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Reproduced with the permission of Oceana Publications

excerpt from

INTERNATIONAL SALES LAW

United Nations Convention on Contracts for the International Sale of Goods

Convention on the Limitation Period in the International Sale of Goods

Commentary by
Prof. Dr. jur. Dr. sc. oec. Fritz Enderlein
Prof. Dr. jur. Dr. sc. oec. Dietrich Maskow

Oceana Publications, 1992

Article 71 [Suspension of performance]

[TEXT OF THE UNIFORM LAW]

(1) A party may suspend [1] the performance of his obligations if, after the conclusion of the contract, it becomes apparent [2] that the other party will not perform a substantial part of his obligations [3] as a result of: (a) a serious deficiency in his ability to perform or in his creditworthiness [4]; or (b) his conduct [5] in preparing to perform or in performing the contract.

(2) If the seller [6] 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 [7] them. The present paragraph relates only to the rights in the goods as between the buyer and the seller [8].

(3) A party suspending performance, whether before or after dispatch of the goods, must immediately give notice [9] of the suspension to the other party and must continue with performance if the other party provides adequate assurance [10] of his performance.

[WORDS AND PHRASES, CONCEPTS

1. a party may suspend the performance of his obligations
2. if, after the conclusion of the contract, it becomes apparent that
3. the other party will not perform a substantial part of his obligations
4. as a result of a serious deficiency in his ability to perform or in his creditworthiness
5. or his conduct in preparing to perform or in performing the contract
6. right of the seller to stop goods in transit
7. even though the buyer holds a document which entitles him to obtain [the goods]
8. the right to stop the goods in transit relates only to the rights in the goods as between the buyer and the seller
9. a party suspending performance, whether before or after dispatch of the goods, must immediately give notice of the suspension to the other party
10. and must continue with performance if the other party provides adequate assurance of his performance ]

[COMMENTARY

[1] [a party may suspend the performance of his obligations ]

There was an unusually lengthy and controversial discussion of Article 71 at the diplomatic conference because representatives of some developing, but also other countries were apprehensive that this rule could be abused to the detriment of less strong countries (O.R., 218 fol, 374, 377, 419 fol, 431 fol; see also G. Strub, "The Convention on the International Sale of Goods: Anticipatory Repudiation Provisions and Developing Countries", ICLQ, 1989, p. 475 fol). A party may suspend performance of his obligations under certain circumstances. This relates to any party and to any obligation. What we are referring to here is chiefly the obligation of the seller to deliver the goods and the obligation of the buyer to pay the price. According to Honnold (393), Article 71 also refers to the obligation of the seller to deliver substitute goods under Article 46, i.e. an obligation which presupposes an earlier breach of contract. It is quite logical to include the obligation to deliver substitute goods if it has become doubtful as a consequence that the price will be paid.

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 (see the 1985 CISG Commentary, 140; likewise Welser/Doralt, 123; critically Reinhart/Freiburg, 379). 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 (O.R., 52; Honnold, 393; Schlechtriem/Lausanne, 154, has certain doubts).

As a practical consequence of the inclusion of preparatory work, the question arises as to how long a party may suspend performance of his obligations (see here note 10).

If a party is granted the right to suspend performance of his obligations, non-performance by that party is not a breach of contract.

While a party under Article 71 can suspend the performance of his obligations, he may pursuant to Article 72 avoid the contract under similar conditions. Proposals made at the diplomatic conference in order to combine both rules were not adopted (O.R., loc. cit.; as to the differences in the conditions required compare note 2).

Also national laws contain the right, however, often more restricted, of the first party to perform under certain circumstances to retain the goods or stop them in transit, e.g. 312 German BGB; Article 83 OR; sec. 41(1) SGA; sec. 2-609(1) UCC. [page 284]

[2] [ if, after the conclusion of the contract, it becomes apparent that ]

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. This rule is the result of the discussions at the diplomatic conference. Preparatory work by UNCITRAL and the draft submitted to the conference only consider those circumstances which emerge after the conclusion of the contract. (For greater details, see Reinhart/Freiburg, 371 fol). One of the arguments brought forward by the International Chamber of Commerce against the inclusion of circumstances existing at the conclusion of the contract was that a party, who could not insist on assurances at the time the contract was concluded, could obtain such assurances later by invoking the right to suspend performance of his obligations (UNCITRAL Yearbook, VIII (1977), p. 47 fol; also Bennett/BB, 514).

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 (Schlechtriem/Lausanne, 152).

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 (Bennett/BB, 524).

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 (Reinhart/Freiburg, 380). 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 (Honnold, 395). The reasons must become apparent to a reasonable person in the same circumstances (Welser/Doralt, 124; Schlechtriem, 87; Schlechtriem/Lausanne, 151; Reinhart/Freiburg, 381).

Decisive is not just the relevant information, but whether the party wishing to suspend performance could hold it to be true. It is disputed, however, who shall be the one to bear the risk of a wrong assessment; the party wishing to suspend or the other party (c. Reinhart/Freiburg, 370, listing further sources). If the party suspending performance could hold the information available to him [page 285] 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 (Reinhart/Freiburg, 381). Risks of this kind cannot be fully avoided in international trade (Vilus/Dubrovnik, 242).

The right to suspend performance supersedes all domestic rules in regard to changes of the Geschäftsgrundlage, error, etc. Avoidance of a contract based on a mistake about the other party's ability to perform is excluded (Schlechtriem, 86; Reinhart/Freiburg, 378). An exception here is the contesting of a mistake on grounds of fraud (Schlechtriem/Lausanne, 153).

While Article 71 says "it becomes apparent" that the other party will not perform a substantial part of his obligations, Article 72 mentions that "it is clear" that the other parties will commit a fundamental breach of contract. Thus the standards of Article 71 are less strict than those of Article 72 (Honnold, 393). Schlechtriem (Lausanne/151) refers to a linguistically somewhat lower ceiling but not to a fundamental difference. A worsening of the economic situation of the other party has to be feared by a reasonable obligee, but no absolute certainty is required. A situation where a totally insolvent obligor suddenly obtains credit does not have to be taken into consideration (Schlechtriem, 87).

[3] [it becomes apparent that the other party will not perform a substantial part of his obligtions ]

Non-performance of a substantial part of obligations will, however, not always amount to a fundamental breach (Bennett/BB, 521; Huber believes differently, Article 73 ULIS; critical remarks by Schlechtriem/Lausanne, 152). 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 Article 71, or avoidance of the contract under Article 72.

An anticipated minor breach of contract by the other party is insufficient.

[4] [ as a result of a serious deficiency in his ability to perform or in his creditworthiness ]

Here 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 (Bennett/BB, 519), 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 [page 286] does anybody have to be responsible for them (Schlechtriem/Lausanne, 150; Reinhart/Freiburg, 377).

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. Another serious deficiency could also be that the other party did not perform his obligations under earlier contracts (Bennett/BB, 520) or attempts at obtaining pledges were unsuccessful (see Article 83, OR).

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. Should it become apparent that the buyer will at the time of delivery not be in a position to open a letter of credit, the seller may cease or postpone manufacture of the goods (see note 2).

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.

Deficiency in creditworthiness should, in our view, be interpreted broadly and cover the event where the economic situation of a guarantor or provider of a guarantee deteriorates.

[5] [ or [in] his conduct in preparing to perform in performing the contract]

Such conduct may also refer to the fulfilment of other contracts (O.R., 52) and is independent of the financial situation (Reinhart/Freiburg, 377), e.g. frequent complaints. It may also cover the use of certain unfitting raw materials in performing obligations under similar contracts (Bennett/BB, 520).

[6] [right of the seller to stop goods in transit]

In contrast to paragraph 1 we are dealing here only with 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 (c. UNCITRAL Yearbook, VIII (1977), p. 54). 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. [page 287]

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. (As to the possibilities of the sender to change plans, compare Handbuch 3, 246, 267 fol, 287, 300.) 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.

[7] [ even though the buyer holds a document which entitles him to obtain [the goods]]

Hence even when the buyer has obtained title in the goods through the handing over of the documents.

[8] [the right to stop goods in transit 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 (Schlechtriem/Lausanne, 155). Also 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 (c. also Article 4 according to which property issues are not covered by the CISG; Bennett/BB, 521).

Finally, 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. 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.

[9] [a party suspending performance, whether before or after dispatch of the goods, must immediately give notice of the suspension to the other party ]

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 (Bennett/BB, 519). Notice here is subject to Article 27 and need not, therefore, to be received. The risk of transmission is borne by the addressee (Reinhart/Freiburg, 381). It should, however, be in the interest of the suspending party to see to it that the notice reaches the other party. [page 288]

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 (Bennett/BB, 521).

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 (Schlechtriem/Lausanne, 156).

[10] [ and must continue with performance if the other party provides adequate assurance of his performance]

Three questions are involved here: first, what is adequate assurance; second, when does a party have to continue with performance; and third, what happens when the other party does not provide adequate assurance.

Adequate assurance depends on the circumstances which have led to the suspension of performance. 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 sellers factory was thwarted or settled, or where the seller obtained new sources of materials for the manufacture of the goods. According to Honnold (398), 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 (Bennett/BB, 523). Such assurance could also be given by way of offering immediate performance of his obligations or performing them without delay (Bennett/BB, 522).

In the event of a deficiency in creditworthiness, a banker's guarantee would for instance offer adequate assurance.

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 (O.R., 53; Honnold, 399; agreeing also Schlechtriem, 87).

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, however, also entail a certain risk (c. note 2). The other party might, in certain circumstances, [page 289] not only claim damages because of the delay but also because of the costs incurred in providing additional assurances.

Even though there is no express requirement under the CISG, the suspending party should inform the other party that he considers the offered assurance as adequate and will continue with performance (Bennett/BB, 523).

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 (Schlechtriem/Lausanne, 157; Reinhart/Freiburg, 379). That time may also be shorter (Honnold, 399). In any case, the party who is entitled to suspend performance can reasonably adjust the time for performance in accordance with the circumstances (Bennett/BB, 523 fol). If the other party provides no assurance, this can be seen as an indication of an anticipatory, fundamental breach of contract, and the party empowered to suspend performance of his obligations can avoid the contract under Article 72 (Honnold, 400; Schlechtriem/Lausanne, 156, Reinhart/Freiburg, 382; Bennett/BB, 524). He may, however, also wait until the time for performance has passed and, in the case of non-performance, avoid the contract under Articles 49 or 64 (Honnold, 400; Bennett/BB, 524). [page 290]

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Pace Law School Institute of International Commercial Law - Last updated September 25, 2002
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