Supply problems in case of cross-border contracts

20.03.2020

In our article “Supply problems caused by COVID-19: Are suppliers able to invoke force majeure?”, we addressed the legal situation when applying German law. It is, however, not self-evident that German law is applicable to cross-border contracts. So what will apply instead?

Above all, it is important to determine which legal system will in fact be applicable. In most instances, but by no means always, international supply contracts contain an appropriate provision. If the contract stipulates the application of German law, the information in the above-mentioned article applies. But beware: A lot depends on the details of the wording. If, for example, a choice of law clause reads: “This contract shall be governed by the laws of Germany,” then it will not be German sales law as stipulated in the Civil Code and the Commercial Code that applies. Instead, the UN Convention on Contracts for the International Sale of Goods (CISG) is applicable, since it is part of German law. Sales law under the Civil Code and the Commercial Code is therefore only relevant if reference is made to German law in exclusion of CISG.

If the contract does not contain a provision on the applicable law, the legal system of the country in which the seller is headquartered will regularly be applicable (this may be different, however, if legal proceedings are instituted outside the EU). If this country is a contracting state of the CISG Convention, the UN Convention on Contracts for the International Sale of Goods will again apply. There are currently 93 signatory states (for a list see: https://uncitral.un.org/en/texts/salegoods/conventions/sale_of_goods/cisg/status). Since Germany is a signatory state, as outlined above, CISG is therefore applicable to export transactions in the absence of a choice of law provision. For imports, on the other hand, it depends on whether the country in which the seller is headquartered is a signatory state of the Convention.

In cases where CISG is to be applied, the following needs to be observed:

If suppliers are unable to deliver, they will be liable for damages irrespective of fault (Articles 45, 74 et seqq. CISG). This guarantee liability is stricter than that under German sales law, where liability for damages requires fault (intent or negligence). The liability also covers the buyer’s loss of profit (Article 74 CISG).

Article 79 CISG provides, however, for a restrictive corrective clause. Accordingly, suppliers will not be liable if they can prove that the failure to perform the obligation was due to an impediment beyond their control and they could not be reasonably 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. This is intended to relieve sellers of liability for uncontrollable risks. Epidemics such as the present one may therefore relieve the supplier. It does, however, depend on the individual case and the ability to provide proof (which might be achieved by a force majeure certificate). If, for example, the seller has concluded the contract with the buyer at a time when it was already apparent that COVID-19 was spreading in the region where the seller’s own supplier is located, it may not be possible to invoke Article 79 CISG and liability for damages would therefore still be given.

Status: March 20, 2020