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Presentation of Issues

Against the backdrop of intensifying global trade frictions and continuously rising tariff policies, the applicability and interpretation of force majeure clauses in international trade have become more complicated. In the field of international trade in goods, the United Nations Convention on Contracts for the International Sale of Goods (hereinafter referred to as "CISG") boasts a wide scope of application. Accordingly, this article, based on Article 79 of the CISG, will carry out discussions centering on force majeure, and share and explore experience related to the prevention and resolution of relevant risks.

1. Force Majeure

The term "force majeure" has a long history, dating back to the ancient Roman period. At present, most countries in the world recognize force majeure as one of the grounds for exemption from liability under contracts, and it has become a valid ground for exemption from liability for both domestic contracts and foreign-related contracts in their respective countries or regions.

Generally, force majeure falls into two categories: The first is caused by natural causes, namely disasters resulting from natural forces, such as earthquakes, floods and the like; the second is caused by social factors, such as wars, strikes, government prohibitions and the like. Normally, force majeure arising from natural causes is relatively easily recognized by the parties to the contract. With respect to force majeure caused by social factors, as provisions in this regard vary from country to country, the parties are more prone to disagreements thereon, which may trigger disputes.

2. Force Majeure Clause under the CISG

Most countries around the world have relevant provisions on force majeure, and share a generally consistent understanding of its basic connotation, that is, force majeure refers to circumstances unforeseeable, uncontrollable and insurmountable by the parties concerned. However, there are certain differences in terms of its designation and interpretation. In the common law system, force majeure is known as "frustration of contract"; in the civil law system, some countries use "change of circumstances" to refer to force majeure. For the provisions on force majeure under the United Nations Convention on Contracts for the International Sale of Goods (CISG), the term "impediment" is adopted to refer to force majeure, which indicates that CISG maintains a neutral position on the definition of force majeure without favoring the connotation under any legal system. To a certain extent, this can reconcile the differences among countries in the designation of force majeure, and avoid confusion arising from legal terminology in the application of force majeure clauses under the Convention.

Definition of Force Majeure

CISG refers to force majeure as impediment. Paragraph 1 of Article 79 thereof stipulates that an impediment is defined as "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." It can be concluded therefrom that the definition of impediment under CISG requires that the relevant event is beyond the control of the contracting party, and that such event and its consequences were unforeseeable, unavoidable and insurmountable for the party at the time of the conclusion of the contract. Proceeding from the interpretation of the original text of CISG, it can be found that the definition of impediment under CISG is generally consistent with the basic connotation of force majeure without essential difference, and a general formulation approach is adopted for the stipulation of the scope of force majeure.

2) Force Majeure Involving Third Parties

Paragraph 2 of Article 79 of the CISG stipulates circumstances of force majeure involving third parties. Where a party fails to perform its obligations due to the non-performance of a third party it has engaged to perform all or part of the contract, the party may be exempted from liability only under the following conditions: First, it is exempted from liability pursuant to the provisions of the preceding paragraph; Second, the person it has engaged would also be exempted from liability if the provisions of the said paragraph apply to such person. The author interprets this provision as follows: Where a party's failure to perform contractual obligations is caused not by its own reasons, but by the non-performance of a third party it engages to perform all or part of the contract, and such event meets the provisions on force majeure applicable to the contracting party, the party may be exempted from corresponding liability. However, the liability of the third party is not necessarily exempted, as such event does not necessarily meet the provisions on force majeure applicable to the third party. The third party may be exempted from liability only when such event also meets the provisions on force majeure applicable to it. This provision takes into account the complexity of contracts for international sale of goods, that is, the liability for contract performance rests with the contracting parties, but the specific performance of the contract is highly likely to be fulfilled by a third party engaged by the parties, which thus gives rise to force majeure involving third parties.

3) Period of Exemption from Liability

Paragraph 3 of Article 79 of the CISG stipulates the period of exemption for force majeure: "The exemption provided for in this Article shall have effect for the period during which the impediment exists." This provision shall be interpreted from the following aspects: First, an impediment may only be used as a ground for exemption during its existence. A temporary impediment only has a temporary exemption effect, and the parties to the contract shall still perform their corresponding contractual obligations after the impediment is eliminated. Under such circumstances, the occurrence of the impediment is more of a ground for exemption from delayed performance for the parties, rather than an entitlement to immediately exercise the right to terminate the contract as soon as the impediment arises. If the delayed performance of the defaulting party does not constitute a fundamental breach of contract, the counterparty shall accept the delayed performance of the defaulting party instead of directly rescinding the contract; the defaulting party shall not directly rescind the contract either, and shall continue performance after the impediment is eliminated. Second, temporary impediments may constitute permanent exemption. Some temporary impediments will bring about great changes to the objective environment for contract performance, causing serious consequences, making it impossible to continue performing the contract and leading to a fundamental breach of contract. Under such circumstances, it is unreasonable to require the defaulting party to continue to perform the contract, which also violates the principle of fairness, so the parties may choose to rescind the contract.

4) Obligation of Notification

Paragraph 4 of Article 79 of the CISG stipulates: "The party failing 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." It can be seen therefrom that the defaulting party bears the obligation of notification, which is a statutory incidental obligation. Where a party to a contract is impeded by force majeure from duly performing its contractual obligations, such party shall have the obligation to notify the counterparty. If it fails to fulfill such notification obligation, it shall bear corresponding legal liabilities. The legal liabilities mentioned herein refer to the additional losses suffered by the other party due to its failure to receive the notification in a timely manner, rather than the losses arising from the impossibility of contract performance caused by force majeure. The defaulting party shall not only notify the contract counterparty that it has encountered force majeure impediments in the course of performing the contract, but also inform the counterparty of the impact of such impediments on its ability to perform obligations, including specific circumstances such as partial impossibility of performance or full impossibility of performance. This facilitates the counterparty to conduct a comprehensive assessment of the situation and formulate corresponding plans to mitigate losses. In addition, the notification shall be given within a reasonable period of time.

5) Scope of Exemption from Liability

Paragraph 5 of Article 79 of the CISG stipulates that: "Nothing in this article prevents either party from exercising any right under this Convention other than a claim to damages." It can be seen therefrom that the provision only exempts the breaching party from the liability for damages arising from failure to perform the contract due to force majeure, while other liabilities shall still be borne, and the non-breaching party is entitled to other remedial rights, such as reduction of the price of goods. From the author's perspective, such provisions under Article 79 of the CISG are designed to reserve space for parties to the contract to make corresponding stipulations in their contract, as well as leave room for discretion for arbitrators and courts, which is precisely the ingenuity of the CISG.

3. Legal Consequences of Force Majeure

Rescission of Contract

Force majeure is a statutory ground for contract rescission. Contract rescission arising from force majeure is statutory rescission, pursuant to which the parties concerned enjoy the statutory right of rescission, and such right is jointly held by both parties to the contract. In international trade in goods, there are generally two scenarios where parties to a contract invoke contract rescission on the ground of force majeure: First, where the obstruction caused by force majeure renders the purpose of the contract unrealizable, which constitutes a fundamental breach, the parties may rescind the contract to minimize their economic losses as much as possible; Second, where force majeure lasts for an excessively long period, resulting in a fundamental breach of the contract, the contract may be rescinded. Generally, force majeure does not exist permanently and is temporary in nature. The parties may presume that the contract can continue to be performed after the incident ceases. However, where the incident lasts so long that the contractual interests of the parties are substantially deprived, either party may notify the counterparty within a reasonable period to rescind the contract.

2) Delayed performance of contract

Delayed performance of a contract is another legal consequence of liability exemption arising from force majeure. Where force majeure only temporarily impedes the performance of a contract and does not render the fundamental purpose of the contract impossible to achieve, the defaulting party may first suspend the performance of the contract and resume performance after the force majeure event ceases, which will result in delayed performance of the contract. The defaulting party may be exempted from liability therefor.

As is evident from the foregoing analysis, in cases where force majeure impedes the performance of a contract, the applicable legal consequence is critically determined by whether the force majeure renders the fundamental purpose of the contract impossible to achieve. Where the fundamental purpose of the contract cannot be achieved, contract termination shall apply, which results in the discharge of the contract; where the fundamental purpose of the contract remains achievable, delayed performance shall apply, that is, the performance period of the contract shall be postponed, and the contract shall be performed when the objective conditions for performance become appropriate. The application of these two rules is not mutually exclusive. As mentioned above, where force majeure lasts for an excessively long period, the legal consequence arising therefrom may transform from delayed performance of the contract to contract termination. In respect of both aforesaid legal consequences, the parties shall not bear the liability for damages caused thereby. It is to be noted that the legal consequences arising from force majeure analyzed herein are premised on the condition that the force majeure has legal effect. Where the force majeure does not have legal effect, there is no such thing as legal consequences caused thereby.

4. Concluding Remarks

Against the backdrop of increasingly close economic and trade cooperation among countries around the world, the scale of international trade in goods is continuously expanding. As contracts for international sale of goods are usually highly complex, a multitude of uncertain factors exist in the process of contract performance. Under such circumstances, the inclusion of force majeure clauses is particularly important, as they can reasonably allocate risks and enhance the certainty of contract performance. For contracts for international sale of goods, force majeure clauses are of great significance: they not only help protect the rights and interests of all parties to the contract, but also ensure the smooth conduct of transactions, thereby promoting the sound development of international trade.