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GUIDE TO ARTICLE 71

Comparison with Principles of European Contract Law (PECL)


Match-up of CISG Article 71 with PECL Articles 9:201 and 8:105


CISG Article 71

1) 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.

(2) If the seller has already dispatched the goods before the grounds described in the preceding paragraph become evident, he may prevent the handing over of the goods to the buyer even though the buyer holds a document which entitles him to obtain them. The present paragraph relates only to the rights in the goods as between the buyer and the seller.

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

PECL Article 9:201 [Right to Withhold
(complete and revised version 1998)

(1) A party which is to perform simultaneously with or after the other party has tendered performance or has performed. The first party may withhold the whole of its performance or a part of it as my be reasonable in the circumstances.

(2) A party may similarly withhold performance for as long as it is clear that thee will be a non-performance by the other party when the other party's performance becomes due.

PECL Article 8:105 [Assurance of Performance]

(1) A party which reasonably believes that there will be a fundamental non-performance by the other party may withhold performance of its own obligations so long as such reasonable belief continues.

(2) Where this assurance is not provided within a reasonable time, the party demanding it may terminate the contract if it still reasonably believes that there will be a fundamental non-performance by the other party and gives notice of termination without delay.

[CISG art. 58, presented below, also addresses portions of the subject matter of PECL art. 9:201.]

CISG Article 58

(1) If the buyer is not bound to pay the price at any other specific time, he must pay it when the seller places either the goods or documents controlling their disposition at the buyer's disposal in accordance with the contract and this Convention;. The seller may make such payment a condition for handing over the goods or documents.

(2) If the contract involves carriage of the goods, the seller may dispatch the goods on terms whereby the goods, or documents controlling their disposition, will not be handed over to the buyer except against payment of the price.

(3) The buyer is not bound to pay the price until he has had an opportunity to examine the goods, unless the procedures for delivery or payment agreed upon by the parties are inconsistent with his having such an opportunity.


Definitions

For the PECL definition of "non-performance", go to PECL art. 1:301(4) and the comment and notes that accompany this definition. For the PECL definition of "fundamental non-performance", see the match-up of CISG art. 25 with PECL art. 8:103. For the PECL definition of "reasonableness", go to PECL art. 1:302 and the comment and notes that accompany this provision.


Editorial remarks

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Comment and notes on PECL 9:201, 8:105

Like the commentaries to the UNIDROIT Principles and the U.S. Restatements, the comments to the PECL help explain the text. The PECL notes identify civil law and common law antecedents and related domestic provisions. With the permission of the Commission on European Contract Law, these comments and notes are presented below. The source of this material is Ole Lando & Hugh Beale eds., Principles of European Contract Law: Parts I and II, Kluwer Law International (2000) 404-408, 370-372.


COMMENT AND NOTES: PECL Article 9:201: Right to Withhold Performance

(1) A party which is to perform simultaneously with or after the other party may withhold performance until the other has tendered performance or has performed. The first party may withhold the whole of its performance or a part of it as may be reasonable in the circumstances.

(2) A party may similarly withhold performance for as long as it is clear that there will be a non-performance by the other party when the other party's performance becomes due.

Comment

A. General

Where under a synallagmatic (that is, a bilateral or multilateral) contract one party is to perform first but has not yet done so, or is to perform simultaneously with the other but is not able or willing to do so (on the order of performance see Article 7:104), it is both just and commercially convenient for the other party to have the right to withhold or suspend its own performance. This both protects the withholding party from having to advance credit to the non-performer and gives the latter an incentive to perform, since until it does so it will not receive the counter-performance. The well-known exceptio non adimpleti contractus is an expression of this idea. Performance of one obligation may be withheld so long as the other is not fully performed.

Illustration 1: A employs B to build a house for him; the contract provides that within two days of the contract being signed, A will make an advance payment of 10,000 to B. B need not start work until the payment has been made.

A party whose own conduct causes the other party's non-performance may not invoke this Article to withhold its own performance. See Article 8:101(3).

Illustration 2: The owner of a house enters a contract with a municipal organisation for communal steam heating. The account is to be sent out by the 15th [page 404] of one month and to be paid by the 15th of the next month. Because of a computer breakdown the organisation does not send out the account for 15 January until 10 February, and the house-owner has not paid by 15 February. The municipality cannot suspend the supply of steam.

The text envisages that the obligation which has not been performed and the obligation of which performance is to be withheld are parts of the same contract. The text takes no view on whether performance may be withheld because of the non-performance of another contract between the same parties.

B. Non-performance need not be fundamental

Where the obligations of the two parties are to be performed simultaneously a party's non-performance need not be fundamental in order to entitle the other party to withhold its own performance. But it is not necessarily appropriate for a party to be entitled to withhold the whole of its performance if the obligations not performed by the other party are not fundamental. In the common law countries the right to withhold performance is restricted to cases where the contract expressly or impliedly makes the obligations conditional upon one another and to cases of fundamental non-performance; in other cases the aggrieved party must perform its obligations in full (though if the non-performance is a breach it may have a claim for damages). Other systems are more flexible, permitting withholding of performance as a way of coercing the non-performing party even where the non-performance is minor, provided that the amount withheld is not wholly disproportionate and the withholding party acts in good faith. It is this approach which is adopted by this Article, which must be read together with Article 1:201 (Good Faith and Fair Dealing).

Illustration 3: A agrees to buy a new car from B, a dealer. When A comes to collect the car he finds it has a scratch on the bodywork. He may refuse to accept the car or pay any part of the price until the car is repaired.

Illustration 4: The same except that the car is to be shipped to A's home in another country, where B has no facilities. Since it would be unrealistic to expect B to repair the scratch, it would be contrary to good faith for A to withhold more than the cost of having the car repaired locally.

In some cases the aggrieved party cannot practicably withhold part of its performance - for instance, many obligations to perform a service must realistically be performed in full or suspended in full. The aggrieved party may only withhold its performance in full if in the circumstances that is not unreasonable. However, it may be expressly provided in the contract that a performance is made reciprocal to the other performance.

C. Order of performance

It is obvious that a party which is obliged to tender performance first is not entitled to withhold performance merely because the other is not willing to perform its part at that stage. [page 405]

Illustration 5: A contracts with B to have a wall built in A's garden for 500 payable on completion. B cannot require an advance payment as a condition of starting work.

If the order of performance is not stated in the contract, it will have to be determined. Whether the parties to a contract are to perform simultaneously, or one before the other, is to be determined in accordance with Article 7:104, Order of Performance. However, even it is clear that one is to perform before the other, it will have to decided whether the party to perform first must perform the whole of its obligation, or only part of it, before the other need perform. Thus in Illustration 5, if the contract had not stated that payment was due on completion the court would have first to decide whether payment was due only then or whether some or all was due at an earlier stage. Thus if it is determined that, as a matter of construction of the contract, payment is due as the work progresses, the employer will not normally be entitled to withhold payment for the work that has already been completed.

However, a party which is to perform first should have the right to suspend its performance if it is clear that there will be a fundamental non-performance by the other when the other's performance is due, and paragraph (2) so provides. In such case the first party has the right to terminate for anticipatory non-performance under Article 9:304, but it may prefer to hold the contract open for performance.

Illustration 6: In January B agrees to build a house for O and to start work on 1st May. O undertakes to make an advance payment of 20,000 as part of the price by not later than 1st June, time of payment being of the essence of the contract. During May O tells B that because of recent heavy expenditure he has incurred he will not be able to pay the 20,000 until the beginning of July. Instead of terminating the contract under Article 9:304, B may keep the contract open for performance by O and may meanwhile suspend the building works.

If it is not clear that O will not perform but B has reasonable grounds for believing that it will not, B may demand an assurance of performance under Article 8:105.

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

1. Presumption on concurrent performances

(a) Civil law

The GERMAN BGB 320 provides that, unless he has to perform first, the debtor of a reciprocal obligation may withhold his performance until the counter-performance has been tendered. A similar presumption on concurrent obligations has been established in GREECE, see CC arts. 374, 375 and 378: ITALY, see CC art. 1460 (1); the NETHERLANDS, see BW art. 6:262; and AUSTRIA (for barter and sale: see ABGB 1052, 1062).

The FRENCH, BELGIAN, LUXEMBOURG and SPANISH codes and the NORDIC statutes do not have general provisions but only fragmentary rules to the same effect as the BGB, see on sales French, Belgian and Luxembourg CC arts. 1651, Spanish CC arts. 1100, 1466, 1467, 1500, and 1502, Danish Sale of Goods Act 14 and FINNISH and SWEDISH Sale of Goods Acts, 10, 49. However, in these countries the courts have established a general [page 406] principle similar to the one just mentioned: see on France, Huet J.Cl.Civ. art. 1184; on Belgium, de Bersaques R.C.J.B. 1949, 125, no. 8, and M.E. Storme De Exceptio, R.W. 1989-90, 317 no. 12 who stresses that it is a question of interpretation; on Spain, Diez-Picazo II 692; Albladejo II, 1, 20.1; on Denmark, Gomard, Obligationsret II 71 ff.; on SWEDEN, Ramberg, Köplagen 202 ff. For sale of goods CISG art. 58(1) also provides for concurrent performances.

It may however follow from the parties' agreement or from the circumstances of the case that one party has to perform or to begin performance first. This is the case when concurrent performance is impossible such as in contracts for lease and services. See Article 7:104.

(b) United Kingdom and Ireland

Section 28 of the UNITED KINGDOM Sale of Goods Act 1979 provides that unless otherwise agreed, delivery of goods and payment of the price are concurrent conditions, that is to say, the seller must be ready and willing to give possession of the goods to the buyer in exchange for the price and the buyer must be ready and willing to pay the price in exchange for possession of the goods. IRISH Sale of Goods Act 1893, s. 28 is to the same effect. Also in other contracts than sales there is a tendency to treat the parties' promises as concurrent conditions, see Treitel, Remedies 214; but as in the civil law it may follow from the circumstances that one of the parties will have to perform first, such as where simultaneous performances are not possible.

2. Withholding performance of a reciprocal obligation

(a) The civil law countries

(i) In general

The rule laid down in Article 9:201(1), first sentence, seems to be widely accepted in the civil law countries where a party may withhold his performance until the other party performs, both in cases of concurrent obligations and where the other party has to perform first. See on contracts in general GERMAN BGB 320; GREEK CC art. 374; ITALIAN CC art. 1460(1); DUTCH BW art. 6:52; and PORTUGUESE CC art. 428. In FRANCE, BELGIUM, LUXEMBOURG, AUSTRIA, SPAIN and DENMARK the courts have established this rule as a general principle based on specific provisions and the spirit of the law: see on sales French, Belgian and Luxembourg CC arts. 1653, 1707 and (semble) 1612 and 1613; on recognition as a general principle in Belgian case law, Cass. 26 April 1945, Pas. I; 24 April 1947, R.C.J.B. 1949, 125; 12 Sept. 1973, Arr. Cass. 1974, 36. For AUSTRIA see ABGB 1052, 1062 and Jabornegg; for SPAIN, CC art. 1466, and the literature cited above, para 1(a). For Denmark see Ussing, Alm. Del. 79. For FINLAND and SWEDEN see SGA 10 and 42 and respectively Taxell, Avtal och rättsskydd 237 and Rodhe, Obligationsrätt 391 ff. CISG art. 58 gives each party a similar right to withhold his performance. See also Unidroit art. 7.1.3.

(ii) Proportionality (reasonableness test)

Provisions to the same effect as Article 9:201(1), second sentence, under which a party may withhold the whole of his performance or part of it as may be reasonable in the circumstances are found in some of the civil law systems. Thus the DUTCH BW art. 6:262(2) provides that in the event of partial or defective performance, withholding of the aggrieved party's own performance is allowed only to the extent justified by the non-performance. GREEK law (CC art. 376) and ITALIAN law (CC art. 1460(2)) prevent the aggrieved party from withholding his own performance when this would be contrary to good faith. Greek case law holds that part performance by one party may only entitle him to a corresponding counter-performance from the other: AP 574/1990, EEN 58 (1991) 166-167. Italian writers have argued in favour of a partial withholding when the non-performance by the defaulting party does not justify a withholding of the entire performance, see Persico 145. Similarly GERMAN BGB 320(2) provides that after partial performance the aggrieved party may not withhold its own performance in as much as this would be contrary to good faith. Under AUSTRIAN law the right to withhold performance is limited by the provision of ABGB 1295(2) prohibiting the vexatious abuse of legal right: such abuse of the right to withhold performance may be found in a flagrant disproportion in the interests of the parties, see e.g. OGH 31 October 1989 JBI 1990, 248. The PORTUGESE Civil Code does not have an explicit provision. However, Portuguese writers have invoked the rule on the aggrieved party's right to reduce his own performance (see Article 9:401 of these Principles) to reach the same result as under Article 9:201(1) second sentence; see Varela II 364. Also SPANISH, FRENCH and LUXEMBOURG courts have adopted the proportionality test, the exercise of which in France is left to the free and final appreciation of the trial judge. For SPAIN see Supreme [page 407] Court 27 March 1991 (Diez Picazo II 693) and 11 July 1991 (Lacruz-Delgado 26, 199) On BELGIAN law see M.E.Storme, De Exceptio, R.W. 1989-90, 319-321.

(b) Common law

In COMMON LAW a party may only withhold his performance because the other has not performed if:

(a) the first party's obligation to perform is expressly or by implication made dependant on the performance by the second party, or

(b) the court construes the second party's obligation as being a condition of the contract, or

(c) the second party's non-performance will have the effect of depriving the first party of the substance of what he was contracting for.

In other words the test for withholding performance is the same as for termination save that termination also requires the time for performance to have expired, see Beale chapters 2 and 3.

In SCOTTISH law, the principle of mutuality of contract enables a party to withhold performance in response to the other party's breach, so long as there is a link between the breach and the performance withheld: Bank of East Asia v. Scottish Enterprise, 18 January 1996 (H.L.) (unrep.).

3. Anticipatory non-performance (Article 9:201(2))

CISG art. 71(1) provides that 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 his creditworthiness; or (b) his conduct in preparing to perform or in performing the contract.

A very similar rule is adopted by the FINNISH and SWEDISH Sale of Goods Acts, 61, see Ramberg, Köplagen 586 ff.

GERMAN BGB 321 provides that a party who is to perform first may withhold performance if, due to an essential deterioration of the other party's financial position after the conclusion of the contract, the first party's claim for the counter performance is endangered. AUSTRIAN ABGB 1052 second sent. is to similar effect. GREEK CC art. 377 is wider: it covers cases of pre-existing financial difficulties of which the first party did not and had no reason to know, Michaelides-Nouaros in Erm. AK II/1, art. 377 no. 4 (1949). See also DUTCH BW arts. 6:80 and 6:263; ITALIAN CC art.

1461 DANISH Bankruptcy Act 54.

Provisions which provide a right to withhold the goods in case of the buyer's insolvency or bankruptcy are found in the DANISH SGA 39; FRENCH, BELGIAN and LUXEMBOURG CC art. 1613; SPANISH CC arts. 1467 and 1502; PORTUGUESE CC art. 429; and UK Sale of Goods Act 1979, s. 41(1). Furthermore, the French and Belgian CC art. 1653 and the Spanish CC art. 1502 permit the buyer to suspend payment of the price if he has reason to fear that a third party's claim to the goods will disturb him in his possession of them. In Belgian law the existence of a more general principle is disputed: see van Ommeslaghe R.C.J.B. 1975, 615, no. 68; M.E.Storme, Invloed, nos. 299 ff.; Vanwijck-Alexandre.

See generally Treitel, Remedies, Chapter VIII; Rabel I 135. [page 408]

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COMMENT AND NOTES: PECL Article 8:105: Assurance of Performance

(1) 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.

(2) Where this assurance is not provided within a reasonable time, the party demanding it may terminate the contract if it still reasonably believes that there will be a fundamental non-performance by the other party and gives notice of termination without delay.

Comment

A. Purpose of rule

This Article is intended to protect the interests of a party which believes on reasonable grounds that the other party will be unable or unwilling to perform the contract at the due date but which may be reluctant to invoke Article 9:304 in case it transpires that the other party would after all have performed. In the absence of a rule along the lines of this Article the potentially aggrieved party will be in a dilemma. If it waits until the due date for performance and performance does not take place it may incur heavy losses. If on the other hand it terminates the contract under Article 9.304 but it is later found that it was not clear that the other party would commit a fundamental non-performance, it itself will have failed to perform the contract, with a consequent liability for damages. Article 8:105 enables it to obtain an assurance of performance, in default of which it can terminate the contract, with the result that the other party will be considered guilty of a fundamental non-performance.

B. Right to withhold performance

So long as the aggrieved party's reasonable belief in future non-performance by the other party continues it may withhold its own performance, until it has received adequate assurance of performance.

C. Effect of non-receipt of adequate assurance

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 [page 370] the contract. The other party's failure to give the assurance requested is itself treated as a fundamental non-performance, giving the aggrieved party the right to terminate the contract and also a right to damages where the deemed non-performance is not excused under Article 8:108.

Illustration 1: A, a caterer, contracts with B to cater for the reception at the wedding of B's daughter in three months' time. A month before the wedding B telephones A to discuss some outstanding details of the arrangements and is then told by A: "I am having some staff problems and there is a slight risk that I will not be able to organize the reception. But do not worry too much, everything should turn out all right." B is entitled to demand an adequate assurance that the reception will be provided. If this is given, as by A informing B that its staff difficulties have now been resolved, both parties remain bound by the contract and there is no breach by A. If the assurance is not given, B is not expected to court disaster on the occasion of his daughter's wedding. He is entitled to terminate the contract, engage another caterer and recover from A any additional expense involved.

Illustration 2: A, a boatbuilder, agrees to build a yacht for B, to be delivered in three months' time. B stipulates that time of delivery is to be of the essence of the contract. Soon after the making of the contract B learns that S's boatyard has been seriously damaged by fire. B is entitled to ask for an adequate assurance from A that the yacht will be delivered on time. A might give this assurance by showing that it has rented facilities to build the yacht at another yard.

D. What constitutes an adequate assurance

This will depend on 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.

Illustration 3: B enters into three successive contracts for the purchase of goods from S. Subsequently B defaults in payment of the price under each of the first two contracts. S is entitled to demand a bank guarantee of the purchase price under the third contract or other reasonable assurance that payment will be made and is not obliged to rely solely on B's promise of payment.

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

1. Likelihood of non-performance

Several European systems have rules which entitle a party to terminate when it is clear that the other party will not perform, see notes to Article 9:304. Further, many systems allow a party to suspend his performance where there is a real and manifest danger that the other party will not perform his obligation when it falls due. Most of the laws deal with the situation where the other party becomes insolvent, see note 2 below. However, except for the UNITED STATES UCC 2.609 no statutory provision is known which provides a general rule equivalent to Article 8:105. The provision which comes [page 371] closest is CISG art.71 which is more detailed and which entitles a party to withhold his performance when, after the conclusion of the contract, it becomes apparent that the other party will not perform a substantial part of his obligations. The first party must give notice of the suspension to the other party, and must continue with his performance if the other party provides adequate assurance of his performance. CISG art. 71 includes, but is not limited to, cases of insolvency. The FINNISH and SWEDISH Sale of Goods Acts. 61 are similar to CISG; see Ramberg, Köplagen 586 ff. In IRELAND, where the non-performance is by an employee who is on strike, the contract of employment is treated as suspended if notice of the strike has been given: Becton Dickinson v. Lee [1973] I.R. 1.

The Dutch BW art. 6:263 provides that the party who is obliged to perform first is entitled to suspend his performance if circumstances come to his attention after the conclusion of the contract which gave him good reason to fear that the other party will not perform his correlative obligations. The contract may be terminated if the conditions of art. 6:80 are met; see also note 2 to Article 9:304.

2. Insolvency

The other laws deal primarily with the situation where one party has become insolvent.

In general there must be a serious deterioration in the other party's financial situation (AUSTRIAN ABGB 1052, second sent.; GERMAN BGB 321; GREEK CC art. 377; ITALIAN CC art.1461; PORTUGUESE CC art. 780(2); DANISH Bankruptcy Act 54 and 57; SPANISH CC arts. 1129, 1467, 1502 and 1503). The first party may then suspend his performance.

Some laws provide similar rules on the seller's right to withhold or stop delivery in case of the buyer's insolvency or bankruptcy, see SPANISH CC art.1467 and FRENCH and BELGIAN CC arts.1613 (seller may withhold his performance if he is in imminent danger of losing his price).

The U.K. Sale of Goods Act 1979, s. 39(1)(b) gives the unpaid seller a right to withhold or stop goods when the buyer becomes insolvent and s. 41(1) gives him a lien in the goods. For IRELAND see Sale of Goods Act 1893, ss. 39 and 41. A right to withhold and to stop goods already sent is provided also in the DANISH SGA 39 and in other legal systems as well.

The right to withhold performance generally persists until the other party provides adequate security, or performs his obligation: e.g. AUSTRIAN ABGB 1052 second sent.; FINNISH and SWEDISH Sale of Goods Acts. 61(4); GERMAN BGB 321; SPANISH cc art. 1467(2). If security is not provided the DANISH SGA 39 gives the seller the right to terminate the contract when the time for delivery of the goods has come. In GERMAN law not to provide security is considered to be a "positive breach of contract" which may give the creditor a right to terminate the contract (BGH 8 Oct. 1990, BGHZ 112, 279, 287). Similarly under GREEK law see Michaelides-Nouaros in Erm.AK II/1 art. 377 nos. 8, 11 (1949). Under ITALIAN cc art. 1461 the creditor can withhold his performance, but cannot terminate the contract. However under CC art 1186, if a debtor is insolvent the creditor can demand immediate performance and, if this is not forthcoming or security provided, the creditor may terminate.

In those laws in which only insolvency is a ground for suspension of performance or for demanding an assurance, to demand an assurance of performance in other circumstances may be wrongful. Thus in SCOTLAND a party who threatened to terminate unless assurance of performance was given was held to be in material breach: GL Group plc v. Ash Gupta Advertising Ltd 1987 S.C.L.R. 149.

See generally Treitel, Remedies 405 ff. [page 372]

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Pace Law School Institute of International Commercial Law - Last updated December 5, 2000
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