB).
56
C. Scott Pryor, Clear Rules Still Produce Fuzzy Results: Impossibility in Indian Contract Law, 27 ARIZ. J INT'L & COMP. L.
1 (2010)
57
Firm of Hussainbhoy v. Hari Das, 1928 Sind 21: 105 IC 319.
 (iii) The want of knowledge on the part of the promise; and finally it depends upon;

(iv) Whether the promisor could have prevented that event which renders the act unlawful; in
particular, if the promisor knew, or with reasonable diligence might have known and the promise
did not know, that the act promised to be done was (or would become) impossible or unlawful,
compensation must be made;

(3) The real question that must be considered, when it has to be determined whether s 56 is applicable or
not, in any suit, except where the contract is sought to be specifically enforced, is not whether the
contract was or became void, but whether the promisor has to make compensation for non-
performance;

(4) The substance of s 56 (namely the payment of compensation being excused) can only apply when
there is no contract to the contrary, and that is but stating in other words that s 56 must be read (when
possible) as an implied term in contracts.

CONCLUSION

Despite the differences in the language and the meaning between Article 79 of the CISG and Section 56
of the Contract Act, both seek to benefit sales transactions between parties. The object of both the statutes
is to determine liability of a party conclusively in cases of non-performance. In the CISG, the presence or
absence of fault of a party is not taken into account in case of impossibility of performance. What is
essential for holding a party liable, subject to certain exceptions is that there should be a non-
performance. In cases involving extreme financial hardship or risks due to market changes, the contract
Act’s “impracticability” doctrine has so far offered occasional refuge while the CISG’s “impediment”
doctrine has offered none. In India impossibility of performance leads to frustration of the purpose for
which the contract has been entered into and it leads to a discharge of obligations of both parties under the
contract. Thus as far as the Indian Contract Act is concerned the fault of a party is not considered as well
but he is not made liable for the same as the parties are discharged from their respective obligations. Both
the systems take into account the role of foreseeability in determining whether a particular impediment or
an impracticable Act is liable for exemption or frustration as the case may be. Both the systems are also
unified on the fact that the impossible act should be beyond the control of the party and he should have no
possible means of overcoming it. The tests for impossibility are stricter in the CISG than in the Indian
Contract Act. Lastly, on the point of damages, the CISG grants exemption from them when there is an
impediment beyond control while all other remedies remain intact. The Indian Contract Act grants a total
discharge from the contract which means that there is no duty to pay damages and in addition to it the
other party is unable to exercise any other remedies which are available to him. The difference between
Indian Contract and CISG jurisdictions, then, is that Courts in India are willing to examine the
circumstances of the contract and infer which party had assumed the risk, while the CISG, at least ideally,
forces the parties to make the risk determination explicit. Although there is a certain degree of uniformity
between these two legislations on the point of no-fault liability, much more is desirable in order to
facilitate trans-border sales and uniformity between the sales laws.