Ukrainian conflict has severe and far-reaching consequence on peoples lives.
In addition to the obvious political and economic consequences of the Ukrainian war crisis, there is a less obvious question of the sustainability of business relations.The contracting parties who could not have foreseen this development, can now easily find themselves in a situation where, due to objective, external obstacles, cannot fulfill their contractual obligations.
This raises the important question of whether the Ukrainian crisis can be considered a „force majeure“ and to what extent it affects the fulfillment of contractual obligations.
FORCE MAJEURE AND THE VIENNA CONVENTION
The United Nations convention on the Contracts for the International Sale of Goods, which is better known as Vienna Sales Convention (“Convention”) is one of the success stories of the commercial law unification that took place within the framework of the United Nations Commission on International Trade Law, as it has been ratified since its entry into force on 1st January 1988 by nearly 100 countries, including the majority of the developed countries.
The rules of the Vienna Convention automatically apply to all agreements on the international sale of goods if it is not excluded by the agreement itself.
It is important to highlight that the Convention does not use the term of “force majeure” at all, because its aim was to establish an international source of law, which is independent of national laws and in order to avoid being interpreted by the courts of different countries based on their domestic law. Therefore, The Convention uses the neutral expression “impediment” which exempts the contracting party from the liability for breaching the sales contract if the following 3 (three) conditions are met (Article 79 of the Vienna Convention):
- the failure was due to an impediment beyond his control;
- he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract and;
- he could not reasonably be expected to have avoided or overcome it or its consequences.
It is important to say, that the party affected by the impediment is not entirely exempted from its liability. This means that the party affected is not liable for the non-performance until the impediment ceases to exist. The existence of the impediment should be proved by the affected party, who carries the burden of proof.
This is an exemption from the basic principle thar says “contracts should be executed”, called “lat. pacta sunt servanda” which means that the existence of the impediment shall be interpreted restrictive.
1. Cause of impediment needs to be beyond the control of the contracting party
In general, quite broad interpretation of definition “what can be in parties’ control” is applied. Accordingly, the so-called “acquisition risk” is always within the control of the Seller, therefore he generally cannot rely on the delay or non-performance of his supplier.
On the other hand, the risk of payment is a risk that can be controlled by the buyer almost at any time, meaning that he cannot be released of its obligations if, for example, the bank refuses to make the transfer of money even do the party gave the payment order. This may affect Russian parties which banks are now excluded from swift arrangement.
2. Foreseeability of the “impediment”
The courts apply the provisions of the Convention depending on whether or not the impediment could have been foreseen at the time the contract was concluded.
3. Inevitable nature of “impediment”
Courts tend to set the bar very high for this condition.
German Iusrisprudence
In a litigation in front of a German court, the French seller argued that he delivered lesser tomato concentrate than the agreed quantity, because there was a radical price increase of the product, due to market shortage, emerging because of heavy rains in France. The court dismissed this argument on the basis that the severe weather conditions had not destroyed the entire tomato crop, so the seller could have overcome the impediment.
CONCLUSION - Ukrainian crisis as a "impediment"
Our opinion is that each case must be analyzed separately and that there is no single solution potentially applicable.
On the other hand, it is obvious that the Ukraine crisis (over large parts of its territory affected with combat operations) can be classified as impediment that may release the party from its contractual liability, effective as long as the impediment lasts… all in accordance with Article 79 of the Vienna Convention, given that the invasion has been unexpected, and as such resulted with casualties, destruction of equipment and facilities, restrictions on freedom of movement and closure of borders.
By Nenad Cvjeticanin, Cvjeticanin & Partners