A COMMENTARY ON ARTICLE 79 OF THE UN CONVENTION ON

THE INTERNATIONAL SALE OF GOODS (CISG)

According to the data of the UN Conference on Trade and Development, the value of year-on-year
global merchandise trade affected by the covid-19 pandemic is estimated to have declined by 18% in
the second quarter of 2020. For international trade merchants, the performance of international
trade contracts has encountered unprecedented obstacles caused by the suspension of production
and traffic control. How to protect the legitimate rights and interests of sellers and buyers under the
framework of the UN Convention on Contracts for the International Sale of Goods (CISG) has
become a common concern for both sides.

This article demonstrates that (1) Article 79 as a rule exempts a party from specific performance
claims, (2) the so-called “hardship” cases are within the ambit of Article 79, and that (3) judges can
adapt contracts through what this author terms a “reasonable expectation test.”

CISG article 79 (1) reads:

“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.”
The article clearly describes exceptional circumstances. When the impediment
mentioned is caused by economic reasons, the situation must be especially
exceptional.

Legal analysis

The basic principle of the CISG is party autonomy, hence the parties’ special agreement on obstacles
to the performance of contracts caused by the covid-19 pandemic shall be respected. In the absence
of such a special agreement, the parties may invoke Article 79 of the CISG to seek an exemption.
Article 79 of the CISG creates the concept of an “impediment”, but it also brings difficulties in
understanding and application, which will be explained below.

Four requirements for applying article 79 of the CISG

Pacta sunt servanda (agreements must be kept) shall always be honoured in the performance of
contracts. If the parties want to exempt themselves from the liability of non-performance of the
contract by invoking article 79 of the CISG, they must prove that the obstacles to performance meet
the following four requirements, and thus constitute an “impediment”: (1) beyond control of the
party; (2) unable to be foreseen; (3) unable to be avoided or overcome; and (4) there is a causal
relationship between the impediment and the party’s non-performance.

To better understand the meaning of the impediment “beyond control of the party”, it is useful to
investigate the meaning of the impediment within control of the party. Some scholars believed that
the obstacles “within” control of the party shall be connected with an orderly organisation of his/her
manufacturing or procurement process, as are the personnel’s qualifications, the technical
equipment, and the disposition of the required financial means.

The judicial practice usually qualifies those administrative rules and governmental actions as a cause
beyond the parties’ control, and some compulsory pandemic prevention and control measures taken
by the government under specific circumstances can also be regarded as impediment beyond
control of the party.

The requirement that the impediment must be unforeseeable is consistent with the basic idea that if
the event were foreseeable, the defaulting party should be considered as having assumed the risk of
its realisation. For example, in an arbitration case with regard to severe acute respiratory syndrome
(SARS) in 2003, the tribunal rejected a plea of exemption under article 79 of the CISG, finding that
because the outbreak of SARS happened two months prior to the signing of that contract, the
impediment was foreseeable.

Furthermore, if the party could reasonably overcome the impediment by providing a “commercially
reasonable substitute”, the exemption will not be supported. For instance, in the litigation of a
German court, the seller relied on impediment because the components of the equipment were out
of production. The German court denied exemption because the seller was capable of renovating
the components, and could supply goods equipped with components not offered by the original
manufacturer.

Finally, the impediment must be the exclusive cause for the non-performance, which means if the
impediment event is a concurrent cause of the failure to perform, the party cannot seek exemption.
For example, if the goods are lost due to defective packaging or delayed delivery in an unforeseeable
natural catastrophe, the party still shall be liable for the failure to perform. This suggests that the
parties need to strictly perform the contract to avoid the failure to exercise the exemption right of
article 79 of the CISG due to the existence of performance defects.

The effect of the exemption

If the party successfully proves the above four requirements, the party can only claim exemption
from the damages caused by non-performance of the contract, and the other party still retains all
other remedies available to him/her except the claim to damages, such as specific performance after
the impediment is removed, and renegotiation of the contract terms. Meanwhile, if the non-
performance constitutes a fundamental breach, the other party may declare the contract void.

It should be noted that the exemption effect of article 79 of the CISG is temporary, and when the
impediment perishes, the party still needs to perform the contract. As a result, the parties must try
their best to remove the impediment in a timely manner.

Some suggestions

For international trade merchants, it is always a pursuit to obtain benefits and avoid risks. The most
rational way for them is to make reasonable arrangements for the commercial risks that may be
caused by the covid-19 pandemic in the contract text, such as using clear wording like “epidemic”,
“plague”, “pandemic” and “infectious disease” in the exemption clause.
As mentioned above, if the performance defects exist together with the impediment, the parties
cannot be exempted from damages. Therefore, the parties should strictly perform the contract to
avoid losing the right of exemption because of performance defects. In view of existing commercial
disputes, the parties should timely communicate with the counter-party, preserve evidence,
investigate the local government’s pandemic prevention and control policies, and use the legal
weapons given by the CISG to safeguard their legitimate interests.

It has been particularly common for upstream and downstream manufacturers to stop production
during the covid-19 pandemic period, and once there is the possibility of delivering a commercially
reasonable substitute, the parties should not rely too much on the exemption effect of article 79 and
neglect to perform the contract.