Turkish Law Blog
International Sales Contracts in Times of Global Crises
The world may be on the verge of a major global crisis. All individuals across the world are talking about the COVID-19 or, in other words, the coronavirus. It has affected the education system, the welfare system, the stock markets; it has burdened the health care systems, and countries are starting to close their borders. Unavoidably, global businesses and trade will see its fair share soon, that is- if it has not yet seen it.
A major challenge that businesses will face in the months to come is their ability to perform under contracts: Will they be able to perform? In terms of goods, will there be a need for supply; will there be demand for certain goods? Will there be import/ export restrictions? Or will there be such a high demand that the supplier will not be able to fulfill properly? These are all unknown challenges that will unfold as days pass by.
All businesses have started to implement “business continuity” plans. Obligations under the executed contracts will be one of the matters to ponder upon. Provisions and laws on force majeure are about to come in “handy” as it perhaps never has before.
The United Nations Convention on Contracts for the International Sale of Goods (“CISG’) has a provision concerning force majeure. The CISG is applicable when the parties to a contract are from different, yet signatory countries or when the private international law rules lead to a contracting country. Needless to mention, the force majeure principle of the CISG will be applicable if the contract is subject to it. CISG was drafted by taking into consideration both the common law doctrine of excuse and the civil law jurisdiction, however, the force majeure principle tends to be closer to U.S. laws because it does not impose the civil law “negligence” or “fault” concept. German Civil Code (BGB), which Turkish law is primarily based upon, foresees that the non- performing party will pay damages if the fault is established.
CISG Article 79(1) 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”.
As per Article 79(1) of the CISG, the elements of force majeure are: a-) the requirement of an impediment “beyond the party’s control”, meaning that it is outside the personal sphere of his control; b-) the impediment is unforeseeable, meaning that it was not foreseen at the time the contract was concluded; c-) the impediment and its consequences could not have been reasonably overcome or avoided and d-) the non-performing party has to show that the non- performance is due to the impediment. Within this framework, it should be noted that Article 79 does not “prevent either party from exercising any right other than to claim damages under this Convention” [CISG Article 79(5)].
There is case law from numerous jurisdictions concerning the application of Article 79 of the CISG. For example, in a case from 2009, the supplier of steel tubes claimed that steel prices had abruptly risen; the Belgian court ruled that “Changed circumstances that were not reasonably foreseeable at the time of the conclusion of the contract and that are unequivocally of a nature to increase the burden of performance of the contract in a disproportionate manner, can, under circumstances, form an impediment in the sense of this provision of the treaty.” [Wording taken from translation found at https://iicl.law.pace.edu/cisg/case/belgium-june-19-2009-cour-de-cassation-supreme-court-scafom-international-bv-v-lorraine] In an earlier arbitration proceedings that was heard by the Arbitration Tribunal of Bulgarian Chamber of Commerce and Industry in 1988, the tribunal stated that the motives for the buyer’s request were based on the fact that market conditions became worse, the dollar quotation had increased and the construction business has been in depression. It ruled that “The listed circumstances that caused the [buyer]'s desire to have delivery suspended do not correspond to the requirements outlined in Article 79 of the CISG. The [buyer] is not in objective impossibility to accept the delivered goods and the described facts do not represent force majeure (acts of God, acts of third person, etc.). Such consequences are not unexpected.” [Wording taken from translation found at https://iicl.law.pace.edu/cisg/case/bulgarian-chamber-commerce-and-industry-7]. U.S. courts have generally looked into the provisions of Article 2 of the UCC, for an analogy to interpret Article 79(1) of the CISG. For example in 2008, the U.S. district court of New York ruled that because there was virtually no case on the CISG, it would look into the UCC. The court based its ruling on the arbitral award, which had also used Article 2 of the UCC to interpret Article 79(1) of the CISG relating to force majeure. Accordingly, it stated that the element requiring the impediment and its consequences to have been reasonably avoided, referred to substituted performance. [see https://iicl.law.pace.edu/cisg/case/united-states-state-minnesota-county-hennepin-district-court-fourth-judicial-district-14 ]
As days go by, there may be parties to a contract that will not be able or will choose not to perform. The basis will be force majeure. Strictly speaking, the global crises that COVID- 19 creates, depending on the circumstances, may meet the elements of a force majeure event, as defined under Article 79(1). If we evaluate the elements and apply them accordingly: An impediment to a contract is indeed beyond the control of the parties, it is a “virus” that also disrupts business operations; it is unforeseeable, no leader or executive could have foreseen a virus to take over the world in the era of science and technology; could the consequence be avoided or overcome, this is a question that could be arguable depending on the circumstances. In most instances, I would say that as past case law suggests that the “virus” alone may not be a reason in itself. Therefore, depending on the measures taken by the non- performing party to mitigate or “forecast” risks after the virus “went viral”, the opposing parties may argue that the consequences could have been avoided at the very least to a certain extent. This element will most likely be determined on a case-by- case basis. As such, U.S. courts will most likely look into the “substitute performance” concept under the UCC. The final element that the non- performance is due to an impediment will of course met, as “COVID-19” is the one to blame for. However, an impediment based on the devaluation of currencies alone may not be taken into consideration by itself as a factor.
In terms of international sales contracts that are to be executed from now onwards, parties should be wise and try to “forecast” the consequences of COVID-19. The virus is now out and traveling all over the world, therefore, foreseeability will be an element that may not be met from now onwards. As commented by Lookofsky concerning a landmark decision from 1999 rendered by the Supreme Court of Germany (Bundesgerichtshof). “internal” excuses such as poor quality control or financial management will not be beyond a parties control, therefore it will not meet the elements of Article 79(1) of the CISG. [extract of the commentary can be found at https://iicl.law.pace.edu/cisg/case/germany-bger-bundesgerichtshof-federal-supreme-court-german-case-citations-do-not-ident-33]. As such, parties should act diligently and make business forecasts taking into consideration the foreseeable consequences of COVID- 19, and draft their contract terms accordingly.
As a final note, it should be noted that especially in times of turmoil, uniform laws such as the CISG will be beneficial to all parties concerned, as it provides clarity in an otherwise unstable business environment. In times like these, when we see the interconnectedness of the world, let us unite and continue to engage in international commerce, as we experience that one small “flap” of the wing of the butterfly has had a huge impact even across the Atlantic.