Excerpt from John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, 3rd ed. (1999), pages 437-440. Reproduced with permission of the publisher, Kluwer Law International, The Hague.
§395 Articles 49 and 64, supra at §301 and §353, govern the right of an aggrieved party (A) to avoid the contract when the other party (B) has committed a breach of contract by defective performance or by failing to perform by the date required under the contract. In contrast, Articles 71 and 72 are concerned with situations where breach by B is threatened prior to the date for performance. Article 71 merely permits A to "suspend the performance of his obligations"; A is liberated from its obligation to perform or to accept performance only by avoiding the contract—(a) after B has committed a fundamental breach of contract (Arts. 49 or 64) or (b) under Article 72, below, when "it is clear" that B "will commit a fundamental breach." avoidance of contract
"(1) 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.
"(2) If time allows, the party intending to declare the contract avoided must give reasonable notice to the other party in order to permit him to provide adequate assurance of his performance.
"(3) The requirements of the preceding paragraph do not apply if the other party has declared that he will not perform his obligations."
§396 A. Grounds for Avoidance; Hazards
In examining the right to suspend performance (Art. 71, supra at §387) we saw that standards for suspension are less rigorous than the standards for avoidance under Article 72. Article 72 authorizes an aggrieved party (A) to avoid the contract prior to the date for performance only when "it is clear" that the other party (B) "will commit a fundamental [page 437] breach of contract." Unless B has declared that he will not perform (para. (3)), A’s attempt to avoid the contract in advance of the time for performance may overstep the limits set by Article 72. In this event, A still has a duty to accept performance by B. Moreover, A’s wrongful declaration of avoidance may constitute a repudiation giving B the right to avoid the contract under Article 72(1).
What circumstances make it "clear" that a party "will commit a fundamental breach of contract"? Paragraph (3) shows that a party’s declaration "that he will not perform his obligations" empowers the aggrieved party to declare the contract avoided, even though such a declaration does not make it absolutely "clear" that the repudiating party will not change his mind and perform by the due date. Schlechtriem notes that "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" provide "in most cases" a basis for immediate avoidance. 1986 Commentary 95. This proposition was probably intended to govern situations in which one party (A) demands new terms from B coupled with an unconditional declaration that A "will not perform" its obligations. Avoidance by B should not be triggered if A informs B of the need to negotiate a modification of their agreement (cf. Art. 29). In any event, a response by B that goes beyond a notice of suspension of B’s counterperformance and a request for assurance (Art. 71, supra) may be hazardous since it may provide grounds for A to avoid the contract on the ground that B has repudiated under Art. 72(1). Cf. White & Summers §6–2; Farnsworth, Contracts 634. Actions may be the equivalent to a repudiation—e.g., the wrongful resale to a third person of the goods that the seller had contracted to deliver to the buyer, or the sale of the manufacturing plant at which the seller had agreed to produce goods for the buyer. Of course, these are only a few of the circumstances that might invoke this article. [page 438]
§397 B. Advantages; Consequences
We have just noted some of the hazards of Article 72 avoidance. Are there advantages of early avoidance? Where A’s avoidance responds to B’s wrongful repudiation and therefore is clearly justified (Art. 72(3)), A’s declaration of avoidance makes it possible for A to resell (or repurchase) the goods called for by the initial contract; A need not be concerned lest B change its mind and tender performance. In addition, by virtue of Article 75, infra at §409, a reasonably prompt resale or repurchase (even prior to the date for performance) may fix the damages for which the repudiating party will be liable. May A bring legal action before the date for B’s performance? Such haste in instituting legal proceedings is seldom of practical value but Articles 75 and 76, infra at §409, seem to authorize action immediately on avoidance.
The effects of avoidance in various settings (Arts. 49, 64, and 72) are prescribed in Ch. V, Sec. V (Arts. 81–85) infra; these include the right to recover damages (Arts. 81(1)) and to claim restitution of whatever the avoiding party has supplied or paid under the contract (Art. 81(2)).
Decisions: Probability of Breach. (1) GER. LG Berlin, 99 O 123/92, 30 September 1992. S contracted to deliver shoes to B, a retailer; payment could be delayed until 60 days from invoice. Before the date for performing this contract, B failed to pay S under a prior ("first") contract. S then asked B to provide security for payment under the "second" contract because of doubts of B’s solvency. B refused to provide the requested security, claiming that the shoes S delivered under the "first" contract were defective. S declared the "second" contract avoided and resold, at a loss, the shoes that would have been delivered under this contract. Held: S’s action for damages from the "second" contract was sustained. For avoidance, the probability of future breach must be very high, but does not require almost complete certainty. Here the probability of future breach justified avoidance. UNILEX D.1992–21. (2) See also: GER. OLG Düsseldorf, 17 U 146/93, 14 January 1994. CLOUT 130, UNILEX D.1994-2.[page 439]
Commentary: Bonell/Ligouri, ULR (1996-2) 359 at 368–369; Strub, M.G., Anticipatory Breach and Developing Counties, 38 Int. & Comp. L. Q. 475–501 (1989); Schlechtriem, Com. (1998) 533–541 (Leser).
§398 C. The Requirement of Advance Notice
Paragraphs (2) and (3) were added to this article at the Diplomatic Conference. The discussion of Article 71, supra at §388, referred to the concern, primarily on behalf of developing countries, that the power of suspension might be abused. Similar concerns were expressed with respect to avoidance under Article 72; the addition of paragraphs (2) and (3) was part of the compromise developed by an ad hoc working group with respect to both Articles 71 and 72.
The addition of paragraphs (2) and (3) to Article 72 appears to have been useful. Under paragraph (2) advance notice of avoidance must be given only "if time allows." Modern methods of communication would normally permit such a notice without unduly hampering the aggrieved party’s freedom of action. In any event, advance notice "if time allows" would be consistent with good faith and normal commercial practice and, indeed, would reduce the hazards of making a declaration of avoidance. [page 440]
FOOTNOTES: Chapter on Article 72
1. Paragraph (1) of Art. 72 is substantially the same as Art. 63 of the 1978 Draft and ULIS 76. Paragraphs (2) and (3) were added at the Diplomatic Conference; see infra, n.6. Other developments at the Diplomatic Conference were linked to Article 71; see §388, supra at notes 3 and 4. For earlier action in UNCITRAL see V YB 41–42, 57, VI YB 72, 106, VIII YB 55, Docy. Hist. 150, 187–188, 203, 231, 348.
2. A’s hazards would be reduced if A, pursuant to Art. 72(2), notifies B of A’s intention and thereby gives B an opportunity to provide assurances of performance. See Arts. 71(3) and 72(2). Failure by B to respond effectively to such a notice would make it more difficult for B to challenge a subsequent declaration of avoidance. See also Art. 7(1) (interpretation to promote "the observance of good faith").
3. If the aggrieved party does not respond to repudiation by declaring the contract avoided, he may be obliged to accept performance if the repudiator changes his mind. Cf. Art. 81, infra Treitel, Contract 653–654, 661. Cf. Corbin §§980–981 (retraction of repudiation may be barred by other party’s change of position).
4. See Gulotta, Anticipatory Breach—A Comparative Analysis, 50 Tulane L. Rev. 927, 932 (1976); Restatement, Second of Contracts §250, Comments c and d, Corbin §§984, 1259 Treitel, Remedies (1988) 379–381. For the approach of German (FRG) law see Dölle, Kommentar Art. 76 p. 485 at 11–12. On repudiation under CISG see Stoll, 52 Rabels Z. 617 (1988) (In German; English summary).
5. The leading English decision authorizing immediate legal action is Hochster v. De la Tour, 118 Eng. Rep. 922 (Q.B. 1853). Recovery of damages, of course, does not present the problem of requiring specific performance before the agreed date. See Corbin §961, §962; Restatement, Second of Contracts §253.
6. Com. I Action: O.R. 130–131, Docy. Hist. 702–703; discussion: O.R. 419–422, 431–433, Docy. Hist. 640–643, 652–654, 702–703.
7. See also note 2, supra. Accord: Bennett, B-B Commentary 530. The significance of communications between the parties was discussed under Art. 7, supra at §100.