Wednesday, September 24, 2008

Impossibility Doctrine Under CISG 79

Thanks to Meredith Miller over at ContractsProf Blog for pointing out the case of Hilaturas Miel S.L. v. Republic of Iraq, --- F.Supp.2d ----, 2008 WL 4029713 (S.D.N.Y. 2008). Before the Iraqi War, Hilaturas Miel S.L. (“Hilaturas”), a Spanish company, agreed to sell yarn to the Republic of Iraq ("Iraq")under the U.N. Oil For Food Program ("OFFP"). The OFFP provided letters of credit to beneficiaries (sellers), but required independent inspection of goods when received on the ground in Iraq. When the fighting broke out, the approved United Nations independent inspectors left the country, so that there was no one to inspect the Hilaturas yarn. Shortly thereafter, the government of Iraq ceased to function. Still later, the letter of credit for the Hilaturas yarn expired. Hilaturas sold the yarn at a loss and sued for its damages.

The Southern District of New York (Sweet, J.) decided the case, Hilaturas having brought suit under the Foreign Sovereign Immunities Act. The Court granted Iraq's motion for summary judgment. Applying CISG Article 79, the court concluded that the since the contract required inspection, the withdrawl of the inspectors created an impossibility of performance. That is, payment for the yarn under the letter of credit could only be made after presentation of the required documents, including the inspector's report.

The Court, in an interesting twist, remarks that United States courts often look to analygous provisisions in the U.C.C. to resolve issues arising under the CISG. The Court goes on to conclude that UCC 2-614 on substituted performance due to impracticability of delivery or payment is such a provision. Important to the Court, the official comment explains that “a reasonable substituted performance tendered by either party should excuse that party from strict compliance with the contract terms which do not go to the essence of the agreement.”

Hilaturas argued that Iraq should have provided an alternative means of performance. That would seem to be an alterative inspection procedure or simply waiving that provision of the letter of credit. Of course, it is doubtful that alternative inspection as acceptable to the United Nations, so that payment under the OFFP letter of credit would not have been forthcoming. In the end, the inability to have the goods inspected during the letter of credit period results in performance being impossible.

CISG 79 only allows parties to excuse performance for certain impediments, namely ones beyond their control. The Court clearly dodges the lurking issue particularly in CISG 79 regarding whether the inspection impediment was "beyond the control" of Iraq and whether it could have "avoided or overcome it or its consequences." The issue is tricky since the former Governmet of Iraq no longer exists in a way to make it accountable for the breach of contract or the creation of the impediment. Hilaturas has a point that Iraq,not it, should have found a substituted performance. I am not as convinced as the Court that all of this mess was "unforeseen." Nevertheless, the Court seems right in the end here as both parties knew they were operating under the OFFP restrictions, which made the inspection provision part of the "essence" of the contract as anticipated by UCC 2-614 cmt. 1.


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