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Perspectives from CISG, UNIDROIT Principles & PECL
Chengwei, Liu [*]
September 2003
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CHAPTER 9. ANTICIPATORY NON-PERFORMANCE
Anticipatory breach denotes situations where: 1) one of the parties will not or will not be able to perform the contract prior to the performance date, or 2) a party has declared that he will not perform a substantial part or all of his obligations within the time for performance. The usual remedy for anticipatory breach under some legal systems is temporary "suspension" of performance by the innocent party, subject to certain conditions or limitations.[1] Yet, if the anticipatory breach amounts to a "fundamental" breach, the aggrieved party is entitled to an early termination of the contract.
Under the Convention, Arts. 71 and 72 deal with related but different aspects of future non-performance by a party of his contractual obligations. Art. 71(1) permits a party to suspend temporarily its performance if "after the conclusion of the contract, it becomes apparent that the other party will not perform a substantial part of his obligations as a result of [...]" Art. 72(1), on the other hand, allows a party to avoid the contract, thus putting a permanent end to its obligation to perform, if "prior to the date for performance of the contract it is clear that one of the parties will commit a fundamental breach of contract".
Clearly, the consequences under the two articles are different: "Under art. 71 the party seeking assurance of performance is only entitled to suspend his own performance pending the provision of the sought assurance; it is only if adequate assurance is not furnished that he is entitled to avoid the contract. Under art. 72, the aggrieved party may immediately avoid the contract if he can discharge the substantially heavier burden of proof incumbent on him and the other party has declared that he will not perform his obligations."[2] This distinction reflects different objects of the two articles: "The object of Article 72 is to provide the innocent party with a remedy in cases where it is clear that the other party will not perform at all or will commit another fundamental breach. This remedy based on the Anglo-American doctrine of anticipatory breach allows the innocent party to avoid the contract when the breach occurs without having to wait until performance becomes due. Whereas Art 72 is aimed at the phenomenon of anticipatory breach of contract, i.e. a breach of contract that takes place before the performance is due by the party in breach, Article 71 has a wider scope in that it deals with anticipatory breach as well as incomplete performance. The remedies in Article 71 is aimed at keeping the contract intact, whereas the remedies in Article 72 is aimed at avoiding the contract."[3]
On the one hand, "suspension under Article 71 requires less certainty concerning a future breach than does avoidance under Article 72. Article 72(1) permits avoidance only when 'it is clear' that the other party will breach; under Article 71, the threatened breach need merely be 'apparent' in order to justify suspension."[4] In other words, "Article 72 states that the prospect of future breach must be 'clear' to justify avoidance, whereas suspension under Article 71 requires only that the threat of breach 'becomes apparent'."[5] Thus, Art. 71 is concerned with the situation where "it becomes apparent" that the other party will not perform a substantial part of his obligations whereas Art. 72 applies where "it is clear" that one of the parties will commit a fundamental breach of contract. Art. 71 is therefore wider than Art. 72 and, in concept at least, was intended to be more easily invokable.[6]
On the other hand, "compared to the requirements for avoidance under Article 72, the consequences of the threatened breach need not be as serious to trigger suspension under Article 71. The standard in Article 71 is non-performance of 'a substantial part' of a party's obligations. Article 72 requires a threat of 'a fundamental breach of contract.' The distinction apparently drawn here between substantial non-performance and fundamental breach lends support to those who have argued that the definition of fundamental breach demands more than a 'mere' material breach."[7] In this point, Flechtner believes that "the drafters would not have used two different phrases ('fundamental breach' as opposed to non-performance of 'a substantial part of his obligations'), and in particular, two different adjectives describing the seriousness of the breach ('fundamental' as opposed to 'substantial'), had they not intended to distinguish the seriousness of the threatened breach that would satisfy the standards of the respective articles."[8] Also, it follows from the two different phrases ("fundamental breach" as opposed to non-performance of "a substantial part of his obligations") that there has been a conscious choice not to deem every deficiency or any conduct, even if relating to a substantial part of the promisor's obligations, a fundamental breach.[9]
Thus, non-performance of a substantial part of obligations will not always amount to a fundamental breach. However, on the other hand, if the expected non-performance were at the same time a fundamental breach of contract, the obligor would have a choice between a suspension of performance under Art. 71, or avoidance of the contract under Art. 72.[10] In other words, in certain circumstances, a party may be entitled to rely on either Art. 71 or 72: "If an anticipatory breach occurs, the innocent party may want to enforce specific performance in which case it would make use of its right to suspend performance under Article 71 rather than to avoid the contract under Article 72 even if it is entitled to do so. However, in the case of part performance a party may apparently only rely on Article 51 in conjunction with Article 45 where Article 51 applies or on Article 71 (if it wants to enforce full performance) or Article 49 (if wants to avoid the contract), but not on Article 72. Article 72 is therefore a remedy that is only to be used in true circumstances of anticipatory breach and not where an actual breach has already taken place. However where the contract consists of a series of performances (installments, for instance, delivery of a certain number of goods on a monthly basis), a serious deficiency in quality of the first installment, entitles the innocent party to exercise its rights under section 73 and avoid the contract."[11]
In any event, however, an anticipated minor breach of contract by the other party is insufficient either to suspend under Art. 71 or to avoid under Art. 72 the contract. Only if the anticipated non-performance of a party is so serious as to contradict a substantial part of his obligations could the party who has to perform first be empowered to suspend performance under Art. 71; or when the anticipated non-performance amounts to a fundamental breach of contract, could the other party avoid the contract prior to the date for performance.
As stated in the preamble of this Chapter, the usual remedy for anticipatory breach is temporary "suspension" of performance by the innocent party. According to Art. 71(1) CISG, a party may suspend performance of his obligations in case of anticipatory non-performance under certain circumstances. Interestingly, the mechanism of suspension under CISG Art. 71 seems to differ to some extent from the withholding mechanism as found in UPICC Art. 7.3.4 or PECL Art. 8:105, where only anticipatory fundamental non-performance triggering termination is dealt with. Therefore, the following discussion on suspension will focus on CISG Art. 71.
Art. 71 CISG provides the grounds and conditions for suspending performance by any party due to the other party's anticipatory breach: "A party may suspend the performance of his obligations if, after the conclusion of the contract, it becomes apparent that the other party will not perform a substantial part of his obligations as a result of: (a) a serious deficiency in his ability to perform or in his creditworthiness; or (b) his conduct in preparing to perform or in performing the contract." It is a logical condition for the suspension of performance of an obligation that the obligation to perform is already due. Hence it was concluded that the party who had to perform first was empowered to suspend performance. What are required are not only acts in performance of the contract, but also those in preparation of performance which, therefore, can also be suspended. Thus production of goods may be stopped and procurement of materials put off. "[12] However, there is no right to suspend performance for insecurity in relation to performance obligations which are not substantial but which might, under the common law, be regarded as essential contractual terms.[13] Furthermore, to justify suspension of performance a threat of anticipatory non-performance of a substantial part of obligations must arise from: (a) a serious deficiency in his ability to perform or in his creditworthiness; or (b) his conduct in preparing to perform or in performing the contract.
According to the cause (a), deficiency in the ability to perform and deficiency in the creditworthiness are placed next to each other. "A deficiency in the seller's ability to perform may arise for the seller, e.g. in the event of a forthcoming strike [...], an official order, a prohibition of export, embargo measures, etc. A deficiency in the buyer's creditworthiness can be the result of a FOB business where there is insufficient storage room on board a ship. There may be a deficiency in the ability of a party to perform a contract even if that party's financial situation is excellent. The reasons for insufficient ability are irrelevant, they don't have to be anybody's fault nor does anybody have to be responsible for them [...]."[14] Creditworthiness, too, can relate to both parties; not only to the buyer who is obligated to pay the price of the goods, but also to the seller who may find himself incapable of financing manufacture of the sold goods. The creditworthiness of the buyer may even play a role when he is the one to perform first, e.g. in the case of advance payment or the opening of a letter of credit. However, a deficiency in the creditworthiness of the buyer is no reason for suspending performance when the financial situation of the buyer has not changed since the conclusion of the contract and when there are growing doubts on the part of the seller in regard to setting the buyer a time limit for payment. Nonetheless, deficiency in creditworthiness should be interpreted broadly and cover the event where the economic situation of a guarantor or provider of a guarantee deteriorates. According the cause (b), on the other hand, such conduct may also refer to the fulfilment of other contracts (O.R., p. 52) and is independent of the financial situation, e.g. frequent complaints. It may also cover the use of certain unfitting raw materials in performing obligations under similar contracts.[15]
If the reasons which allow a party to suspend performance of his obligations were known to him at the time the contract was concluded, that party could not refer to them to suspend performance. It is, however, not a condition that those reasons emerge only after the conclusion of the contract. It will suffice that they become apparent only after the conclusion of the contract. One should note that Art. 71(1) was substantially amended at Vienna. It is originally provided in 1978 Draft Art. 62(1) that a party could suspend performance of his obligations if the prescribed circumstances gave "good grounds to conclude" that the other party would not be able to perform a substantial part of his obligations. The version was said to permit suspension based on a "subjective assessment of the situation" (O. R., p. 419). Therefore, after lengthy deliberations, the wording of Draft Art. 62(1) was changed when the more objective "it becomes apparent" was adopted in Art. 71(1). The modification is said to have been made so that under CISG Art. 71 "subjective fear by one party will not justify suspension; there must be objective grounds showing substantial probability of non-performance"[16]
The right to suspend performance must not lead to a situation where contracts are thoughtlessly concluded. In spite of the inclusion of the circumstances existing at the conclusion of the contract, the first party still has the obligation to examine the creditworthiness of the other party. Therefore, the right to suspend performance cannot be invoked if the bad economic situation of the other party is generally apparent but not in fact known to the party wishing to suspend performance. A party would have the right to suspend performance only if he was aware of the bad economic situation of the other party at the conclusion of the contract and can prove that the other party's economic situation considerably worsened. An objective measure should be used to judge the reasons which would give rise to a suspension of performance; subjective fear by one party will not be sufficient. There must be a high degree of probability of non-performance. The reasons must become apparent to a reasonable person in the same circumstances. Decisive is not just the relevant information, but whether the party wishing to suspend performance could hold it to be true. If the party suspending performance could hold the information available to him to be true, the risk falls to the other party. If the first party, however, refuses to perform his obligations unfoundedly, he commits a fundamental breach of contract. Risks of this kind cannot be fully avoided in international trade.[17]
In a word, "it is clear that under article 71 the suspending party cannot invoke the suspension right on mere hunches on the probability of non-performance."[18] Nonetheless, suspension under Art. 71 requires less certainty concerning a future breach than does avoidance under Art. 72. While Art. 71 says it becomes apparent that the other party will not perform a substantial part of his obligations, Art. 72 mentions that it is clear that the other parties will commit a fundamental breach of contract. The requirement that it merely be "apparent" under Art. 71 is intended to be less onerous than the requirement that it be "clear", a criterion which applies in cases of avoidance for anticipatory breach under Art. 72. Thus the standards of Art. 71 are less strict than those of Art. 72.[19]
9.3 SELLER'S RIGHT TO STOP GOODS IN TRANSIT UPON SUSPENSION
Art. 71(2) continues the policy of Art. 71(1) in favour of a seller in stipulating that in case the seller has already dispatched the goods before the grounds for suspension become evident, he, nevertheless, "may prevent the handing over of the goods to the buyer even though the buyer holds a document which entitles him to obtain them". In other words, if the deficiency in the buyer's creditworthiness is such as to make it apparent that the buyer will not pay for the goods, the seller has the right as against the buyer to order the carrier not to hand over the goods to the buyer even though the buyer holds a document which entitles him to obtain them, e.g., an ocean bill of lading, and even if the goods were originally sold on terms granting the buyer credit after receipt of the goods.[20]
As for the application of CISG Art. 71(2), in contrast to Art. 71(1), the issue to be dealt with here only concerns the right of the seller to stop the goods in transit. One could have imagined that the buyer, too, should have been granted such a right, i.e. that he should have had the opportunity to revoke a money transfer order. A relevant proposal was rejected, however, during the drafting of the CISG because there was fear of a serious impairment of the international payment transactions and because in many countries the non-payment of a cheque constitutes a criminal act. No such protection is needed in the case of the opening of a letter of credit because the seller usually cannot have access to the letter of credit before having delivered.[21] At the same time, Art. 71(2) expressly states that it "relates only to the rights in the goods as between the buyer and the seller". The right to stop the goods in transit, therefore, does not relate to the relationship between the buyer and his other partners if he has already resold the goods and a third party has obtained title in the goods.[22]
In other words, under the CISG the seller loses his right to order the carrier not to hand over the goods if the buyer has transferred the document to a third party who has taken it for value and in good faith.[23]It follows that the relations between the buyer and his obligees remain untouched. If an obligee of the buyer has the goods or if he has pledged title in the goods from a document, the rights of the seller are not governed by the CISG but by the otherwise applicable domestic law. In this point, Vilus submits: "The most common situation referred to in Art. 71 is the case when the goods are in transit. In such circumstances there is a common law institution called stoppage in transitu which the seller can use when the buyer has delivered the documents to a third person. This is clear from the formulation of Art. 71 which emphasizes that 'the present paragraph relates only to the rights in the goods as between the buyer and the seller.' The view is held that in such cases the seller cannot claim the goods from a third party on the basis of the Convention, but he might do so under the applicable national law."[24]
On the other hand, the right to stop the goods in transit does not touch upon the relationship between carrier and buyer. There are no obligations for the carrier under the CISG to respect the seller's request for stoppage. The question whether the carrier must or is permitted to follow the instructions of the seller where the buyer has a document which entitles him to obtain them is governed by the appropriate law of the form of transport in question.[25] If he voluntarily stops the goods in transit he exposes himself to a claim for damages on the part of the buyer. The seller, on his part, could, because of the right to stop performance, request the buyer not to take measures against the carrier. Because of the contractual relationship with the carrier, the seller could perhaps give orders to the former thus exercising his right to stoppage. Otherwise, he would have to call in a court. In other words, if the seller has already dispatched the goods, he can only prevent the handing over of the goods to the buyer by giving relevant orders to the carrier or forwarding agent in question. To what extent the latter follows those orders in the first place depends on the contract concluded for carriage. If the buyer's country has acceded to the CISG, or if the domestic rules of that country also provide for a right to stop the goods in transit, the seller may try to enforce this right through the courts, e.g. by way of distress or temporary injunction.[26]
9.4 DUTY TO GIVE NOTICE IN EXERCISING SUSPENSION
Unlike Art. 73 ULIS, Art. 71(3) CISG requires that the party suspending performance pursuant to paragraph (1), whether before or after dispatch of the goods, "must immediately give notice of the suspension to the other party", who may restore performance by giving "adequate assurance of his performance" to the aggrieved party. This is intended to increase cooperation between the parties.
However, it is sufficient to give notice after the performance of obligations has been suspended; the entitled party does not have to indicate his intention earlier because frequently there will be no time to do so. Notice here is subject to Art. 27 CISG and need not, therefore, to be received. The risk of transmission is borne by the addressee. It should, however, be in the interest of the suspending party to see to it that the notice reaches the other party. In addition, it is not required in the rule to indicate grounds in the notice. But it may be inferred from the principle of good faith that grounds should be stated so as to enable the other party to decide what action is to be taken. If the entitled party fails to give notice of suspension, he will not lose the right to suspend performance, but he may have to satisfy the claims for damages by the other party.[27]
9.5 RESTORING PERFORMANCE BY GIVING ADEQUATE ASSURANCE
In the same sentence, Art. 71(3) CISG requires that the party suspending performance "must continue with performance if the other party provides adequate assurance of his performance". This is another effort made to increase cooperation between the parties. Thus the other party can reinstate the first party's obligation to continue performance by giving the first party adequate assurance that he will perform. Three questions are involved here: first, what is adequate assurance? second, what is covered by such adequate assurance? and third, what happens when the other party does not provide adequate assurance?
First, for such an assurance to be "adequate", it must be such as will give reasonable security to the first party either that the other party will perform in fact, or that the first party will be compensated for all his losses from going forward with his own performance.[28] For instance, if export of the goods sold was prohibited, but the seller later obtained an export license, the requirement of adequate assurance would be fulfilled. The same is true for cases where a strike in the seller's factory was thwarted or settled, or where the seller obtained new sources of materials for the manufacture of the goods. According to Honnold, this includes the event in which the buyer, who had suspended payment of this obligations, has re-established them. If performance was suspended on the basis of the 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. Such assurance could also be given by way of offering immediate performance of his obligations or performing them without delay. In the event of a deficiency in creditworthiness, a banker's guarantee would for instance offer adequate assurance.[29]
In short, adequate assurance depends on the circumstances which have led to the suspension of performance. Adequate assurance need not include full performance; a slight delay should be accepted. In this context, however, reference should be made to assurance in the sense of security for damage claims in case of non-performance.[30]
When the other party provides adequate assurance, such assurance may cover two events: (a) the grounds which led to the suspension of performance have been overcome; and (b) the grounds were not existent at all. In the latter case, the suspending party may already have committed a breach of contract including all the consequences ensuing from it. Suspension of performance may, thus, entail a certain risk. The other party might, in certain circumstances, not only claim damages because of the delay but also because of the costs incurred in providing additional assurances.[31]On the other hand, it is generally assumed that the suspending party, who has to continue with the performance of his obligations, can extend the period for performance by the time that has passed since he has stopped his preparatory work. That time may also be shorter. In any case, the party who is entitled to suspend performance can reasonably adjust the time for performance in accordance with the circumstances.[32]
However, there is no statement of the consequences of an inadequate assurance in Art. 71(3) CISG, and it should not be presumed that the failure to provide an assurance (or an adequate assurance) is enough to make it "clear" that the other party will commit a fundamental breach. A failure to provide an adequate assurance does not automatically provide a right of avoidance and there is therefore no mechanism by which a party may demand an assurance of performance and treat a failure to respond with an adequate assurance as a fundamental breach.[33] The Secretariat Commentary on Art. 62 of the 1978 Draft [draft counterpart of CISG Art. 71] clearly states, however, that if the party suspending performance suffers damages because the other party did not provide adequate assurances as required by this article, he may recover any damages he may have suffered, whether or not he declares the contract avoided.[34]
9.6 TERMINATION UPON ANTICIPATORY FUNDAMENTAL NON-PERFORMANCE
As stated in Chapter 8, "anticipatory" fundamental breach constitutes the second ground for avoidance of the contract. In this respect, Art. 72(1) CISG stipulates: "If prior to the date for performance of the contract it is clear that one of the parties will commit a fundamental breach of contract, the other party may declare the contract avoided." Both Art. 7.3.3 UPICC and Art. 9:304 PECL follows this rule in substance. Art. 7.3.3 UPICC reads: "Where prior to the date for performance by one of the parties it is clear that there will be a fundamental non-performance by that party, the other party may terminate the contract." And Art. 9:304 PECL reads: "Where prior to the time for performance by a party it is clear that there will be a fundamental non-performance by it, the other party may terminate the contract." In the following paragraphs, I will focus on anticipatory non-performance as a ground for the right to terminate the contract.
9.6.1 In General
Art. 72(1) CISG, Art. 7.3.3 UPICC and Art. 9:304 PECL are said to establish the principle that a non-performance which is to be expected is to be equated with a non-performance which occurred at the time when performance fell due.[35] These articles entitle the aggrieved party to terminate the contract for "anticipatory non-performance", by which is meant an obvious unwillingness or inability to perform where the failure in performance would be fundamental within Art. 25 CISG, Art. 7.3.1 UPICC and Art. 8:103 PECL, respectively.
The right to terminate for anticipatory fundamental non-performance rests on the notion that a party to a contract cannot reasonably be expected to continue to be bound by it once it has become clear that the other party will commit, cannot or will not perform at the due date. The effect of theses articles is that for the purpose of the remedy of termination an anticipatory fundamental non-performance is equated with a fundamental non-performance after performance has become due.[36] It is implicit in these articles that a party which exercises a right to terminate the contract for anticipatory non-performance has the same rights as on termination for actual non-performance and is therefore entitled to exercise any of the remedies available to actual non-performance, including damages, except that damages are not recoverable where the non-performance at the due date would be excused.[37]
However, at first blush there seems to be a slight difference between the provisions of Art. 72(1) CISG and Art. 7.3.3 UPICC or Art. 9:304 PECL. In Art. 72(1) CISG, it is required that it must be clear that the counter party will commit a fundamental breach. Both Art. 7.3.3 UPICC and Art. 9:304 PECL are apparently more widely formulated in that they only require that it must be clear that there will be a fundamental non-performance, i.e. a fundamental non-performance will take place. This difference is more apparent than real.[38]
9.6.2 Clear Indication of A Fundamental Non-performance
The CISG, UPICC and PECL all require a clear indication of a fundamental non-performance, i.e. that it must be clear that there will be or the other party will commit a fundamental non-performance; "a suspicion, even a well-founded one, is not sufficient."[39]
It is clear that a fundamental breach of contract will be committed when the other party declares that he will not perform his obligations. There is the same clarity when the other party denies the very existence of a sales contract. It is also clear that a fundamental breach of contract will be committed when the seller resells to a third party the goods that he had contracted to deliver to the buyer, or when he sells the machines with which he had agreed to produce the goods for the buyer. A breach of contract is also clear in the case of insolvency and the initiation of bankruptcy proceedings. The circumstances mentioned in CISG Art. 71((a) a serious deficiency in his ability to perform or in his creditworthiness; or (b) his conduct in preparing to perform or in performing the contract.) can be so serious that it is clear that a fundamental breach of contract will be committed. There need not, however, be absolute certainty. Since the possibility is envisaged that adequate assurance be provided and the contract be performed in the end, there need not be a fundamental breach of contract.[40]
Thus, great difficulty arose in connection with the question of when a particular act or occurrence justifies the conclusion that a fundamental breach is to be expected. The debate over whether the formulation "it is clear" under CISG Art. 72(1) means or should mean a higher degree of certainty than the formulation in Art. 71(1) "it becomes apparent" played a major role in the discussion. Under commentators there is a difference of opinion on whether "it is clear" (in Art. 72) has the same meaning as "it becomes apparent" (in Art. 71). The majority opinion seems to be that Art. 72 requires a higher standard of prospective certainty than Art. 71 mainly due to the more drastic nature of the remedy under Art. 72, namely avoidance. Suspension as provided for in Art. 71 is less drastic in that it is only a temporary remedy, especially if the contract is to be avoided without giving notice to the counter party. This approach also seems to be supported by the case law. This approach is also supported by the provisions of Arts. 7.3.3 and 7.3.4 of the UNIDROIT Principles (as well as those of PECL Arts. 9:304 and 8:105), where there is a clearly formulated difference in the requirements. In terms of Art. 7.3.3 it is required that it must be clear that there will be a fundamental non-performance, whereas in terms of Art. 7.3.4 there need only be a reasonable belief on the part of the innocent party that there will be a fundamental non-performance.[41]
However, Schlechtriem refers to a linguistically somewhat lower ceiling but not to a fundamental difference. Schlechtriem submits that the different formulations do not require different degrees of certainty - such a requirement would hardly be practicable anyway. In Art. 73(2), the same wording originally used in Art. 71(1) - "good grounds to conclude" - was retained for the case where a fundamental breach is anticipated with regard to instalment contracts. The decisive factor in all three provisions - Arts. 71(1), 72(1) and 73(2) - is whether a reasonable person would be convinced that a breach of contract is certain to occur. Moreover, another reason for not requiring a higher degree of certainty under Art. 72(1) is that otherwise, a serious refusal to perform would never be "certain" enough under Art. 72(3) since an obligor can always change his intentions until the time for performance. On the other hand, the refusal of the obligor to provide "adequate assurance" following a notice under Art. 71(3) should not in itself be regarded as "clear" evidence of an impending breach of contract.[42]
Furthermore, the terminology used is of the same in both Art. 7.3.3 UPICC and Art. 9:304 PECL, and the UPICC or the PECL therefore sheds little light on what measure should be used to determine whether "it is clear" under CISG Art. 72(1). Therefore, if there is any doubt on whether, due to the conduct of the other party or the prevailing circumstances, there is an anticipatory breach objectively speaking, a party should rather exercise the right to suspend performance under Art. 71 CISG and require an adequate assurance from the other party than issue a notice of avoidance under Art. 72(2). It is the safer option because the giving of a notice of avoidance in terms of Art. 72(2) under circumstances where it is not warranted may in itself constitute an anticipatory breach entitling the other party to avoid the contract.[43] Even where it is in fact clear that a fundamental breach of contract will occur, the duty to mitigate the loss enunciated in Art. 77 CISG may require the party who will rely upon that breach to take measures to reduce his loss, including loss of profit, resulting from the breach, even prior to the contract date of performance.[44]
Nonetheless, termination in case anticipatory non-performance is permitted only where the obligation of which non-performance is threatened is of such kind that its breach would entitle the aggrieved party to terminate the contract. This applies also to a threatened delay in performance. If a party indicates that it will perform but that its performance will be late this does not constitute an anticipatory non-performance within these articles except where time of performance is of the essence of the contract or the threatened delay is so serious as to constitute a fundamental non-performance.[45] If a party declares the contract avoided without a fundamental breach of contract by the other party being anticipated, the former commits a fundamental breach of contract. In other words, a party who intends to declare the contract avoided in case of anticipatory non-performance should do so with caution. If at the time performance was due no fundamental breach would have occurred in fact, the original expectation may not have been "clear" and the declaration of avoidance itself be void. In such a case, the party who attempted to avoid would be in breach of the contract for his own failure to perform.[46]
In sum, in order for Art. 72(1) CISG, Art. 7.3.3 UPICC and Art. 9:304 PECL to apply it must be clear that a party is not willing or able to perform at the due date. If its behaviour merely engenders doubt as to its willingness or ability to perform the other party's remedy is to demand an assurance of performance.[47] Despite of all the ambiguities as for what measure of certainty is required that a fundamental breach will occur in such cases, In a 1992 German decision, the Landgericht [District Court] Berlin has given the best judicial exposition of the standards required under Art. 72. It defined the words "it is clear" ("offensichtlich") in terms of the probabilities that a fundamental breach will be committed. It stated that a very high degree of probability is required ("einer sehr hohen naheliegender Wahrscheinlichkeit."), but that this did not mean a probability almost reaching certainty ("eine an Sicherheit grenzende Wahrscheinlichkeit.").[48] As clarified in the Secretariat Commentary, the future fundamental breach may be clear either because of the words or actions of the party which constitute a repudiation of the contract or because of an objective fact, such as the destruction of the seller's plant by fire or the imposition of an embargo or monetary controls which will render impossible future performance.[49] In a word, a high degree of certainty about occurrence of the breach and its fundamental character is required.[50]
9.6.3 Notice Given in case of Termination
Unlike the apparent duty to give notice, as established under Art. 71(3) CISG, by a party intending to suspend performance, there are different opinions on whether the obligation to give notice is a condition precedent for the valid exercising of the right to avoid in case of anticipatory fundamental non-performance.
According to Art. 72(2) CISG: "If time allows, the party intending to declare the contract avoided must give reasonable notice to the other party". Some commentators submit that in the very interest of the obligee, it should be reasonable in most cases to give notice of an avoidance of contract. Given the sophisticated means of communication, it is hardly imaginable that time would not allow to give notice to the other party of the intended avoidance of the contract. Time also relates to the time-span between the giving of notice and the expiration of the time for performance. The other party must have sufficient time to provide assurance. Even in the event of the other party's bankruptcy, his receiver could prefer fulfillment to avoidance of a contract. A notice is reasonable whenever there is a chance that the other party will provide assurance of performance.[51]
However, this is contradicted by circumstances where there is absolute certainty of future fundamental breaches of contract.[52] Notice of the intent to avoid is unnecessary in those situations - practically speaking, the most important - in which the other party has already declared that he will not perform the contract (Art. 72(3)). Since this exception also covers the frequent cases in which a demand for new terms or alleged contract violations by the other side are used as a pretext for not performing one's own obligations, immediate avoidance still remains an option in most cases. However, Art. 72(2) should apply primarily to situations where performance by a willing party is jeopardized by objective circumstances. In those cases where there is no time to notify, where the delivery date is so near that assurances could not be procured in time, there is again no need to notify the other party. Where there is little chance that the other party can still provide security - for example, where a delivery cannot be made because of war - notice will often be unnecessary.[53]
Nonetheless, the CISG takes a more lenient approach to anticipatory breach than the PECL or the UNIDROIT Principles in that it obliges the innocent party, when time allows, to notify the other party if it intends avoiding the contract, except where the other party has clearly declared its intention not to perform. The object of the notification is to enable the other party to provide adequate assurance that it will perform. There are different opinions, however, on whether the obligation to give notice is a condition precedent for the valid exercising of the right to avoid. It is submitted that in interpreting the duty to inform, a court should follow a stricter approach towards the necessity to inform if regard is had to the approach followed under the PECL or the UNIDROIT Principles. If there is doubt on whether the innocent party should have informed or not, the court ought to rule in favor of the innocent party, i.e., that there was no duty to inform. In terms of Art. 7.3.3 UPICC or Art. 9:304 of the PECL a party is not obliged to inform the other party, but may as a precaution require an adequate assurance of due performance, failing which that party is entitled to terminate the agreement.[54]
To sum up, the party intending to avoid the contract should act prudently in the situation of giving notice enabling the other party to provide adequate assurance since his avoidance without the ground for his action may result in his fundamental breach of the contract committed subsequently. This is in the interests of the party who considers himself entitled to termination in order to preclude unjustified avoidance of contract.[55] The object of the notification is to enable the other party to provide adequate assurance that it will perform. If that has become impossible, then the necessity to give notice must surely fall away.[56]
9.7 ADEQUATE ASSURANCE OF DUE PERFORMANCE
9.7.1 Purpose of Rule
Practically speaking, it is not always easy to provide clear proof of a fundamental breach of contract except in exceptional cases, for instance, bankruptcy of the debtor or its express refusal to perform. Thus, the party threatened by future non-performance would often be in a dilemma. If it were to wait until the due date of performance, and this did not take place, it might incur loss. If, on the other hand, it were to terminate the contract, and it then became apparent that the contract would have been performed by the other party, its action will amount to non-performance of the contract, and it will be liable in damages.[57]
Therefore, the notice of the party intending to declare the contract avoided demanding that the other party provide adequate assurance of the performance, as Art. 72(2) CISG allows in such a case, seems to be the best solution to relieve the former party from doubts about occurrence of the other party's breach and reduces the risk he would otherwise be taking. A similar rule is laid down in the first sentence of Art. 7.3.4 UPICC: "A party who reasonably believes that there will be a fundamental non-performance by the other party may demand adequate assurance of due performance and may meanwhile withhold its own performance"; as well as in Art. 8:105(1) PECL: "A party which reasonably believes that there will be a fundamental non-performance by the other party may demand adequate assurance of due performance and meanwhile may withhold performance of its own obligations so long as such reasonable belief continues".
Such rules are intended to protect the interests of a party who has reason to believe that the other will be unable or unwilling to perform the contract at the due date but who cannot or may be reluctant to terminate the contract immediately in case it transpires that the other party would after all have performed.[58]Consequently it enables a party who reasonably believes that there will be a fundamental non-performance by the other party to demand an assurance of performance from the other party and in the meantime to withhold its own performance.
9.7.2 Non-receipt of Adequate Assurance
As to what adequate assurance is, it is comparable to that in the suspension mechanism under Art. 71 as discussed above (supra. 9.5.1). What constitutes an adequate assurance will depend upon the circumstances, including the standing and integrity of the debtor, its previous conduct in relation to the contract and the nature of the event that creates uncertainty as to its ability and willingness to perform. In some cases the debtor's declaration of intention to perform will suffice. In other cases it may be reasonable for the creditor to demand evidence of the debtor's ability to perform.[59]
Rather, the way in which such adequate assurance is to be provided depends on the expected fundamental breach of contract. In practice, there will be very few cases where a mere statement of intention and ability to perform provides adequate assurance to the promisee. In most instances a new term of payment against documents, a guarantee by a reputable bank, or a letter of credit issued by a reputable bank will be required.[60] The simplest means is to provide assurance by way of paying a sum, e.g. banker's guarantee. If there is serious doubt as to the seller's performing of his obligations, he could also provide a guarantee of performance. He could also explain in which way he can and will deliver the goods in time, in the agreed quality and free from third party rights or claims (e.g. use of sub-contractors, increase in the production capacity, cancellation of other obligations to deliver, acquisition of licenses, etc.).[61] In any event, for such an assurance to be "adequate," it must give reasonable security to the promisee that either the promisor will perform in fact, or that the promisee will be compensated for all losses incurred in executing his own performance.[62]
There is a difference of opinion between commentators, however, on whether a failure or a refusal to produce adequate security where it has been demanded is in itself a fundamental breach or whether it may only be a clear indication that the other party will commit a fundamental breach.[63] As discussed above, in the suspension mechanism under Art. 71 CISG, a failure to provide an adequate assurance does not automatically provide a right of avoidance and there is therefore no mechanism by which a party may demand an assurance of performance and treat a failure to respond with an adequate assurance as a fundamental breach. This matter under CISG Art. 72(2) remains unclear as that under Art. 71(3). Despite the absence of a clear guidance on this matter, considering the conditions required in Art. 72 are much harsher than that in Art. 71, it may be correct to say that the failure by a party to give adequate assurances that he will perform when properly requested to do so may, under CISG help it "clear" that he will commit a fundamental breach.
In this respect, Art. 7.3.4 UPICC and Art. 8:105 PECL may be of assistance in interpreting the interplay between Arts. 72 and 71 as Art. 7.3.4 UPICC and Art. 8:105 PECL make express provision for the innocent party to demand an adequate assurance where it reasonably suspects that there will be a fundamental non-performance. In terms of Art. 7.3.4 UPICC and Art. 8:105 PECL, it is clearly stipulated that a failure to provide this assurance within a reasonable period of time, entitles the other party to terminate (avoid) the agreement.[64] In other words, if the aggrieved party does not receive adequate assurance of performance and still believes on reasonable grounds that performance will not be forthcoming, it may terminate the contract. Although whether this is possible in the light of the drafting history of the CISG, is debatable; the other party's failure to give the assurance requested is itself treated as a fundamental non-performance under the two sets of Principles, giving the aggrieved party the right to terminate the contract and also a right to damages where the deemed non-performance is not excused.[65]
Whereas a contract can usually be avoided only after a fundamental non-performance under CISG Arts. 49 and 64, UPICC Art. 7.3.1 or PECL Art. 9:301, a party may, under the prerequisites of CISG Art. 72, UPICC Art. 7.3.3 or PECL Art. 9:304 already declare the contract avoided before. Indeed, termination based on anticipatory non-performance as contained in these rules confirms the approach that employs the parties' (in)ability and (un)willingness to perform as a relevant factor in the determination of fundamental breach prior to the date of performance. It also confirms the approach that focuses on whether a party's behavior may give cause to the other not to rely on his future performance.[66]
However, these rules all require a clear indication of a fundamental non-performance, i.e. that it must be clear that there will be or the other party will commit a fundamental non-performance; "a suspicion, even a well-founded one, is not sufficient." If at the time performance was due no fundamental breach would have occurred in fact, the original expectation may not have been "clear" and the declaration of avoidance itself be void. In such a case, the party who attempted to avoid would be in breach of the contract for his own failure to perform. Therefore, if there is any doubt on whether, due to the conduct of the other party or the prevailing circumstances, there is an anticipatory fundamental non-performance objectively speaking, a party should rather exercise the right to suspend performance under Art. 71 CISG and wait until the time for performance has expired or when the other party has provided adequate assurance of his performance; or under UPICC Art. 7.3.4 or PECL Art. 8:105 demand adequate assurance of due performance and meanwhile withhold his own performance than issue immediately a notice of termination. Nonetheless in this context, the mitigation principle (to be discussed in Chapter 14) should be taken into consideration. A contract should definitely be avoided where an immediate avoidance would mitigate the losses.[67]
In sum, a party who intends to declare the contract avoided in case of anticipatory non-performance should do so with caution. It is the safer option to exercise the right to suspend or withhold performance because the giving of a notice of termination in terms of CISG Art. 72, UPICC Art. 7.3.3 or PECL Art. 9:304 under circumstances where it is not warranted may in itself constitute an anticipatory breach entitling the other party to avoid the contract.
FOOTNOTES: Chapter 9
* Chengwei, Liu. LL.M. of Law School of Renmin University of China, P.O. Box 9-01 No. 1 (International Law), Law School of Renmin University of China, 59 Zhongguancun Street, Beijing 100872, China. E-mail: Genes@263.net.
1. See Jianming Shen in "Declaring the Contract Avoided: The U.N. Sales Convention in the Chinese Context"; New York International Law Review, Vol. 10, No. 1, New York State Bar Association (Winter 1997); pp. 20-21. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/shen.html>.
2. See Jacob S. Ziegel in "Report to the Uniform Law Conference of Canada on Convention on Contracts for the International Sale of Goods". Available online at <http://www.cisg.law.pace.edu/cisg/text/ziegel71.html>.
3. See Sieg Eiselen in "Remarks on the manner in which the UNIDROIT Principles of International Commercial Contracts may be used to interpret or supplement Articles 71 and 72 of the CISG". (2002) Available online at <http://www.cisg.law.pace.edu/cisg/principles/uni71,72.html#er>; also in "Remarks on the manner in which the Principles of European Contract Law may be used to interpret or supplement Articles 71 and 72 of the CISG". (2002) Available online at <http://www.cisg.law.pace.edu/cisg/text/peclcomp71,72.html#er>.
4. See Harry M. Flechtner in "Remedies Under the New International Sales Convention: The Perspective from Article 2 of the U.C.C.": 8 Journal of Law and Commerce (1988) 53-108. Available online at <http://www.cisg.law.pace.edu/cisg/text/flecht71,72.html>.
5. See Harry M. Flechtner in "The Several Texts of the CISG in a Decentralized System: Observations on Translations, Reservations and other Challenges to the Uniformity Principle in Article 7(1)": 17 Journal of Law and Commerce (1998) 187-217. Available online at <http://www.cisg.law.pace.edu/cisg/text/flechtner71,72.html>.
9. See J. W. Carter in "Party Autonomy and Statutory Regulation: Sale of Goods"; 6 Journal of Contract Law, North Ryde NSW, Australia (1993) p. 106. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/carter3.html>. The distinction, however, also creates an ambiguity in the operation of Art. 71: "Suppose that a party has suspended performance because the other side will apparently fail to perform a substantial but not 'fundamental' part of its obligations. If adequate assurances are not forthcoming, can the aggrieved party continue to suspend its performance indefinitely? The answer should be no. Professor Honnold notes that '[c]ontinued suspension of performance is closely akin to avoidance of the contract.' Permitting indefinite suspension where the threatened breach is not fundamental, therefore, would undermine Article 72, which permits avoidance only where it is clear that a fundamental breach will occur. Two solutions are possible: (1) Article 71 could be construed to require that the suspending party either avoid the contract or end its suspension within a reasonable time after demanding adequate assurances; (2) the standards for the seriousness of the threatened breach in Articles 71 and 72 could be treated as equivalent. Neither solution, however, is supported by the text of the Convention." (Supra. note 5.)
10. See Fritz Enderlein, Dietrich Maskow, International Sales Law: United Nations Convention on Contracts for the International Sale of Goods, Oceana Publication (1992); p. 286. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/enderlein.html>.
14. Supra. note 10, pp. 286-287.
16. See Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, 2d ed., Kluwer (1991); p. 488.
17. Supra. note 10, pp. 285-286..
18. See Alejandro M. Garro in "Reconciliation of Legal Traditions in the U.N. Convention on Contracts for the International Sale of Goods": 23 International Lawyer (1989); pp. 443-483. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/garro1.html>.
21. See Secretariat Commentary on Art. 62 of the 1978 Draft [draft counterpart of CISG article 71], Comment 10. Available online at <http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-71.html>. The match-up indicates that paragraphs (2) and (3) of Art. 62 of the 1978 Draft and CISG Art. 71 are substantially the same. However, paragraph (1) was significantly modified. See the match-up, available online at <http://www.cisg.law.pace.edu/cisg/text/matchup/matchup-d-71.html>.
23. Supra. note 21, Comment 11.
24. See Jelena Vilus in "Provisions Common to the Obligations of the Seller and the Buyer": Petar Sarcevic & Paul Volken eds., International Sale of Goods: Dubrovnik Lectures, Oceana (1986); pp. 243-244. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/vilus.html>.
25. Supra. note 21, Comment 12. The rules governing the carrier's obligation to follow the consignor's orders to withhold delivery from the consignee differ between modes of transportation and between various international conventions and national laws.
27. Supra. note 10, pp. 288-289.
28. Supra. note 21, Comment 13.
33. See J. W. Carter, supra. note 9.
34. Supra. note 21, Comment 16.
35. See Comment on Art. 7.3.3 UPICC.
36. See Comment and Notes to the PECL: Art. 9:304. Comment A. Available online at <http://www.cisg.law.pace.edu/cisg/text/peclcomp72.html>.
39. Supra. note 36, Comment B.
42. See Peter Schlechtriem in "Uniform Sales Law - The UN-Convention on Contracts for the International Sale of Goods", Manz, Vienna (1986); p. 96. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/schlechtriem-72.html>. As to be discussed below, there is also a difference of opinion between commentators on whether a failure or a refusal to produce adequate security where it has been demanded is in itself a fundamental breach or whether it may only be a clear indication that the other party will commit a fundamental breach.
44. See Secretariat Commentary on Art. 63 of the 1978 Draft [draft counterpart of CISG article 72], Comment 4. Available online at <http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-72.html>. The match-up indicates that paragraph (1) of article 63 of the 1978 Draft and paragraph (1) of CISG article 72 are substantially identical. Paragraphs (2) and (3) of the Official Text are new. See the match-up, available online at <http://www.cisg.law.pace.edu/cisg/text/matchup/matchup-d-72.html>.
46. Supra. note 44, Comment 3.
47. Supra. note 36, Comment C.
48. Germany 30 September 1992 Landgericht [District Court] Berlin; available online at <http://cisgw3.law.pace.edu/cases/920930g1.html>.
49. Supra. note 44, Comment 2.
50. See Anna Kazimierska in "The Remedy of Avoidance under the Vienna Convention on the International Sale of Goods": Pace Review of the Convention on Contracts for the International Sale of Goods, Kluwer (1999-2000); p. 97. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/kazimierska.html>. In this respect, Kazimierska submits that this certainty will arise when the seller resells to a third party the goods he was to deliver to the buyer, or when he sells machines necessary for the production of goods contracted for by the buyer, or in the case of seller's insolvency and initiation of bankruptcy proceeding. When a deficiency in the seller's ability to perform, usually a deficiency in his creditworthiness, becomes so serious that it is clear that a fundamental breach of contract will be committed, the buyer also will have grounds for avoidance.
51. Supra. note 10, pp. 292-293. Another issue to be noted here is that under the CISG this notice is subject to Art. 27. If it is lost, the party entitled to avoid the contract does not lose that right. But he should in his own interest make sure that the notice reaches the other party.
52. Thus there is no need to give notice in advance of the intention to avoid the contract. But also in this case, the other party has a right and no obligation (except in regard to mitigation of losses, note 3) to declare the contract avoided. If the entitled party does not avoid the contract, and if the obligor changes his mind, the latter may still fulfil the contract. On the other hand, the obligee does not have to wait and see whether the obligor changes his mind; he can avoid the contract immediately. In such a case, the declaration of an intended non-performance of the contract is irrevocable (Supra. note 10, p. 293.)
55. Alike the matter in suspension of performance discussed above, termination also entails a certain risk. In the assessment of the appropriateness of termination, decisive is not just the relevant information, but whether the party wishing to terminate the contract could hold it to be true. If the party terminating the contract could hold the information available to him to be true, the risk falls to the other party. If the first party, however, refuses to perform his obligations unfoundedly, he commits a fundamental breach of contract. Risks of this kind cannot be fully avoided in international trade.
57. See Comment 1 on Art. 7.3.4 UPICC. See also Comment and Notes to the PECL: Art. 8:105. Comment A. Available online at <http://www.cisg.law.pace.edu/cisg/text/peclcomp71,72.html>.
59. See Comment 2 on Art. 7.3.4 UPICC; Comment D on Art. 8:105 PECL, supra. note 57.
60. See Robert Koch in "The Concept of Fundamental Breach of Contract under the United Nations Convention on Contracts for the International Sale of Goods (CISG)": Pace Review of the Convention on Contracts for the International Sale of Goods (CISG) 1998, Kluwer Law International (1999), p. 307. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/koch.html>.
65. See Comment 3 on Art. 7.3.4 UPICC; Comment C on Art. 8:105 PECL, supra. note 57.
67. Supra. note 10, p. 292. But even if there is no obligation to mitigate losses, clarity can be obtained by avoiding contract and the way could be opened up for new contracts. When a contract has been declared avoided, the entitled party can immediately claim damages.
Pace Law School Institute of International Commercial Law - Last updated October 27, 2003