This article is written by Vipul Garg, a law graduate and currently working as Vice President at Coinmen Capital Advisors. He is also pursuing a Diploma in M&A, Institutional Finance and Investment Laws. This article has been edited by Ojuswi (Associate Lawsikho). 

This article has been published by Sneha Mahawar.

Introduction

In the backdrop of the COVID-19 pandemic, the realm of International trade got a major hit, given the globalized world that we live in. Despite the various minor trends of nationalism and sub-regionalism, the pandemic came as a major reminder to all of us about the inter-linkages that the world has developed owing to global trade. One of the crucial aspects of this disruption due to such a pandemic is its legal implications on the contracts of sale. 

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The International Commercial Law, which can be manifested from various treaties, conventions, rules, and regulations were drawn at international, supra-national, sub-national, and national levels has to be analyzed to understand the effect and validity of contracts during a world pandemic. This article will look into all these aspects during a world pandemic (with a specific focus on COVID-19), starting from its impact on global trade. It will then discuss the legislative framework for international sale contracts during such events. Finally, it will analyze the effect, validity, and remedies available for such contracts during a world pandemic. 

Impact of world pandemic on global trade and sale contracts

The unprecedented shocks and situations like lockdowns forced by the Pandemics such as COVID-19, result in sharp changes in demand and revenue. It also leads to disruptions in the supply chain and the entire business ecosystem. 

These disruptions and changes have varied impacts on the contractual obligations of different businesses. These shifts in the regular course of business give rise to various questions that come up about the legal obligations during such testing times, such as-

  • What are the clauses containing the force majeure provisions in the contract?
  • What is the scope of relief that these clauses provide to a party? Can it include all scenarios beyond the reasonable control of the affected person or the relief is given only concerning specific scenarios like a natural tragedy?
  • How are these provisions defined in the Agreement? Whether it applies only to an event that “prevents or delays” performance? Whether it intends to give relief where performance is “affected” or made less economical?
  • To what extent, the contract elaborates on an epidemic or a pandemic to qualify as such an event? E.g. An “epidemic” is usually used for a disease prevalent in a community whereas a “pandemic” usually refers to an infectious disease that prevails over a whole country or the world. 
  • Which are the steps which a party needs to take to claim to be affected by such an act of God?
  • What is the nature of the relief provided, is it mandatory or merely discretionary? 

These questions usually work and apply differently on a case-to-case basis based on the jurisdiction, legal concepts, area of business, and especially, how the contracts are worded. 

Meaning of international sale contracts

The UN Convention on Contracts for the International Sale of Goods defines the scope of such contracts in Article 1 as- 

“This Convention applies to contracts of sale of goods between parties whose places of business are in different States: 

(a) when the States are Contracting States; or 

(b) when the rules of private international law lead to the application of the law of a Contracting State.”

Even today, the major mode of transport in international trade is through ships to deliver and distribute the commodities and manufactured goods. Therefore, the contracts of sale also include provisions and clauses which deal with the description and meaning of those goods. However, the monetary considerations, as well as details of shipping arrangements, are covered by the standard trade terms such as the Incoterms. The interplay of these concepts and the clauses in the contracts regularly become a point of dispute when such a pandemic takes place.  

Legislative framework for international sale contracts during a pandemic

There are primarily four legal sources, which guide us as to what can be done by the parties during a pandemic. We shall only look at the specific provisions which can be invoked under such Sale Contracts. 

United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980) (CISG)

CISG, also known as the Vienna Convention, is one of the core international trade law conventions, which has established uniformity in terms of international sale of goods, which can be applied to the sale contracts of goods between the parties with a place of business in the Contracting States. 

Under CISG, the Articles 79 and 80 provide for the exemption clauses for the liability for a failure to perform any of any party’s obligations if that party proves that the failure was due to an impediment beyond his control and that it 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. Under these Articles, the prerequisites should be present including the impediment must be beyond the control, unforeseeability, and unavoidability. 

Incoterms

One of the most important sources of interpretation of standard terms for International Sale Contracts is the Incoterms rules. They have been published by the International Chamber of Commerce regularly since the year 1936. These rules include various concepts such as Free on Board (FOB), Delivered at Place (DAP), Carriage and Insurance Paid To (CIP) among various others, which are been given concrete meaning for this purpose of the sale of goods. 

The ICC Incoterms have been accepted as both agreed usages and practices under the CISG, to establish the communication between the parties and as trade usages. 

Convention on the Limitation Period in the International Sale of Goods (New York, 1974)

The Limitation Convention was adopted in 1974 to overcome the numerous disparities that existed among legal systems for the conceptual basis, resulting in significant variations in the length of the limitation period and in the rules governing claims after that period. The Convention provides uniform international legal rules governing the limitation period in a contract for the international sale of goods. 

UNIDROIT Principles of International Commercial Contracts 

The UPICC norms are non-binding, but also codify important provisions of rules and principles of Contract law, which have been designed for international trade. However, its scope of application has not been confined to contracts for the sale of goods. It set forth “general rules” of contract law. Its. Chapter 7 provides for many general provisions on non-performance including the non-performing party’s right to cure (Article 7.1.4), the aggrieved party’s right to withhold performance (Article 7.1.3), and the exemption from liability for damages in cases of force majeure (Article 7.1.7). 

Effect and validity of international sale contracts during world pandemic

The CISG makes an assumption where the liability for breach of contract is not a strict liability i.e. without a requirement of fault. This approach is taken to prevent excessive liability, thus a broad contour is taken with corrective limitations on it. Therefore, for a party to be held liable for its failure in performing the obligations, it has to be proved that the failure was not due to an impediment beyond the control of that party. Also, it has to be proved that the party could not have anticipated such an event reasonably to have been able to avoid its consequences. 

Since every case is a unique one, international law cannot have a ‘one fit all’ determination of the limits of reasonableness in a larger context. Rather, it is always an individualistic sphere of analysis where one can have the potential to prove that the given pandemic could have lent that reasonableness or not. This can be done in the following ways- 

  • Whether the shortfall of production has happened on the part of the supplier? The claim of exemption will centre on the unavoidability of each operational measure. 
  • To what extent does the supply chain face disruption? Here it will be analyzed whether the parties can settle on a modified distribution of risk within their contractual agreement. 
  • Does the pandemic result in illiquidity on the part of the buyer? As a general rule under CISG, usually, the debtor is completely responsible for his financial capacity. But this can be subject to exceptions, should the loss of financial capacity itself be caused directly and solely by an event of force majeure.
  • The concept of economic hardships has not been covered in any statute properly, which has invited a debate as to whether such hardships shall fall within the scope of application of CISG or not? 

Hence, the effects and validity of international sale contracts during such a world pandemic depend and change on a case-to-case basis. 

Remedies available for effective International Sale Contracts

The following remedies and exemptions can be utilized by the defaulting parties under International Law-

  • The parties can claim exemption from damages for non-performance, provided it meets all the pre-requisites. 
  • By taking shelter under Article 49(1) (a) under CISG, the buyer can avoid the contract after a delay in performance. 
  • By taking shelter under Article 50 under CISG, the parties can ask to reduce the purchase price. 
  • By taking shelter under Article 78 under CISG, the parties can seek to exempt the interest claims. 
  • Under Article 6.2.3 of UPICC, there is an option for contract renegotiation and adaption. This provision comes as a legal consequence where there is a case of hardship. 

In general, the parties can review how the force majeure clauses can be read along with other provisions of the contract. 

Conclusion

Such black swan events can happen anytime without any warning signs or triggers. It is thus critical that such International Sale Contacts be drafted considering all the potential scenarios. The drafting of clauses should be as exhaustive and specific as possible, the notification requirements should be mentioned appropriately, the terms of negotiation and re-negotiation should be addressed adequately and lastly, every party to such contracts should try to ensure and reduce its legal risks whenever such black swan events take place. The most appropriate takeaway from such events is to evolve the legal profession and practice, to incorporate its learnings and challenges in future contracts. 

References

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