IJI’s work in practice: force majeure in the event of non-performance, and applicable law

21 April 2020

A Dutch medical equipment manufacturer contracted to buy semi-finished products from a Japanese manufacturer. Owing to various substantial restrictions imposed by the Japanese government, the Japanese manufacturer was unable to supply the Dutch manufacturer. The latter consequently suffered considerable damage because, for example, of not being able to meet its commitments to third parties. The Dutch manufacturer sought to establish whether the Japanese manufacturer could justifiably claim force majeure.

We first had to check the contract between the Dutch and Japanese manufacturers to see what had been agreed and whether they had made any provision for force majeure. In many cases, such clauses list the situations qualifying as force majeure. If this list includes, say, the situation where one party is unable to fulfil its obligations owing to government measures, there is a good chance that this will be regarded as constituting force majeure. Obviously, performing the contract must be genuinely impossible: a contract that has become more difficult to perform, or requires more time, is less likely to result in a party successfully invoking force majeure.

Another important factor to establish is which law applies to the contract, given that any force majeure will operate under this law (and will not normally qualify as a rule of priority applying regardless of the applicable law). If the case falls within the scope of the 1980 Vienna Sales Convention (CISG) and the parties have not excluded its application, the CISG will determine much of the procedural law applying. Article 1 CISG, covering the application of law, reads as follows:

“(1) 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.

(2) The fact that the parties have their places of business in different States is to be disregarded whenever this fact does not appear either from the contract or from any dealings between, or from information disclosed by, the parties at any time before or at the conclusion of the contract.

(3) Neither the nationality of the parties nor the civil or commercial character of the parties or of the contract is to be taken into consideration in determining the application of this Convention.”

As both the Netherlands and Japan are contracting states for CISG purposes, the CISG applies if neither party has excluded its application or opted for the law of one of the contracting states to apply without excluding application of the CISG. If the CISG applies, Article 79 is of relevance and states that:

“(1) 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.

(2) If the party's failure is due to the failure by a third person whom he has engaged to perform the whole or a part of the contract, that party is exempt from liability only if:

(a) he is exempt under the preceding paragraph; and

(b) the person whom he has so engaged would be so exempt if the provisions of that paragraph were applied to him.

(3) The exemption provided by this article has effect for the period during which the impediment exists.

(4) The party who fails 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.

(5) Nothing in this article prevents either party from exercising any right other than to claim damages under this Convention.”

Although the chances of successfully invoking force majeure under the CISG are not generally very high, invoking it in the event of non-performance attributable to government restrictions could well succeed in certain circumstances.

If the parties have excluded the CISG, the law applying to their contractual relationship will have to be decided on the basis of the Rome I Regulation (‘Rome I’). If the law chosen is that of a non-CISG state, that law will apply under Article 3 Rome I (as explained above, the CISG applies if the parties opt for the law of a CISG state without simultaneously excluding application of the CISG). If no law is chosen, Article 4(1)(a) Rome I states that the contract will be governed by the law of the country of the seller’s habitual residence. Under Article 19(1) Rome I, the habitual residence of companies, associations and other legal persons is the place of the entity’s central administration. If, therefore, the central administration of the Japanese manufacturer in this case is in Japan, Japanese law will apply. The Dutch manufacturer’s legal position will then be heavily dependent on Japanese law. This immediately highlights the importance of making a choice of law (and possibly also simultaneously excluding the CISG and the reduced legal certainty it creates).

N.B. If legal action is taken in Japan, that country’s rules on conflicts of law will apply and not those set out in Rome I. The results of a referral may then differ.

Over the years, the IJI has built up an extensive database on the application of foreign systems of law (including the CISG). We can therefore provide advice quickly and cost-effectively. Call us for advice (no commitment on your part) on +31-(0)6-1316 0332 or e-mail us at info@iji.nl.