Reproduced with permission from 8 Journal of Law and Commerce (1988) 53-108
Harry M. Flechtner [*]
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Prospective Non-performance, Anticipatory Repudiation, Stoppage of Goods in Transit
Article 71(1) of the Convention gives a party the right to suspend 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:
(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."
Article 71(3) requires the suspending party to "continue with performance if the other party provides adequate assurance of his performance."  Article 72(1) permits a party to avoid the contract where "it is clear" that the other party "will commit a fundamental breach of contract." Articles 71 and 72 thus appear to parallel, respectively, U.C.C. section 2-609 (right to suspend performance if "reasonable grounds for insecurity arise with respect to the [other party's] performance" and to treat a failure to provide adequate assurances as a repudiation of the contract) and section 2-610 (options and remedies upon anticipatory repudiation).
The apparent parallelism between Article 71 of the Convention and U.C.C. section 2-609 and between CISG Article 72 and U.C.C. section 2-610 is, however, in part an illusion. Unlike U.C.C. section 2-609(4), Article 71 does not permit a party to treat the contract as repudiated if the other side fails to provide adequate assurances. On the other hand, a failure to receive adequate assurances under Article 71 may make it "clear" that a fundamental breach will occur, thus permitting the aggrieved party to proceed under Article 72. Article 72, however, allows the aggrieved party to avoid the contract only if, time permitting, it gives "reasonable notice" in order to "permit [the other party] to provide adequate assurance of his performance."  This requirement, which applies unless "the other party has declared that he will not perform his obligations,"  has no parallel in U.C.C. section 2-610.
In other words, Article 71 of the Convention parallels U.C.C. section 2-609 only to the extent that the latter permits a party to suspend performance upon demanding adequate assurances. Article 72 of CISG, on the other hand, combines the functions of U.C.C. section 2-609(4) (which treats a failure to meet a justified demand for adequate assurances as a repudiation of the contract) and section 2-610 (which specifies the aggrieved party's rights where there has been an anticipatory repudiation). Those familiar with U.C.C. Article 2 who fail to grasp these differences in the Convention's approach to suspension of performance and anticipatory repudiation may be misled.
Other aspects of Articles 71 and 72 are worthy of comment. As could be expected, 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. It also appears that, 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.
The distinction also creates an ambiguity in the operation of Article 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.
To justify suspension of performance under CISG Article 71, a threat of breach must arise from
"(a) a serious deficiency in [the other party's] ability to perform or in his creditworthiness; or
(b) [the other party's] conduct in preparing to perform or in performing the contract."
Although these grounds are more inclusive than the standards for suspension in some domestic sales regimes, they are narrower than the broad "reasonable grounds for insecurity" that will justify suspension under U.C.C. section 2-609(1). For example, suppose a seller suggests (but does not openly declare) that it may simply refuse to deliver the goods. Under U.C.C. section 2-609(1), the buyer clearly could suspend performance. Under Article 71(1) of the Convention, however, the buyer could suspend only if the seller's statements indicate an inability to perform or constitute "conduct in preparing to perform or in performing." The latter phrase may refer only to conduct directly related to contract performance (e.g., manufacturing the goods or preparing them for shipment). If the grounds for suspension under the Convention are too limited to reach this situation, the buyer must determine whether the seller's ambiguous statement is enough to satisfy the standards for avoidance under Article 72 -- i.e., whether it constitutes a "clear" threat of a fundamental breach. This is the kind of dilemma that U.C.C. section 2-609(1) avoids by using the "reasonable grounds for insecurity" formulation.
Under Article 71(2) of the Convention, a seller that becomes aware of grounds for suspending performance after the goods have been dispatched may intercept the goods in transit. This provision is analogous to U.C.C. section 2-705, which permits a seller to stop goods in transit if, inter alia, the seller has a right to suspend performance. On at least one question, however, U.C.C. Article 2 and the Convention reach different results. CISG Article 71(2) permits the seller to intercept the goods "even though the buyer holds a document which entitles him to obtain them." This language would cover a situation in which the buyer holds a negotiable bill of lading covering the goods. Under U.C.C. section 2-705(2)(d), in contrast, a seller's right to stop goods in transit ceases upon "negotiation to the buyer of any negotiable document of title covering the goods."
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Go to entire text of Flechtner commentary
* Assistant Professor, University of Pittsburgh School of Law. . . .
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185. The suspending party "must immediately give notice of the suspension to the other party." Id. art. 71(3).
186. Among the options that the U.C.C. gives to a party that has experienced an anticipatory repudiation is the right to "resort to any remedy for breach," including the avoidance-type remedies of cancellation and resale/cover or market-price-differential damages. U.C.C. § 2-610(b) (1978). This option parallels the right to avoid the contract under Article 72(1) of the Convention.
187. Article 71 simply does not specify the aggrieved party’s rights if adequate assurances are not forthcoming. At the Vienna diplomatic conference, the First Committee considered an amendment that would have permitted the aggrieved party to avoid in these circumstances. Amendment to Article 62 of the Draft Convention, Sponsored by Australia and Canada, U.N. Doc. A/CONF.97/C.1/L.224 (1980), reprinted in Official Records, supra note 71, at 129. The proposed amendment was rejected. Summary Records of the Twenty-seventh Meeting of the First Committee, U.N. Doc. A/CONF.97/C.1/SR.27 (1980), reprinted in Official Records, supra note 71, at 377, 377-78.
188. Draft Commentary, supra note 86, art. 63, ¶ 2, reprinted in Official Records, supra note 71, at 53; Honnold, supra note 25, at 400. Contra Ziegel, supra note 80, § 9.05 at 9-35.
189. See Sales Convention, supra note 1, art. 72(2).
190. Id. art 72(3). Must a party who has failed to receive adequate assurances after a demand made under Article 71 and who wishes to avoid the contract before performance is due issue a second demand for adequate assurances under Article 72? That would be absurd. It can be finessed by holding that a demand for assurances under Article 71 satisfies the notice requirement in Article 72(2). The need to construe around this problem, however, illustrates the clumsy fit between Articles 71 and 72, which were the subject of last-minute debate and tinkering at the Vienna diplomatic conference. See Honnold, supra note 25, at 394, 403; Ziegel, supra note 80, § 9.05 at 9-34.
To nurture the argument that a demand for assurances under Article 71 satisfies the notice requirement in Article 72, the demand should specify not only that the aggrieved party is suspending performance but also that it will avoid the contract unless assurances are made within a reasonable time. Avoidance upon a failure to respond to such a demand would be equivalent to avoidance for failure to perform in response to a Nachfrist notice. Cf. Sales Convention, supra note 1, arts. 47, 49(1)(b), 63, 64(1)(b); supra notes 82-91 and accompanying text.
191. Article 72 of the Convention dispenses with a demand for adequate assurances if the other side has declared that it will not perform. Sales Convention, supra note 1, art. 72(2), (3). Similarly, U.C.C. Article 2 does not require use of the adequate assurances procedure where there has been a clear anticipatory repudiation – i.e., "an overt communication of intention or an action which renders performance impossible or demonstrates a clear determination not to continue with performance.’" U.C.C. § 2-610 comment 1 (1978).
192. See Honnold, supra note 25, at 393, 401-02; Ziegel, supra note 80, § 9.05 at 9-35.
193. This issue is discussed at supra notes 100-01 and accompanying text.
194. A similar situation could arise if a party that has suspended performance receives assurances of performance that would not constitute a fundamental breach, but which would involve a failure by the other party to perform "a substantial part" of its obligations. Professor Honnold has argued that assurance of less than perfect performance should be considered "adequate assurance" under Article 71(3) provided the imperfection is not substantial. Honnold, supra note 4, § 392. Presumably the same principle should apply under Article 72(2). Thus an assurance of imperfect performance should preclude avoidance under Article 72 as long as the performance that is assured would not constitute a fundamental breach. If the assured performance would involve a "substantial" but not fundamental breach, therefore, the aggrieved party could not avoid but could apparently continue to suspend performance under Article 71.
Professor Honnold’s analysis of the "imperfect assurance" issue under Article 71 resembles the discussion at supra notes 82-91 and accompanying text, in which it is argued that only a material failure to perform within the time fixed by a Nachfrist notice should justify avoidance. Imperfect assurances and imperfect responses to a Nachfrist notice present analogous questions because the functions of a Nachfrist notice and a demand for adequate assurance are analogous: the Nachfrist procedure eliminates uncertainty when performance is overdue; the adequate-assurance procedure eliminates uncertainty concerning performance that is not yet due. See supra note 190.
195. See Honnold, supra note 25, at 398. In other words, indefinite suspension of performance would relieve the suspending party of its executory duties under the contract, just as avoidance does. See Sales Convention, supra note 1, art. 81(1). Indefinite suspension, however, would not entitle the suspending party to other avoidance remedies such as restitution under Article 81(2) and resale/cover or market-price-differential damages under Articles 75 or 76. See Honnold, supra note 25, at 393. Thus indefinite suspension would permit the suspending party to escape an unfavorable executory exchange, but would allow it neither to "undo" an executed exchange nor to protect a favorable unexecuted exchange.
196. See Honnold, supra note 25, at 393; cf. id. at 393-94 (assurance that performance will occur after a slight delay should be considered "adequate assurance" under Article 71(3) because that approach is "consistent with the principles on avoidance in Article 25, 49, 64 and with the rule of Article 71(1)").
197. See Sales Convention, supra note 1, art. 71(1).
198. See Honnold, supra note 25, at 395-97.
199. That something less than a clear avowal of an intention to breach will satisfy the standards of Article 72(1) is suggested by Article 72(3), which dispenses with adequate assurance procedure when the other party "has declared that he will not perform his obligations."
200. See U.C.C. § 2-610 comment 1 (1978).
201. See id. § 2-705 comment 1.
202. See Honnold, supra note 25, at 397.
203. Where the buyer controls a negotiable bill of lading, however, Article 71(2) may not always achieve the result it contemplates. The last sentence of Article 71(2) limits the provision’s scope to "the rights in the goods as between the buyer and the seller." This is a reaffirmation of the basic principle, found in Article 4, that the Convention "governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract." A carrier of goods, however, is not normally a party to the sales contract and is neither a buyer not a seller. The domestic law that governs the responsibilities of the carrier may permit it to deliver the goods to the holder of a negotiable bill of lading. Under U.C.C. § 2-705(3)(c), for example, a carrier is not required to obey a stop order unless any negotiable document of title covering the goods is surrendered. It is, however, unclear whether § 2-705(3) would apply where the Convention, rather than Article 2 of the U.C.C., governs the contract for sale.
At any rate, if the carrier is permitted under applicable domestic law to deliver the goods to a buyer who holds a negotiable document of title, even though the seller has a right to intercept the goods under Article 71(2) of the Convention, the situation resembles that described in the last paragraph of comment 2 to U.C.C. § 2-705: the buyer cannot complain if the carrier obeys the seller’s stop order; the seller, on the other hand, cannot complaint if the carrier exercises its right to deliver the goods to the buyer holding a negotiable bill of lading.
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