Cite as Bennett, in Bianca-Bonell Commentary on the International Sales Law, Giuffrè: Milan (1987) 513-524. Reproduced with permission of Dott. A Giuffrè Editore, S.p.A.
1. History of the provision
2. Meaning and purpose of the provision
3. Problems concerning the provision
(1) A party may suspend the performance of his obligations if, after the
conclusion of the contract, it becomes apparent that the other party wlll
not perform a substantial part of his obligations as a result of:
(a) a serious deficiency in his ability to perform or in his credit-worthiness; or
(b) his conduct in preparing to perform or in performing the contract.
(2) If the seller has already dispatched the goods before the grounds described in the preceding paragraph become evident, he may prevent the handing over of the goods to the buyer even though the buyer holds a document which entitles him to obtain them. The present paragraph relates only to the rights in the goods as between the buyer and the seller.
(3) A party suspending performance, whether before or after dispatch of the goods, must immediately give notice of the suspension to the other party and must continue with performance if the other party provides adequate assurance of his performance.
1. History of the provision
1.1. - This article enables either party to suspend his performance of a contract because of an anticipated breach of it by [page 513] the other. Paragraph (1) sets out the circumstances which give rise to the right to suspend performance. Paragraph (2) indicates the rights of a seller who takes suspension action while the goods are in transit. Paragraph (3) provides for the suspending party to give notice of the suspension to cease if the other party then provides adequate assurance of his performance.
1.2. - The need for a right to suspend performance of a contract for international sales of goods was generally accepted in relation to ULIS and in the discussions which led to the adoption of Article 71. Throughout those discussions, however, there was concern to ensure that the grounds for exercising the right should be as objective as possible. Representatives of developing countries were apprehensive that a party in a stronger position would otherwise be placed in a position in which he could, by suspending performance, insist on a security for due performance which he had not required at the time the contract was entered into.
1.3. - A number of amendments were made to the provision at various stages of its development to make its operation as objective and as certain as possible. Nevertheless, as the article makes provision for situations in which breaches of contract are anticipated only, its operation will inevitably involve some subjective assessment on the part of a suspending party.
1.4. - Paragraph (1) is derived from Article 73(1) of ULIS, which provides:
Each party may suspend the performance of his obligations whenever, after the conclusion of the contract, the economic situation of the other party appears to have become so difficult that there is good reason to fear that he will not perform a material part of his obligations.
1.5. - At the fifth session of the Working Group in 1974 this provision was re-drafted to take account of a number of criticisms of it which had been expressed, particularly that the words «the economic situation of the other party appears to have become so difficult» needed to be more objective and precise (see Yearbook, V (1974), 38). The re-drafted provision read as follows: [page 514]
A party may suspend the performance of his obligation when, after the conclusion of the contract, a serious deterioration in the economic situation of the other party or his conduct in preparing to perform or in actually performing the contract, gives reasonable grounds to conclude that the other party will not perform a substantial part of his obligations.
1.6. - This provision retained the reference to «the economic situation of the other party» but required that there should be «a serious deterioration in» that situation. It also broadened the circumstances in which suspension was to be possible by permitting regard to be had to the other party's «conduct in preparing to perform or in actually performing the contract». The phrase «good reason to fear» was changed to «reasonable grounds to conclude» and «material part of his obligations» was changed to «substantial part of his obligations».
1.7. - At the sixth session of the Working Group in 1975 some representatives contended that «a serious deterioration in the economic situation of the other party» was too vague a test to be employed without difficulty. It was accordingly decided to replace those words by «a serious deterioration in the capacity to perform or credit worthiness of the other party ...» (see Yearbook, VI (1975), 59).
1.8. - At the session of the Working Group in 1976 the need for the grounds of suspension to be «reasonable» was omitted, but this change was accompanied by another which limited the power to suspend by the words «if it is reasonable to do so» (see Yearbook, VII (1976), 94). At the tenth session of the Commission in 1977 the paragraph was further amended to require that the grounds be «good» (see Yearbook, VIII (1977), 19).
1.9. - At the Vienna Conference the provision was the subject of considerable discussion. One criticism of the UNCITRAL draft was that it would have rendered the remedy of suspension unavailable against a party who was unable at the time of the conclusion of the contract to perform his obligations, even though that inability was not then known to the other party. Some representatives considered that this was appropriate because they believed that each party had a duty to determine [page 515] the situation of the other before concluding the contract. However, the majority view was that a right to suspend should be available if the requisite deficiency in ability to perform or in credit-worthiness became apparent after the conclusion of the contract, even though it existed before then.
1.10. - The subjectivity of the provision in the UNCITRAL draft was again criticized. There was also criticism of the absence of any requirement in it for a party to give notice to the other party before being able to suspend his performance and of the fact that the anticipated breach only had to be substantial, not fundamental. These criticisms were forcefully advanced by representatives of developing countries in support of an Egyptian proposal which would have had the effect of combining the remedies of suspension and avoidance for anticipated breach. The votes for and against that proposal were equal and the proposal was therefore not adopted. However, as it was clear that the issue was of great importance to many countries, an ad hoc working group was established to consider and submit proposed texts for the article providing for suspension and avoidance for anticipatory breach.
The proposals of that working group for Article 71(1) were subsequently adopted subject only to three amendments. One of these omitted the words «if it is reasonable to do so», which had been inserted in 1976; another substituted «if» for «when» to meet the constant desire of civil lawyer's to distinguish between temporal and condition clauses; and the third substituted the phrase «it becomes apparent» for «it appears».
1.11. - Paragraph (2) is derived from Article 73(2)(3) of ULIS, which provided as follows:
2. If the seller has already dispatched the goods before the economic situation of the buyer described in paragraph 1 of this Article becomes evident, he may prevent the handing over of the goods to the buyer even if the latter holds a document which entitles him to obtain them.
3. Nevertheless, the seller shall not be entitled to prevent the handing over of the goods if they are claimed by a third person who is a lawful holder of a document which entitles him to obtain the goods, unless the document contains a reservation concerning the effects of its transfer or unless the seller can prove that the holder of the document when he acquired it, knowingly acted to the detriment of the seller. [page 516]
1.12. - Several comments suggested that the provisions imposing obligations upon the carrier conflicted with those of municipal and international law concerning the carriage of goods (see Yearbook, V (1974), 37). The Secretariat accordingly proposed that paragraph (2) be augmented to include the sentence «[t]he foregoing relates only to the rights in the goods as between the buyer and the seller and does not affect the obligations of carriers and other persons ...» and that paragraph (3) be deleted.
These proposals were adopted in substance by the Working Group in a revised version of paragraph (2) which, with only minimal alterations of a drafting nature and without paragraph (3) of the ULIS provision, was subsequently adopted by the Vienna Conference.
At the tenth session of the Commission a proposal was made that the right of the seller under paragraph (2) to prevent the handing over of goods already dispatched should be accompanied by a similar right of the buyer to stop payment which has been arranged. This proposal failed because it was considered that it would seriously disrupt commercial practice (for example, in relation to irrevocable letters of credit issued by banks) and in the case of stopped payment of cheques, would be a criminal offence in some countries (see Yearbook, VIII (1977), 54).
Paragraph (3) has no counterpart in ULIS, but the comments received prior to the fifth session of the Working Group included a suggestion that the buyer should be allowed to remedy the situation by providing assurances (see Yearbook, V (1974), 37). The Secretariat proposed the inclusion of a paragraph for this purpose, which was adopted by the Working Group after revision by a drafting party. The paragraph then read as follows:
A party suspending performance, whether before or after dispatch of the goods, shall promptly notify the other party thereof, and shall continue with performance if the other party provides adequate assurance of his performance. On the failure by the other party, within a reasonable time after notice, to provide such assurance, the party who suspended performance may avoid the contract.
The sixth session of the Working Group changed the word «promptly» to «immediately» (see Yearbook, VI (1975), 60). The second sentence was deleted at the Working Group's seventh session as a result of comments in which it was pointed out that [page 517] suspension of performance was to be available in respect of other than fundamental breaches and that it was accordingly undesirable that the article providing for it should provide also for avoidance of the contract.
At the Diplomatic Conferepce an attempt was made to introduce a provision to the same effect as the deleted sentence but the proposal was rejected (see Official Records, I, 378).
2. Meaning and purpose of the provision
2.1. - Provisions to deal with anticipated breaches of contract give rise to conflicting considerations. It is undesirable that a party to a contract should be released from his obligations whenever he suspects that the other party might be about to commit some breach. However, there is a need for the law to provide for situations in which there is a real likelihood that a substantial breach will occur. When that is so it would be inappropriate for the other party to be required to continue with his performance of the contract, which could result in his suffering an irrevocable loss. To provide for these conflicting considerations the law needs to be delicately balanced and considerable efforts were expended in endeavouring to provide that balance in Article 71.
2.2. - Some legal systems recognize only a very limited right for suspension of performance with the right being available to the seller only and being dependent on the buyer's insolvency. However, there are broader provisions in Article 321 of the Federal Republic of Germany Civil Code and in § 2-609 of the United States Uniform Commercial Code. The German provision applies «if a person is obliged by a mutual contract to perform his part first», while the United States provision applies to «either party». Neither provision is limited to insolvency situations and the thrust of both is to enable a party to suspend performance pending removal of the doubt concerning future performance by the other. The German provision authorizes refusal of performance «until the counter-performance is made or security is given for it»; the United States provision authorizes suspension of performance until receipt of «adequate assurance of due performance». [page 518]
2.3. - Article 71 resembles these provisions in a number of respects. It provides for suspension by either party. It is also not limited to insolvency situations. The various amendments which were made to its text by the Working Group and the Vienna Conference have made its operation more certain and more objective. But the considerations involved are such that it is hard to see how a completely objective operation would have been possible without severely limiting the right to suspend to factual situations such as insolvencies and declarations of intention not to perform.
2.4. - There is a need to keep in mind that, as well as giving rise to a right to suspend performance under Article 71, an anticipatory breach of a fundamental character may be a ground for declaring the contract avoided under Article 72. The separateness of these two provisions is significant and represents a departure from the approach taken in the United States Uniform Commercial Code. It enables the Convention to provide for a party to suspend performance where the other party's breach, while substantial, may not be sufficiently fundamental to justify avoidance. It also enables suspension of performance to be authorized without a requirement of prior reasonable notice to the other party which is more justified in relation to the more drastic right to avoid a contract.
2.5. - Article 71 recognizes that the need to suspend performance will often arise when there will not be time to give the other party a prior notice of intention to suspend performance. In this regard the requirements for suspension of performance are less than for avoidance. A notice of a suspension, must, however, be given to the other party immediately after the suspension action has been taken.
2.6. - The following are examples of when suspension of performance would be possible under Article 71(1).
Deficiency in seller's ability to perform: Production at the seller's factories may have been held up by a strike, which is likely to continue for some time. By suspending performance the buyer will render it, unnecessary to make a prepayment, to establish a [page 519] letter of credit to cover the price of future deliveries or to take preliminary steps such as the making of shipping arrangements or the handing over of documents. However, suspension of performance does not involve authority to take other action such as disposing of goods held for the buyer or purchasing replacement goods.
Deficiency in buyer's credit-worthiness: A buyer may fall behind in his payments to a seller in respect of other contracts. This could indicate a serious deficiency in the buyer's credit-worthiness. If it also becomes apparent that as a result of that deficiency the buyer will not pay for goods that the seller is to procure and supply under the contract in question, the seller will be entitled to cease procuring and supplying those goods.
Conduct in performing the contract: A buyer who has contracted for precision parts, which he intends to use immediately upon delivery, may discover that, although there has been no deterioration in the seller's ability to perform and deliver parts of the quality required, defective deliveries are being made to buyers with similar needs. If the reason for these defective deliveries is that the seller has been using raw material from a particular source and if the seller is proposing to use material from that source for the contract in question, the buyer will be entitled to suspend his performance.
2.7. - Article 71(2) applies in a specific situation -- where the threat of non-payment becomes apparent after the goods have been dispatched and before they have been handed over by the carrier. The seller is empowered in such circumstances to prevent the handing over of the goods to the buyer. Apart from this provision Article 58(2) enables a seller to dispatch goods on terms providing for them not to be handed over to the buyer except against payment of the price. Presumably, therefore, Article 71(2) will be resorted to only where the goods have not been dispatched on those terms.
2.8. - Paragraph (2) is expressly limited in its operation to «the rights in the goods as between the buyer and the seller». The carrier is accordingly not bound to comply with a direction of the seller not to hand over the goods to the buyer, and indeed [page 520] where the buyer holds a document which entitles him to obtain the goods, the carrier may be precluded from withholding them from him by his obligations under municipal and international law. In such circumstances the effective operation of the paragraph could therefore be quite limited.
2.9. - Paragraph (2) also needs to be read in conjunction with the statement in Article 4(b) that the Convention is not concerned with «the effect which the contract may have on the property in the goods sold». A third person may therefore acquire title to the goods from the buyer under the applicable domestic law which would then govern the question whether those rights were subject to the seller's right to prevent the handing over of the goods to the buyer.
2.10. - It is to be noted that paragraph (3) does not expressly require a notice of suspension to state the ground upon which the suspension has been based. In practice it would be most desirable that the ground be stated so that the party receiving the notice is placed in a position in which he can decide what action on his part is needed to provide adequate assurance of his performance. The need to observe good faith in international trade (see Article 7(2)) would be relevant in this connection.
3. Problems concerning the provision
3.1. - One question that is bound to arise under the article is whether particular non-performance extends to a substantial part of a party's obligations. The Convention does not provide express guidance in this regard and a broad view will have to be taken in light of all the circumstances. The obligations that are not going to be performed will need to be of some significance but it seems clear that their non-performance will not have to constitute a fundamental breach as defined by Article 25 (compare in this regard the express reference to a fundamental breach in Article 72).
3.2. - A more basic problem concerns the degree of certainty required for deciding that the other party «will not» perform a [page 521] substantial part of his obligations. As has been mentioned, considerable effort was put into drafting the provision so that its applicability would depend on objective considerations, notwithstanding that in many cases it will not be possible to do more than predict that a non-performance is likely to occur. Paragraph (1) requires that the prospective non-performance «becomes apparent» whereas the corresponding words of Article 72 are «it is clear». This different wording was deliberately adopted by the Vienna Conference on the basis that, at least in the French text, a difference of meaning was involved. In the French text, Article 71 uses the expression «il apparait» (which was said to have an objective meaning and to be synonymous with «il est étabil»). The stronger language «il est manifeste» («it is evident») is used in Article 72.
3.3. - Strictly construed, the language of the article seems to require that the likelihood of the apprehended non-performance amount to a virtual certainty by normal business standards. In practice, however, this will call for a judgment on the part of the party proposing to suspend performance. His judgment will to some extent be subjective although it will need to be based on appropriate facts. The judgment will not be final in its operation because the suspension action may lead to the other party providing an adequate assurance of his performance. Thus, it is likely that disputes as to the availability of the right to suspend performance will focus on whether such assurances provided by the other party are adequate. If one party suspends his performance in circumstances where no real doubt exists in regard to the performance of the other party and if that other party is duly notified of the suspension, he will normally respond by protesting that he is proposing to perform the contract and is able to do so. This will amount to an assurance of performance. Whether the assurance is adequate may then become a matter for consideration. If the parties disagree on whether the assurance is adequate it may become necessary to have that issue determined by a court.
3.4. - The question whether an assurance is adequate will depend on the circumstances which gave rise to the threat of non-performance. The assurance will need to be such as to remove that threat. Generally this will call for more than a mere [page 522] statement of intention and ability to perform. Where, for example, the threat of non-performance by a purchaser was based on the fact that he was not paying his debts as they fell due, an assurance would not be adequate unless it indicated that he had re-established current payments. Where the basis of a suspension of performance had been an apprehended inability to supply due to a strike of workers in the seller's factory, an assurance would need to indicate that the strike had been settled or that an alternative source of supply was available. On the other hand, where a suspension of performance had been based on a mere statement by the other party that he did not intend to perform his obligations, a later statement that he would now be performing as required by the contract may be adequate. A party who had suspended his performance would not be entitled to insist upon an assurance which would provide him with security for performance of a kind that was not provided for in the contract. Nor, it seems, would he be entitled to insist on «perfect» performance by the other party. An assistance would be sufficient to oblige the suspending party to continue with performance if any performance which is not assured does not amount to a substantial part of the obligations of the party giving the assurance. Of course a non-performance of that order may, nevertheless, give rise to a right to damages (see Article 74).
3.5. - Where a party who has suspended performance receives an adequate assurance from the other party, he is required by the article to continue with performance. He should, however, inform the other party that he has accepted the adequacy of the assurance and is continuing with performance, although there is no express requirement to this effect in the article.
3.6. - There is a question as to what time requirements apply to the resumed performance. For example, a seller may have contracted on April 30 to supply goods by June 30. A deficiency in the buyer's credit-worthiness may have caused the seller to suspend his performance for a month from May 15 to April 15, when he received adequate assurances from the buyer. By then the seller may not be able to supply the goods by the contract date of June 30. The Convention does not state what is to be the position in these circumstances but there seems to be a clear [page 523] implication that the seller is entitled to a reasonable adjustment of the date of supply to take account of the suspension. This would accord with what is expressly provided in § 2-611(3) of the Uniform Commercial Code of the United States in regard to the effect of a withdrawal of a repudiation.
3.7. - If no adequate assurance is given following a suspension of performance what will be the status of the contract? Suspension of performance under Article 71 has been kept separate from avoidance under Article 72 and it follows that the contract continues in existence unless and until it is avoided. Frequently, however, a failure to provide an adequate assurance will justify a conclusion that a fundamental breach will be committed and avoidance for anticipatory breach will be possible. Alternatively, when the time for performance has passed an actual breach will have occured giving rise to a right to avoid the contract under Article 49 or Article 64. In either event damages will of course be recoverable for loss resulting from the non-performance (Article 74).
3.8. - The article requires the prospective non-performance to become apparent after the conclusion of the contract. This prevents a party from relying on the provision if he were aware before he entered into the contract of the circumstances standing in the way of performance by the other party. If those circumstances were generally apparent but not in fact known by the party wishing to suspend performance, it is not clear whether the article would be held to be applicable, but probably it would be held not to be.
3.9. - Paragraph (2) uses the word «evident» rather than «apparent» but the two words would seem to be synonymous. [page 524]