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How to avoid liability for breaching a trade contract with a foreign counterparty in connection with the pandemic?

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Trading companies, especially those involved in international trade, are being badly affected by the effects of the SARS-COV-2 coronavirus pandemic. Economists paint increasingly pessimistic scenarios as governments, practically around the world, impose new restrictions and limitations on social and economic life, which are bound to have an adverse effect on those businesses, especially on their ability to fulfil their contractual obligations.

So, what can be done in such “interesting times”? Is there anything businesses trading internationally can do to avoid or limit their liability due to non-performance? Some solutions have been provided for in international law, and specifically in the provisions of the United Nations Convention on Contracts for the International Sale of Goods (CISG).

What is the Convention and when does it apply?

The United Nations Convention on Contracts for the International Sale of Goods is an international treaty signed in Vienna in 1980 and ratified by 93 countries, including Poland along with the majority of the member states of the European Union and the European Economic Area, as well as the United States and China. Its provisions are applicable to the contracts for the sale of goods which have been executed between parties whose places of business are in different states, provided that these states have adopted the CISG (i.e. are contracting states). Significantly, the Convention also provides for its applicability when only one of the parties has its place of business in a contracting state, as long as the rules of international law indicate the law of that country as the governing law for the interpretation of the given contract. In principle, this will be the domestic law of the state of the seller’s habitual residence (the state of the registered office for companies and other legal entities, or the state of the principal place of business for natural persons doing business), unless the parties to the contract chose the law of another state as the governing law.

The provisions of the Convention apply to classic contracts for the sale of goods, as well as to the contracts for the supply of goods to be manufactured or produced by the supplier, unless the party ordering the goods undertakes to supply a substantial part of the materials necessary for such manufacture or production. Further, the Convention does not apply to contracts in which the predominant part of the obligations of the party who delivers the goods consists in the supply of labour or other services.

Exemption of liability for non-performance of contractual obligations under the Convention

Does the Convention contain any provisions which may be helpful for businesses in the current circumstances? The answer is definitely positive if we consider the CISG provisions on the exemption of liability for non-performance of contractual obligations.

IMPORTANT FRAGMENT

Article 79 of the Convention contains a particularly relevant provision, whereby a party is not liable for a failure to perform any of its obligations if they can prove that the failure was due to an impediment beyond their control. Please note that the Convention also requires that the party relying on the above provision prove that they could not reasonably be expected to have taken the impediment into account at the time of executing the contract or to have avoided or overcome it, or its consequences.

Thus, an enterprise can claim an impediment beyond their control if, for instance, the delivery of goods is delayed due to the waiting time at the border crossing. However, they will not be able to raise such a defence if the contract was made after border controls had been reinstated, as in such a case the enterprise should have reasonably taken the impediment into account.  Consequently, the enterprise’s ability to effectively claim exemption of liability under the Convention is dependent not only on the existence of an impediment beyond their control, but also on whether the circumstances could reasonably have been expected (at the time of executing the contract) and whether the enterprise could possibly have taken measures to avoid them.

Please note as well that, subject to certain conditions, CISG provisions also allow the enterprise to avoid liability in the case where the failure to perform was due to the non-performance by a subcontractor. This provision is of particular importance in the current circumstances, seen as the SARS-COV-2 pandemic causes disruptions and delays practically at every stage of the supply chain. The enterprise can avoid liability towards the counterparty due to the subcontractor’s failure to perform, but only on condition that they qualify for the above exemption and so could the subcontractor. In practice, this means that the impediment under consideration should apply equally to both the enterprise and its subcontractor, preventing them from duly performing their obligations, and moreover – the impediment could not have been foreseen or prevented by either of them.

The Convention does stipulate certain restrictions on the applicability of the exemption of liability on these grounds. Firstly, the exemption only has effect for the period during which the impediment preventing the enterprise from performance exists. Secondly, the exemption referred to here only applies to the liability for damages towards the counterparty, and the latter can still exercise other rights that they have under the contract (e.g. rights related to warranties of quality).  

IMPORTANT FRAGMENT

mportantly, the enterprise can only claim the liability exemption under the Convention on condition that they notify the other party about the impediment and its effect on their ability to perform. If the notice is not received by the other party within a reasonable time, the entity claiming the impediment shall be liable for damages resulting from the non-receipt of such notification by the other party.

Review of contracts is a must

Lastly, please note that prior to invoking CISG provisions, it is necessary to review the provisions of the contracts which have not or may not be duly performed. This is because some contracts may contain clauses expressly excluding the application of the Convention, which is common particularly in contracts with large customers, ordering goods from entities from different countries. The exclusion of the Convention’s applicability does not, however, preclude the supplier from claiming impediments arising due to the current global situation. They may still try to avoid liability by invoking the so-called “event of force majeure”.

The above considerations should also be taken into account when negotiating new contracts with business partners. If the contract involves international trade, and especially if it is governed by a foreign law and does not contain special provisions regarding exemption of liability in the event of force majeure, it is advisable to verify whether it does not exclude the application of the Convention. Its provisions may remedy problems of business enterprises arising from the non-performance or underperformance of their contractual obligations towards foreign business partners in the current challenging times.

Enterprises involved in international trade which, due to the obstacles brought about by the SARS-COV-2 coronavirus outbreak, have not fulfilled their contractual obligations may claim exemption from liability provided for in the United Nations Convention on Contracts for the International Sale of Goods. Such a step should, however, be preceded by a review of the terms and conditions in the contracts for the applicability of the Convention’s provisions in relations with the given counterparty.

The lawyers from Grant Thornton Legal are at your full disposal to provide legal advice, including but not limited to reviewing the provisions of your contracts in terms of the liability of the parties in the context of the pandemic, and also to take part in renegotiating the terms and conditions of existing contracts to include provisions regulating the parties’ relations in the face of the pandemic.

AUTHOR: Marek Pawlak, attorney-at-law, Grant Thornton Legal

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