Customs duties, Embargoes, Brexit

Loss of business foundation, impossibility, force majeure, hardship, frustration???

The current question is whether and how (trade) policy developments can affect contracts already concluded, for example if goods can no longer be delivered or procured, or if they can only be procured at much higher prices. Is this a case of impossibility, force majeure, hardship, loss of business foundation or frustration and what does it lead to with regard to contractual obligations and rights in different legal systems?

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Impossibility under German law

German law knows the impossibility in § 275 BGB, which applies if the service is impossible or requires an effort that is grossly disproportionate to the creditor’s interest in performance, taking into account the content of the contractual obligation and the imperatives of good faith. According to literature and case-law, the provision may be applied in the event of subsequent introduction of export and import bans and general trade embargoes (cf. Ekkenga/Kuntz, in Soergel Vol. 3/2, 13th edition 2014, § 275 marg. 52 f.; Ernst, in Münchener Kommentar zum BGB, 7th edition 2016, § 275 BGB, marg. 45; BGH, judgment of 08.06.1983 – VIII ZR 77/82 (Frankfurt) – Case of unauthorised import of goods into the German economic territory - in concreto, however, denying the impossibility for reasons of proof; Schmidt-Kessel, in Prütting, Wegen, Weinreich, BGB Kommentar, 13th edition 2018, § 275, marg. 9). With regard to the permanence of impossibility, lower requirements may be set for embargoes (cf. Azimi in Kaufvertragstörungen aus Sicht des BGB und des Iranischen Rechts, 2015, p. 121 f.; Ernst, in Münchener Kommentar zum BGB, 7th edition 2016, § 275 BGB, marg. 145). Whether subsequently increased customs duties can also fall at least under § 275 para. 2 BGB depends on the individual case. Furthermore, Brexit can lead to an impossibility in the form of a misuse (see Lehmann/Zetsche in JZ 2017, 62, 66). If the degree of disproportionality is reached by sufficiently complicating the distribution possibilities, the de facto impossibility (§ 275 para. 2 BGB) is also possible (Paulus in Brexit and the legal consequences, 2017, pp. 101, 121). 

Force Majeure and Hardship in German Law

German law only knows force majeure and hardship if the contract provides for it; such rules can be very useful. Though it remains unclear what is to be regarded as "force majeure", at least one major Swiss raw materials trader has already referred to force majeure in the course of the current US aluminium punitive tariffs (https://www.bloomberg.com/news/articles/2018-04-11/glencore-said-to-declare-force-majeure-on-some-aluminum-supply-jfvbfv1u). However, especially with regard to customs increases, import restrictions and associated costs, hardship clauses are regularly relevant (Martiny in International Contract Law, 8th edition 2015, Part 3: Scope of the Contract Statute, 3.15.8-9). Force majeure, on the other hand, covers probably only concrete export bans that make it absolutely impossible for the seller to fulfil the contract (Martiny in International Contract Law, 8th edition 2015, Part 3: Scope of the contract statute, 3.16.0-3 with reference to: S. Czarnikow Ltd. v. Rolimpex, 1978, 2 All ER 1043 (House of Lords 1978) – Polish trader sold sugar to English buyers, but after harvest failure the export licence was revoked and the trader – without compensation – was released from the obligation to pay). 

The question to what extent Brexit could fall under force majeure/hardship clauses depends not only on the drafting of the contracts, but also on the specifics of the exit and is thus answered very differently by the literature (for a possible assignment to force majeure e.g. Reif/David in ZVertriebsR 2017, 35, 37; against classification as force majeure e.g. Emde in ZVertriebsR 2018, 77, 78). However, since the Brexit referendum, one might legitimately ask why parties have not taken this into account in contracts concluded thereafter.

Loss of business foundation under German law

German law knows loss of business foundation in § 313 BGB; this provision only became law in 2002 – before that it had long been common in jurisprudence as a formula. According to the explanatory statement of the law (BT Drucks. 14/6040 of 14.05.2001, p. 174 ff.), objective and subjective elements of the business foundation are now covered; in simple terms, the legislator wants the following to apply:

“The requirements list several characteristics that must be present cumulatively:

• Circumstances must have changed decisively after the conclusion of the contract.
• These circumstances must not have become part of the contract.
• If the parties had foreseen the amendment, they would not have concluded the contract or would have concluded it with a different content.
• The adherence to the unchanged contract must be unreasonable for one part, taking into account all circumstances of the individual case, in particular the contractual or statutory distribution of risk”.
  
  

The provision is probably applied to changes in the law or other measures by public authorities (e.g. import bans: cf. BGH, judgment of 08.02.1984, Ref.: VIII ZR 254/82 (affirmative)); also mentioned in the literature for customs duties (cf. Finkenauer, in Münchener Kommentar zum BGB, 7th edition 2016, § 313 BGB, marg. 230-231). However, since the contractual balance must be disturbed, it is particularly important in the case of customs duties who has to bear the increased duties. With regard to the resignation of an EU member, § 313 BGB may become applicable, for example, if the business relationship is between a German and British bank which is no longer classified as an EU bank (Lehmann/Zetsche in JZ 2017, 62, 66; controversial whether the decisive moment must already be set at the exit vote or the enforced resignation, see Paulus in Brexit and the legal consequences, 2017, pp. 101, 120 f.). However, since the Brexit referendum, again one might legitimately ask why the parties have not taken this into account in contracts concluded afterwards or whether this can even be an unforeseen circumstance at all.

Damages under German law

Compensation for damages depends on fault, § 280 BGB. If the primary obligation does not cease to apply due to the impossibility, loss of the business foundation or clauses in the contract, then it must be asked whether the debtor is responsible for his nonperformance – which will not always be the case with customs duties, embargos and Brexit.

EU Law

In EU law, it should be noted that “the consequences of a total or partial breach of obligations” (Art. 12 para. 1 lit. c) of the Rome I Regulation) are assessed according to the substantive law applicable to the contract. This includes the exemption from performance due to impossibility, withdrawal and exercise of the withdrawal, adjustment of the contrac t in the event of loss of the business foundation or the intervention of so-called hardship clauses in long-term contracts and the consequences of force majeure (cf. Hohloch in Erman, BGB, Vol. 15. 2017, Art 12 ROM-I-VO, marg. 10). Useful guidance regarding this topic is also provided in “International Sales, Supply and Distribution Law”.

France, Italy, Portugal, Greece

In accordance with the new Art. 1195 CC, which has been in force since 01.10.2016, the loss of the business foundation is also regulated by law in France. According to Italian law, the cases of loss of the business foundation are covered by Art. 1467 Codice Civile. In Portugal, Article 437°/1 of the Civil Code allows the parties to request termination of the contract in such cases. In Greece this is found in Article 388 of the Greek Civil Code.

Common law

In common law there is frustration (groundbreaking Coronation Case Krell by Henry 1903 to Edward VII – in casu the one who rented a room to see the coronation train was dismissed from his duty to perform because the coronation failed due to illness) and in rare cases also impossibility is conceivable (Taylor v. Caldwell 1863 – here the landlord of a concert hall did not have to pay damages, because the same hall burned down before the beginning of the lease, but after conclusion of the contract – or Parker v. Arthur Murray 1973 – the victim of a car accident, which is physically no longer able to dance, can demand compensation for the amount already paid for dance lessons). The doctrine of excuse covers cases of impossibility, frustration of purpose and commercial impractibility in US law, the latter being codified in § 2 – 615 UCC and having clear references to force majeure but being interpreted very narrowly (Grün/Steffens in Internationale Wirtschaftsverträge, 2nd edition 2017, § 10 marg. 30 f.). See also the cases in which American courts have dealt with the question of whether there was an impractability case (Sec. 2-615 UCC) when the oil embargo occurred in the Middle East in 1973, such as Public Service Co. v. Peabody Coal Co. (no contract adjustment for oil suppliers because the disadvantage is based on the agreed fixed price, which is due to poor contract management and not the external circumstances), Iowa Electric Light & Power Co. v. Atlas Corp. (No relief for the seller of uranium), Publicker Industries Inc. v. Union Carbide Corp. (No relief for the seller of ethylene – price increase was 75% and the court assumed "impractability" only from 100% upwards). However, compensation for damages is not dependent on fault.

The narrow requirements of frustration are probably not fulfilled by Brexit, but due to the uncertainty as to how the exit will take place, no definitive prediction can be made (See Paulus in Brexit and the legal consequences, 2017, p. 101, 124).

China, Turkey, Japan, Mexico

On current occasions, possible consequences of punitive tariffs and embargoes appear interesting, especially in countries such as China and Japan, but also in Turkey. In China Art. 107 GPCL states that “Civil liability shall not be borne for failure to perform a contract or damage to a third party if it is caused by force majeure, except as otherwise provided by law”. Likewise, Turkish law, which is predominantly based on Swiss law (in Swiss Law Art. 119 OR regulates impossibility), is aware of impossibility and only grants claims for damages depending on fault. The current civil code in Japan does support a force majeure defense (Art. 412 ff. Civil Code, except for monetary debts Art. 419 para. 3 Civil Code). However, Japanese sales law is subject to a major civil code reform, which will probably come into force from 2020. Art. 1827 of the Mexican Civil Code prohibits impossible or illegal obligations (e.g. in the case of embargoes). Price changes and many other cases of force majeure regularly do not meet these strict requirements.

UN Sales Law - CISG

The UN Sales Convention, on the other hand, does not contain any hardship clauses; it more or less regulates the case of force majeure in Art. 79 CISG. Nevertheless, the literature argues that cases of export or import bans, boycotts, embargoes and the closure of transport routes can relieve the debtor if they were causal for the nonperformance and if the other requirements of Art. 79 CISG are met (see Magnus in Staudinger, revision 2018, Art. 79 CISG marg. 28). However, compensation for damages is not dependent on fault.

Clauses

Clauses in international contracts that regulate the loss of the business foundation in accordance with German regulations are probably referred to as “hardship clauses”. The ICC Rules and UNIDROITS Principles contain examples of such clauses that the parties can incorporate into their contracts.

THIS PRACTICAL GUIDE MERELY CONTAINS A SELECTION OF INFORMATION ON THE TOPIC AND DOES NOT REPLACE LEGAL ADVICE IN A GIVEN CASE. NO LIABILITY IS ASSUMED FOR THE COMPLETENESS AND ACCURATENESS OF THE INFORMATION CONTAINED IN THIS PRACTICAL GUIDE.