March 29 2010
The Supreme Court has ruled that circumstances which were not reasonably foreseeable at the time of the conclusion of an agreement and which increase the burden of the agreement disproportionately can, in certain circumstances, be considered an 'impediment' within the meaning of Article 79 of the UN Convention on Contracts for the International Sale of Goods (CISG).
A French vendor and a Dutch purchaser entered into successive contracts for the sale and delivery of steel tubes for scaffolding, which were to be delivered to Tongeren in Belgium. In early 2004, in view of a 70% increase in the market price of steel, the vendor asked for the contracts to be renegotiated for an increased sale price. As the parties were unable to reach an amicable agreement, the dispute went to court in Belgium.
The president of the Tongeren Commercial Court, sitting in summary proceedings, ordered as a provisional measure that the vendor deliver the ordered products to the purchaser and that the purchaser pay half of the requested price increase. This led the purchaser to initiate proceedings on the merits.
Commercial court decision
In the proceedings on the merits the court held that price fluctuations are foreseeable and were part of the business risk assumed by the vendor, all the more so in this case because the vendor had failed to include a price adjustment clause in the sales contract.
The court held that circumstances which do not make a contract impossible to perform, but merely render its performance more onerous, cannot be considered an impediment in the sense of Article 79. The vendor appealed.
Appeal court decision
Antwerp Court of Appeal's judgment was radically different. It implicitly held that the issue at stake was not governed by the CISG and that the question should be governed by the national law applicable to the contract. By virtue of Article 4 of the Rome Convention on the Law Applicable to Contractual Obligations, French law applied in this case.
French law, particularly the principle of good faith in Article 1135 of the French Civil Code, was found to give parties in such circumstances the right to renegotiate the contract. Therefore, the purchaser's refusal to renegotiate the price constituted a breach of contract, as a result of which the vendor - which was ordered to deliver by the president of the Tongeren Commercial Court - was entitled to compensation. The purchaser appealed to the Supreme Court.
Supreme Court decision
In a landmark judgment dated June 19 2009, the Supreme Court held that Article 79 can govern hardship. Changed circumstances which were not reasonably foreseeable when the agreement was concluded and which increased the burden of the agreement disproportionately can, in some circumstances, constitute an impediment in the sense of Article 79.
However, the court noted that the CISG gives no indication as to how hardship issues are to be resolved.
In an attempt to bridge this gap, the court (by virtue of Articles 7(1) and 7(2) of the CISG) referred to the general principles governing the law of international trade, including the UNIDROIT Principles for International Commercial Contracts, which state that the party which invokes changed circumstances that fundamentally disturb the contractual balance is entitled to seek the renegotiation of the contract.
The Supreme Court therefore upheld the judgment of the Court of Appeal, as the latter had correctly held that the purchaser and vendor were obliged to renegotiate the contracts.
This is a landmark decision for two reasons. First, the court went out on a limb in accepting hardship under Article 79. Internationally, this is a significant precedent. Second, for the first time in its history, the Supreme Court made reference to the UNIDROIT Principles of International Commercial Contracts to resolve a dispute. This indicates that its judges are up to date with recent economic and legal developments in international trade.
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