Cases of immunity – 1980 Vien Convention

1. WHAT EVENTS ARE CONSIDERED FORCE MAJEURE?

If a party encounters force majeure and violates the signed contract, it will be
exempted from liability. In practice, however, it is sometimes not easy to
determine whether an event is force majeure or not.
Dispute between an Austrian company (seller) and a Bulgarian company (buyer).
The seller sues the buyer to arbitration for damages caused by the buyer not
opening the letter of credit (L/C). The buyer assumes that he did not open the letter
of credit due to force majeure. The two sides argue over the force majeure event
cited by the buyer. The dispute was adjudicating at the Paris International
Arbitration Centre, ruling No. 7197/1992.

Dispute developments
In 1990, sellers and buyers signed a contract to export goods in a form. The parties
agree to pay by letter of credit open one day in advance and the goods must be
delivered under DAF (Delivered At Frontier) conditions (INCOTERM 1990) at the
Austrian-Bulgarian border four weeks after the opening of the letter of credit.

The buyer does not fulfill his obligation to open the letter of credit within the term
specified in the contract and also during the extended period by the seller. The
seller sues the buyer for arbitration, seeking compensation for damages incurred by
the buyer's non-performance of the contract.

The buyer countered that the un opened letter of credit was due to the Bulgarian
government ordering a suspension of payment of foreign debts. This is a force
majeure event and therefore, the buyer is completely exempt from liability, not
damages.

The judge's ruling:

The arbitrator held that the contract was governed by the 1980 UNITED
NATIONS Vienna Convention on International Contracts for the Sale of Goods
(CISG) because both Austria and Bulgaria are members of the Convention.
The arbitrator invokes article 54 CISG, under which the buyer is obliged to pay for
the goods, including the application of measures in compliance with the procedures
required by the contract or law in order to be able to make payment of the goods.

The arbitrator said the Bulgarian government's request to suspend payment of

foreign debts was not a "force majeure" case that made it impossible for buyers to
open letters of credit. According to article 79, paragraph 1 of the CISG, force
majeure is an obstacle beyond the control of the parties, the parties do not
anticipate at the time of signing the contract and the parties do not avoid nor
overcome the consequences of this event.

In the dispute, the Bulgarian government's order to suspend payment of foreign

debts is an objective event, beyond the control of the buyer. However, that
suspension was announced at the time of signing the contract, so the buyer
certainly had to anticipate that the suspension would make it difficult to open the
letter of credit. As such, this event is not "unpredictable."

Moreover, in fact, the buyer cannot prove that the inability to open the letter of
credit is a consequence of that suspension order.

With those arguments, the arbitrator ruled that the event cited by the buyer is not a
force majeure event, so the buyer is not exempt from liability but must compensate
the seller for not fulfilling his obligations.

2. THEORY OF IMPRÉVISION
Content of the dispute:

The dispute occurred between a French company (seller) and a Dutch company
(buyer). Sellers and buyers sign a number of contracts for the sale and sale of steel
pipes, of which there is no provision for price adjustment. After signing the
contract and before delivery, the price of steel unexpectedly increased by 70%. The
seller tries to negotiate a higher selling price but the buyer insists on refusing and
the request is delivered at the agreed selling price under the contract signed. The
seller does not deliver, so the buyer sues in the Belgian Court of Jurisdiction. The
law applicable to dispute settlement in the aforementioned international contract
for the sale of goods is the 1980 Vienna Convention of the United Nations on
Contracts for the Sale of International Goods (CISG).

The proceedings of the case:

January 25, 2005- The Court of First Instance found that the buyer was in a
position to adopt the "theory of imprévision." However, the Tribunal found that the
CISG did not adjust the circumstances set forth by this doctrine, thus refusing to
apply a review of the selling price of the contract based on the aforementioned
doctrine.

Court of Appeal ruling:

Preliminary ruling of June 29, 2006: The Court of Appeal recognizes buyers in the
context of the "doctrine of unpredictable circumstances", however the Court of
First Instance refuses to review the selling price because the CISG does not
regulate the issue incorrectly. In addition, the Court of Appeals said that the Court
of First Instance refuses to apply for a review of the sale price without
understanding the applicable law based on the rules of international justice and
whether such applicable law excludes a review of the selling price.

February 15, 2007: The Court affirmed that the CISG has no provisions regarding
price adjustments in unusual circumstances that cannot be expected, but that the
price adjustment does not violate cisg principles.

The Court determined that the applicable law is French law based on Article 7(2)
of the CISG, which in turn allows the parties to renevel in contracts derived from
the principle of goodwill. The seller's refusal to deliver if the selling price is not
reasonably adjusted does not violate the contract, but the buyer himself has
violated the principle of goodwill by refusing to renidue the sale price.

June 19, 2009- The Court of Justice rejects the application of French domestic law.
The Court of Appeal found that the Court of Appeal has misrepresess Article 7 of
the CISG, which, when interpreting the CISG, should ensure unity in the
application of the Convention and respect goodwill in international trade. In
addition, the relevant issues which are not specified in the Convention shall be
resolved in accordance with the general principles on which the Convention is
established, in the absence of appropriate principles, they shall be resolved in
accordance with applicable laws defined in accordance with the principles of
international justice.

From the above provisions, the Court of Justice said that in this case, it is necessary
to apply the general principles governing international trade law. Specifically, the
Court leads to unidroit's Principles of International Commercial Contracts, where
according to which when a party to the contract suffers a change in circumstances
that causes the balance of position between the parties to be fundamentally turned
upside down, the party has the right to request a renegotiation of the contract.

The above-mentioned change in circumstances must satisfy the conditions: (i) it is

reasonably unpredictable at the time of the conclusion of the contract, (ii) clearly
demonstrates in essence to increase the burden of the performance of the contract
disproportionately. This change in circumstances is also interpreted by the Court as
an obstacle that allows a party in the contract to be exempt from liability when it is
unable to fulfill its obligations under Article 79(1) of the CISG.

Since then, the Court of Appeals has determined that the increase in steel prices is
an unforeseen event, a change in circumstances in which the continuation of the
contract under current conditions will cause serious damage to the seller. The court
ordered the parties to renegotiate the contract in good faith.

In addition, the Court of Appeal found that the seller's refusal to deliver if the
selling price is not adjusted is not in accordance with the principle of pacta sunt
servanda in Article 71(1) of the CISG.