I. INTRODUCTION
The concept of ‘anticipatory breach of contract’ refers to an expectation of a breach of contract which arises before performance is due. This expectation may be justified if the words or conduct of the promisor make it clear that future performance will not be given (renunciation). Anticipatory breach may also arise in the case of prospective incapacity, namely, a situation in which the promisor is willing to perform but appears to be incapable of effecting the promised performance in the future. All legal systems allow for a suspension of performance by the promisee if there are significant doubts as to whether the promisor will perform their side of the bargain.Footnote 1 However, the right to avoid the contract in such a case is not universally accepted.
The right of avoidance based on anticipatory breach originates in English lawFootnote 2 and was enunciated in the landmark case of Hochster v de la Tour.Footnote 3 It was held in this case that after the renunciation of the agreement by one party, the other party ‘should be at liberty to consider himself absolved from any future performance of it, retaining his right to sue for any damage he has suffered from the breach’ rather than ‘remaining idle and laying out money in preparations which must be useless’.Footnote 4 The rule articulated in Hochster v de la Tour was confirmed in the area of English sales law in the case of Cehave NV v Bremer Handelsgesellschaft mbH (The Hansa Nord) Footnote 5 in 1976. Lord Denning stated in this case that: ‘If the one party, before the day on which he is due to perform his part, shows by his words or conduct that he will not perform it in a vital respect when the day comes, the other party is entitled to treat himself as discharged.’Footnote 6 Following English law, the right of avoidance for anticipatory breach has gained acceptance in other common law jurisdictions, as well as in some civil law jurisdictions.Footnote 7 It has also found its way into international law instruments, of which the UN Convention on Contracts for the International Sale of GoodsFootnote 8 (the CISG) is the prime example.Footnote 9
The rationale for the right to avoid the contract prior to the date set for performance focuses primarily on the need to promote economic efficiency.Footnote 10 Where it is clear that one party will not perform, it would be a waste of resources for the innocent party to perform their side of the bargain. Furthermore, by exercising the right of avoidance before performance is due, the innocent party gains an opportunity to enter into another transaction at an earlier stage, which can potentially save further costs. Apart from economic efficiency, the right to avoid the contract based on anticipatory breach contributes to maintaining a fair balance between the interests of both parties.Footnote 11 Expecting the innocent party to perform their obligations where it is clear that the other party will not do what was promised in return would create a disparity in the level of protection offered to each of the parties.
Regardless of its benefits, the doctrine of anticipatory breach exposes the innocent party to significant risk. Avoidance based on anticipatory breach is often predicated on an element of speculation. In many cases, the innocent party cannot be absolutely certain that the breach will occur. The promisor's conduct may be inconsistent. The promisor may express their willingness to perform while at the same time being unable to do so. As a result, the promisor may convey ambiguous signals to the promisee. Although there may be objective reasons to believe that the promisor will not perform (because, for example, they have become insolvent or failed to perform other, similar contracts), it might also be the case that the promisor has, in fact, made special arrangements to ensure that the contract in question will be performed despite these circumstances.
These ambiguities may lead to two different consequences for the promisee. First, in the case of prospective incapacity, where the promisee believes that the contract will not be performed by the promisor and therefore avoids the contract, they may, themselves, be held liable for a breach if their anticipation proves to be unfounded. Second, where the promisee believes that the contract will not be performed by the promisor but nonetheless fails to avoid the contract, they may find themselves in breach of the duty to mitigate when the breach actually occurs. The doctrine of anticipatory breach thus has the potential to create uncertainty and instability in commercial transactions.
The problems of uncertainty and instability raised by the doctrine of anticipatory breach have been addressed in the US Uniform Commercial Code (the UCC). A major innovation introduced into the UCC was the right to demand adequate assurance of due performance (Section 2-609 UCC). The right to demand adequate assurance is a form of self-help, a non-judicial mechanism which serves to clarify the blurred situations in which the innocent party may find themselves in the event of anticipatory breach.Footnote 12 By using this mechanism, the party whose sense of security is impaired can suspend their own performance and any necessary preparations with a legitimate excuse for the resulting delay and can demand adequate assurance that the other party will perform as agreed. Where adequate assurance is not provided within a reasonable time, the suspending party can exercise the remedies for a breach of contract without running the risk of being held liable for a breach themselves.
It has been claimed that the right to demand adequate assurance as designed by the drafters of the UCC constitutes ‘the most innovative and commercially sensible development in contract law in the twentieth century’.Footnote 13 As such, it has also gained acceptance beyond the Code.Footnote 14 The CISG introduced the doctrine of adequate assurance in Articles 71 and 72. Article 72 CISG regulates the right to avoid the contract where the occurrence of a future breach is clear. This provision does not have an equivalent in the UCC. Article 71 CISG regulates the right to suspend performance where it becomes apparent that the promisor will not perform a substantial part of their obligations. In such a case, the promisee must give the promisor a chance to provide adequate assurance. Contrary to Section 2-609 UCC, Article 71 CISG does not specify the consequences of a failure by the promisor to provide adequate assurance. In particular, the provision does not explicitly allow the promisee to avoid the contract where adequate assurance is not provided. As such, the right to request assurance under Article 71 CISG cannot offer the same benefits as its UCC counterpart.
For this reason, it has been claimed in the literature that the provisions of the CISG on anticipatory breach should be amended with a UCC-type clause stating that the failure to provide adequate assurance within a reasonable time shall entitle the promisee to treat the contract as repudiated.Footnote 15 Alternatively, it has been argued that there is a gap in the Convention regarding the consequences of a failure to adequately respond to a request for assurance. It has been proposed that this gap could be filled by reference to Article 7.3.4 of the UNIDROIT Principles of International Commercial Contracts (the PICC).Footnote 16 Article 7.3.4 of the PICC, similarly to Section 2-609 UCC, states that where adequate assurance is not provided within a reasonable time, the party demanding it may terminate the contract.
The need for clarity regarding the consequences of a failure to provide adequate assurance under the CISG has become critically important in light of the current COVID-19 crisis, which has led many businesses to consider suspension or avoidance of a contract based on anticipated non-performance. This article offers a novel approach to the interpretation of the doctrine of adequate assurance under the CISG. It argues that, in the context of the CISG, the mechanism of adequate assurance found in the UCC is a faux ami.Footnote 17 Despite some similarities, the doctrine of adequate assurance regulated in the Convention is distinct and serves different functions to its UCC counterpart. Consequently, the lack of a right to avoid the contract when adequate assurance is not provided under the CISG does not amount to a gap that needs to be filled. Rather, it results from the different purpose the procedure regulated in the Convention is meant to serve.
Throughout this article, the terms ‘promisee’ and ‘the innocent party’ will be used to describe the party to a contract who suspects that the other party will not perform their side of the bargain. The terms ‘promisor’ and ‘the party under suspicion’ will be used to describe the party to a contract whose breach is anticipated.
II. DEMAND FOR ADEQUATE ASSURANCE UNDER THE UCC
The Uniform Commercial Code, first published in 1952, is one of the uniform acts which have been introduced in order to harmonise the law applicable to commercial transactions across the United States. The doctrine of adequate assurance of due performance was introduced into the UCC by Karl Llewellyn, who served as the principal drafter of Article 2 UCC governing sales law.Footnote 18 The general idea behind the solutions promoted by Llewellyn was to make ‘commercial law and practice clear, sane and safe’.Footnote 19 Llewellyn questioned a unitary approach to sales law and believed that there is a need for a separate set of rules for mercantile and non-mercantile situations.Footnote 20 He argued that merchants need rules they can rely on, ie rules which produce predictable results.Footnote 21 He emphasised that commercial law should be functionalFootnote 22—it should guide business persons in conducting their business affairs and enable them to plan ahead.Footnote 23
Only clear and rational legal rules and certainty in their application can adequately protect the interests of commercial actors and promote sound business practices.Footnote 24 The mechanism of adequate assurance of due performance was meant to serve these goals by eliminating the potential uncertainty and instability caused by the doctrine of anticipatory breach. It was based on the idea that by concluding a contract, the parties promise that they will give each other ‘no reasonable grounds for insecurity in regard to [their] continuing ability and willingness to perform’.Footnote 25 The absence of insecurity has thus been seen as an implicit contractual term.Footnote 26 The right to demand adequate assurance is regulated in Section 2-609 UCC, which states:
(1) A contract for sale imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party, the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return.
(…)
(4) After receipt of a justified demand failure to provide within a reasonable time not exceeding thirty days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract.
As indicated in the provision, there must be ‘reasonable grounds for insecurity’ on the innocent party's side for the mechanism of adequate assurance to apply. One major objection to the mechanism of adequate assurance is that it may lead to an extension of the parties’ rights and obligations under the contract. A demand for adequate assurance requires the promisor to do more than was originally promised under the contract; for example, if the contract provided for sale on open account, but subsequent events cause insecurity on the side of the promisee, the promisor may be required to offer greater security under Section 2-609.Footnote 27 Consequently, the need to provide such assurance may significantly increase the cost of trading. For these reasons, the right to demand adequate assurance has been limited to situations in which there are reasonable grounds for the promisee's sense of security to be impaired.
What constitutes an adequate assurance depends on the circumstances. If the performance by the seller-manufacturer is uncertain because of a strike in their factory, for example, they may be required to provide proof that the strike has been settled. Meanwhile, where the seller has lost a source of raw materials which are necessary for manufacturing the goods, they may need to show that another source of raw materials has been secured. In other instances, the promisor may be required to provide an irrevocable letter of credit issued by a bank. In general, the promisor must therefore provide evidence of specific facts or actions that remove the threat that the contract will not be performed.
To qualify as ‘adequate’, assurance must give the innocent party a reasonable sense of security that performance will be forthcoming. In contracts between merchants, the adequacy of assurance is assessed based on commercial rather than legal standards.Footnote 28 In some cases, a mere promise by a party with a good business reputation that the contract will be performed may constitute a sufficient assurance.Footnote 29 In the case of Louisiana Power & Light Co v Allegheny Ludlum Industries Inc,Footnote 30 a written declaration that the promisor will perform their side of the bargain was considered an adequate assurance given that the parties had been involved in an ongoing business relationship for about five years. A far more sophisticated form of assurance may be required from a party who is known to cut corners.Footnote 31
The mechanism of adequate assurance regulated in Section 2-609 UCC is considered to be ‘a logical corollary’Footnote 32 of the doctrine of anticipatory breach. It constitutes an objective instrument to determine whether the promised performance will be forthcoming. The right to demand adequate assurance implements the same policies as the doctrine of anticipatory breach. It contributes to economic efficiency by providing the innocent party with a relative guarantee as to whether the contract will be performed.Footnote 33 Receiving adequate assurance increases the innocent party's confidence and incentivises them to perform their side of the bargain, which in most cases is beneficial and efficient.Footnote 34 If no adequate assurance is provided, the innocent party may avoid unnecessary costs and channel its resources somewhere else without running the risk of being held liable for a breach of contract.Footnote 35
The adequate assurance mechanism thus increases a sense of security in commercial transactions which, in turn, promotes voluntary exchange. Furthermore, this mechanism meets the expectations of business-personsFootnote 36 by endorsing communication and cooperation between the parties.Footnote 37 The adequate assurance procedure is also justified in the context of the duty to mitigate. Under the doctrine of mitigation, the innocent party is expected to take reasonable steps to minimise the scope of the loss suffered.
As explained above, the doctrine of anticipatory breach raises the risk of the promisee being held liable for a breach of the duty to mitigate if they do not avoid the contract and continue to perform their obligations, even though it is clear that the promisor will not perform their side of the bargain. The mechanism of adequate assurance incentivises the promisee to clarify at an early stage whether the promised performance will be forthcoming and, consequently, whether there is a need to take steps to minimise the loss by avoiding further expenditure linked to the performance of their own obligations.Footnote 38
III. ADEQUATE ASSURANCE UNDER THE CISG
The CISG lacks pedigree in domestic legal systems, which has been seen both as a weakness and an opportunity. Article 7(1) CISG states that the Convention should be interpreted with regard to ‘its international character and to the need to promote uniformity in its application’. The reference to the need to promote uniformity in the application of the Convention signifies that the Convention should be interpreted in the same way in each jurisdiction. The CISG thus requires an autonomous interpretation.Footnote 39 To be qualified as autonomous, an interpretation cannot proceed by reference to the meanings assigned to particular concepts in domestic legal systems.Footnote 40 Rather, the terms and concepts used in the CISG should be ‘interpreted in the context of the Convention itself … by reference to the Convention's own system and objectives’.Footnote 41
A. The General Model of Anticipatory Breach under the CISG
The doctrine of anticipatory breach has been regulated in Articles 71, 72 and 73(2) CISG. Article 71 gives the innocent party a right to suspend performance, whereas Article 72 provides the possibility to avoid the contract for anticipatory breach. Article 73(2) regulates the right of avoidance for anticipatory breach in the specific context of instalment contracts. As opposed to Articles 71 and 72, Article 73(2) CISG applies where a breach of contract has already been committed, ie where the promisor has failed to perform his obligations in respect of past instalments, which gives the promisee good grounds to conclude that future instalments will also not be performed. Article 73(2) does not provide an opportunity for the promisor to offer assurance of performance. Even if the promisor does provide assurance, the promisee is entitled to avoid the contract with respect to future instalments.Footnote 42 The doctrine of adequate assurance is therefore not relevant in the cases of anticipatory breach covered by Article 73(2) CISG. Consequently, this provision will not be analysed in the following part of this article.
According to Article 71(1) CISG:
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.
Article 72(1) CISG, on the other hand, provides that:
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.
The prerequisites for invoking the right to suspend performance and the right of avoidance based on anticipatory breach clearly differ. In order to suspend performance, the innocent party must prove that the future occurrence of a breach ‘became apparent’ and that the expected breach will concern ‘a substantial part’ of the promisor's obligations. In comparison, an avoidance for anticipatory breach is only possible where ‘it is clear’ that the promisor will commit ‘a fundamental breach’ of contract. The concept of fundamental breach has been defined in Article 25 CISG. According to this provision, a fundamental breach occurs where the failure to perform results in such a detriment to the promisee ‘as substantially to deprive him of what he is entitled to expect under the contract.’ It has been clarified in the literature that in order to constitute a fundamental breach, the failure to perform has to be so intense that ‘the purpose of the contract could not be fulfilled anymore’.Footnote 43 The threshold for avoidance for anticipatory breach set out in Article 72(1) CISG is therefore very high.
Article 71(1) CISG, regulating the suspension of performance, does not require the anticipated breach to be fundamental. Instead, the breach should cover a ‘substantial part’ of the promisor's obligations. The concept of a ‘substantial part’ of a party's obligations has not been defined in the CISG. Nevertheless, it is commonly accepted that a ‘substantial part’ of obligations constitutes a lower threshold than the requirement of a fundamental breach.Footnote 44 In one case, for example, the court stated that the buyer's failure to provide a bank's confirmation that the letter of credit would be opened as soon as the goods were examined does not constitute a fundamental breach of contract; nevertheless, it is sufficient to justify a suspension of performance.Footnote 45 Similarly, the court emphasised that a fundamental breach is not required for a rightful suspension of performance under Article 71 CISG in a case in which the seller refused to perform only with respect to certain items.Footnote 46
The probability standard adopted in Article 72(1) (‘it is clear’) is also stricter than its counterpart in Article 71(1) (‘it becomes apparent’).Footnote 47 Although it is accepted that the standard of ‘being clear’ used in Article 72(1) CISG does not require complete certainty that a fundamental breach will occur, a very high degree of probability is required.Footnote 48 It has been explained in one case that the future occurrence of a fundamental breach must be ‘obvious to everybody’ to justify avoidance of a contract under Article 72(1).Footnote 49 The probability standard adopted in Article 71(1), according to which a breach must ‘become apparent’, at least theoretically,Footnote 50 requires a lower degree of likelihood than the standard of ‘being clear’. It is usually defined as a ‘high’ or ‘substantial’ degree of likelihood assessed from the perspective of a reasonable person in the position of the suspending party.Footnote 51 In sum, the preconditions for suspension of performance are easier to satisfy than the preconditions for avoidance for anticipatory breach.
B. Adequate Assurance under Article 71(3) CISG
1. The general rules
The mechanism of adequate assurance has been regulated in both Article 71(3) CISG, concerning the suspension of performance, and Article 72(2) CISG, concerning the right of avoidance for anticipatory breach. This section will focus on Article 71(3) and the next section will consider Article 72(2) CISG.
Article 71(3) CISG states:
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.
Contrary to Section 2-609 UCC, Article 71(3) CISG uses the phrase ‘adequate assurance of performance’ rather than ‘adequate assurance of due performance’. An assurance may thus be considered sufficient even where the possibility of a minor breach remains.Footnote 52 At the same time, it is arguable that the ‘adequacy’ of assurance should be assessed more strictly under Article 72(2) than under Article 71(3) CISG because the circumstances justifying a request for assurance under the former provision are more severe.Footnote 53
Article 71(3) CISG explicitly indicates the consequences of the provision of adequate assurance by the promisor in response to the suspending party's demand. In such a case, the right of suspension terminates, thus the suspending party must continue with performance of their side of the bargain. However, contrary to Section 2-609 UCC, Article 71(3) CISG does not specify the consequences of a failure to provide adequate assurance. In particular, it does not explicitly allow the suspending party to avoid the contract where adequate assurance is not provided. Unlike Section 2-609 UCC, Article 71 CISG does not introduce a time limit for the suspension of performance. It is therefore submitted that where adequate assurance is not offered, the suspending party may continue with the suspension of performance unless and until the grounds which triggered the right to suspend cease to exist. Alternatively, the suspending party can invoke Article 72 CISG and avoid the contract as long as the preconditions set out in this provision are satisfied. Finally, once the time for performance has passed and an actual breach has occurred, the suspending party may avoid the contract under Article 49 or Article 64 CISG.
2. Consequences of a failure to provide assurance
It was explained in the previous part of this article that the rationale for introducing the adequate assurance procedure into the UCC was to eliminate the uncertainty that normally accompanies the exercise of remedies in the case of anticipatory breach. Section 2-609 UCC eliminates this uncertainty by stating that a failure to provide adequate assurance within a reasonable time, not exceeding 30 days, constitutes a repudiation of the contract. The lack of a time limit in Article 71(3) CISG, as well as the fact that the provision does not entitle the promisee to avoid the contract where adequate assurance is not provided, seems to prevent the adequate assurance mechanism from satisfying its very function.
This issue was raised during the preparatory works on Article 62(3) of the draft CISG of 1978,Footnote 54 the equivalent of the current Article 71(3) CISG. At the 1980 Diplomatic Conference, the delegates from Canada and Australia submitted a joint proposal to add an additional provision following Article 62 of the 1978 draft (Article 62 bis). The proposed new provision was intended to clarify that a ‘failure … to provide adequate assurance of performance within a reasonable period of time shall entitle the party requesting the assurance to avoid the contract’.Footnote 55 The aim of the proposed amendment was to deal ‘with a practical problem to which Article 62 did not provide a definite solution’.Footnote 56 The delegate from Canada argued that:
It should be made clear that if a party did not receive adequate assurance of the other party's ability to perform, he was entitled to avoid the contract and not merely suspend performance. If, for example, a buyer heard rumours that the seller from whom he had ordered equipment for a hydroelectric installation might be unable to build the items concerned and did not receive any assurance from the latter, suspension of performance would merely delay the entire project still further.Footnote 57
The delegate from Australia argued that ‘without the joint proposal, the text would prejudice the rights of the non-defaulting party by leaving him in a position of intolerable uncertainty’.Footnote 58 Nevertheless, the joint proposal was rejected. The delegates opposing the proposal claimed that the CISG is based on the idea that avoidance should only be allowed in the case of a fundamental breach and ‘the exact circumstances’ justifying avoidance ‘should not be specifically defined in each Article’.Footnote 59 Rather, it should be left to the courts to decide whether the circumstances of a given case are sufficient to justify avoidance.Footnote 60
The uncertainty arising from the content of Article 71(3) CISG has led some authors to claim that a failure to provide adequate assurance by the promisor makes it ‘clear’ that a breach will occur.Footnote 61 Accordingly, a mere failure to provide assurance is sufficient to satisfy the probability standard required for avoidance under Article 72 CISG. It is submitted that this argument is unfounded. Similarly to the assessment of the severity of the breach justifying avoidance, the assessment of the probability that the breach will occur is conducted on a case-by-case basis. The courts take all the circumstances into account to determine whether the future occurrence of a breach is ‘clear’. Such circumstances include, for example, the likelihood of obtaining substitute goods where the goods agreed upon in the contract are no longer able to be found by the seller;Footnote 62 the fact that the buyer failed to pay for prior shipments;Footnote 63 the number of prior instalments for which payment was missing;Footnote 64 the fact that the reason for withholding the goods by the seller was a dispute which arose between the parties concerning the manner and final date of performance;Footnote 65 and the fact that although the seller stated that they intend not to deliver the goods, they agreed to continue negotiations with the buyer.Footnote 66
These examples show that the court needs to examine the entire spectrum of circumstances in order to determine the probability that a breach will occur. A failure of the promisor to provide adequate assurance can be seen as one such circumstance considered in the court's assessment. However, there is no ground for giving it priority over the other circumstances of the case and regarding it as the decisive factor which determines that the future occurrence of the breach is ‘clear’ and thus that the requirements for avoidance stated in Article 72 are satisfied. Certainly, neither the wording of Articles 71 and 72, nor of any other provision of the Convention, justify the overarching significance of the failure to provide assurance as compared to other circumstances of a given case.
It has also been argued that a failure to provide adequate assurance requested under Article 71(3) CISG amounts to a renunciation.Footnote 67 According to this argument, an explicit refusal by the promisor to provide adequate assurance is tantamount to a ‘refusal to perform’, as regulated in Article 72(3) CISG, while a mere failure to provide the assurance constitutes an implied refusal to perform. According to Article 72(3) CISG, the promisee can avoid the contract without prior notice to the promisor where the promisor ‘has declared that he will not perform his obligations’.
One major flaw of this argument is that Article 72(3) CISG refers to a declaration of the promisor that he ‘will not perform his obligations’. The provision of adequate assurance does not constitute a part of the promisor's obligations. An obligation to provide the assurance certainly does not arise from the sales contract. The question of adequate assurance comes into play only at the stage of performance of the contract. Article 71(3) CISG also does not impose on the promisor an obligation to provide the assurance. The provision merely states that the promisee must continue with their performance if the promisor provides adequate assurance; the provision of adequate assurance is thus a right of the promisor. There may be many reasons for the promisor to fail to provide the assurance. In particular, the promisor may question the validity of the promisee's feeling of insecurity. It has been emphasised that Article 72(3) CISG should be interpreted strictly. It can only apply in the case of definite and unambiguous refusal to perform the promisor's obligations.Footnote 68 In principle, a refusal to provide adequate assurance, whether explicit or implied, does not constitute such a declaration.
Avoidance for anticipatory breach based solely on a failure to provide adequate assurance would have been possible if there were an explicit regulation allowing for that in the Convention. An analogy can be drawn with the Nachfrist mechanism regulated in Articles 47 and 63 CISG. The Nachfrist procedure gives the promisee a right to fix an additional period of time for the promisor to perform their obligations.Footnote 69 Both a Nachfrist notice and a demand for adequate assurance aim to preserve the contract by giving the promisor an opportunity to prevent the exercise of remedies by the promisee. A basic difference between the two mechanisms is that the Nachfrist procedure is applicable when performance is overdue, while the adequate assurance procedure applies when performance is not yet due.Footnote 70
As far as the Nachfrist procedure is concerned, it is explicitly stated in Article 64(1)(b) CISG that if the buyer does not perform their obligations within the fixed period or declares that they will not do so within the fixed period, the seller may declare the contract avoided. Similarly, Article 49(1)(b) explicitly states that if the seller does not deliver the goods within the additional period of time fixed by the buyer, or if they declare that they will not do so within the fixed period, the buyer may declare the contract avoided. These provisions have been interpreted strictly. For instance, given that the text of Article 49(1)(b) refers only to cases of non-delivery, giving the seller a Nachfrist notice in the case of delivery of non-conforming goods does not entitle the buyer to avoid the contract after expiration of the fixed period.Footnote 71 The promisor's failure to respond to the Nachfrist notice in an adequate manner thus gives the promisee a right to avoid the contract, but only under specific circumstances explicitly indicated in Articles 49(1)(b) and 64(1)(b) of the Convention.
Given the similarities between the Nachfrist procedure and the adequate assurance procedure, the systematic interpretation of the Convention requires that similar conditions apply to both mechanisms. Analogously to the solutions adopted in the Nachfrist procedure, a failure to provide assurance per se could only justify avoidance of a contract if (and to the extent that) this was explicitly stated in the Convention. A provision analogous to Convention Articles 49(1)(b) and 64(1)(b) would be required to achieve this result. In the absence of such a provision, the failure to provide adequate assurance may only be seen as one of the circumstances examined to determine whether the occurrence of the anticipated breach was clear. In other words, a failure to provide assurance per se cannot justify avoidance of a contract. However, it may influence the assessment of the probability that the breach will occur.
Consequently, in some instances, avoidance will not be justified even though the assurance requested by the promisee was not provided. By way of example, it may be that the provided assurance is not adequate, yet it constitutes a clear sign that the promisor has the intention and ability to perform. A ‘comfort letter’ from a parent company stating that the promisor will perform their side of the bargain may in some cases constitute such an indication, even where—from the perspective of the promisee—it will not qualify as a satisfactory assurance.Footnote 72 In such a situation, the failure to provide an adequate assurance does not ‘make it clear’ that the contract will not be performed, thus it does not justify avoidance of the contract based on Article 72(1) CISG. The promisee should rather ask the promisor to provide an alternative security for their performance, as long as time allows and doing so does not cause unreasonable inconvenience and uncertainty to the promisee.Footnote 73
On the other hand, in a situation in which the promisee asks the promisor to provide a bank guarantee as an assurance, and does so after the promisor had already failed to pay for a previous delivery and failed to provide another bank guarantee explicitly required by the contract, provision of an invalid bank guarantee will normally ‘make it clear’ that the contract will not be performed.Footnote 74 It follows that a failure to provide assurance under Article 71(3) CISG does not automatically ‘make it clear’ that a breach will occur. Rather, it constitutes one of the circumstances examined in order to determine the likelihood of a breach.
3. The adequate assurance procedure as a failed legal transplant
Based on the above analysis, it is difficult to avoid the conclusion that the adequate assurance mechanism regulated in Article 71(3) CISG is an example of a failed legal transplant, a legal concept which serves a certain purpose in one legal system but cannot serve the same purpose when moved to another legal system because of its incompatibility with the existing legal framework. The adequate assurance mechanism regulated in Section 2-609 UCC operates in the shadow of the perfect tender rule adopted in the UCC,Footnote 75 which allows the buyer to immediately reject non-conforming goods independent of the seriousness of the non-conformity. The solutions adopted in Article 2 UCC concentrate on the need to provide speedy and convenient remedies to the promisee. Consequently, the adequate assurance procedure regulated in the UCC operates within a very different system of remedies than that adopted in the Convention. Analogously to the right to cure by the seller,Footnote 76 the possibility to provide adequate assurance based on Section 2-609 UCC may be seen as an instrument limiting the harsh consequences of the perfect tender rule.
On the other hand, the system of remedies adopted in the Convention is based on the principle of favor contractus which has been identified as one of the general principles underlying the Convention. Footnote 77 The principle prioritises keeping the contract alive; in case of a breach of contract, the parties are encouraged to maintain their relationship and find a solution. Avoidance should be seen as a last resort. Footnote 78 It follows that the adequate assurance procedure cannot provide the same benefits under the CISG as it does under the UCC, simply because the Convention generally adopts a much higher threshold than the UCC for avoidance of a contract.
The different significance of the adequate assurance procedure in the CISG and the UCC may be linked to a more general belief, demonstrated in the Convention,Footnote 79 that not only the promisee, but also the promisor has an interest in performance worthy of protection. This interest continues to exist where the promisor has failed to perform their obligations. Common law jurisdictions typically concentrate on the promisee's performance interest. There is hardly any mention of the promisor having an interest in performance in the case law or the literature.Footnote 80 By emphasising the promisor's interest in performance, the CISG comes close to solutions adopted in civil law jurisdictions, where importance is placed on the interests of the promisee and promisor, alike.
This general approach is reflected in the wording of Article 71(3) CISG, which states that the promisee who suspends the performance of their obligations ‘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’ (emphasis added). The adequate assurance procedure regulated in Article 71(3) CISG does protect the interests of the promisee by ensuring that they can exercise the right of suspension without incurring the risk of being transformed into the breaching party due to their own failure to perform. However, the wording of the provision clearly emphasises the role of the mechanism of adequate assurance in protecting the interests of the promisor by giving them a chance to stop the suspension of performance.
A different focus can be seen in the wording of Section 2-609 UCC. The provision starts by declaring that each party has an obligation to ensure that the other party's ‘expectation of receiving due performance will not be impaired’. It goes on to state that in cases in which the promisee has ‘reasonable grounds for insecurity’, they ‘may … demand adequate assurance of due performance’. The demand for adequate assurance under Section 2-609 UCC is thus shaped as a right of the promisee; the text of the provision unambiguously indicates that the procedure is meant to serve the promisee's interests by removing their sense of insecurity and does not put an emphasis on the need to protect the interests of the promisor. The different consequences of a failure to provide the assurance under the CISG and Article 2 UCC thus reflect a more general difference in the balancing of interests of both parties to a contract.
C. Adequate Assurance under Article 72(2) CISG
Article 72(2) CISG regulates the adequate assurance procedure applicable in cases in which it has become clear that a fundamental breach of contract will occur. The scope of application of the provision is limited to cases of prospective incapacity; the promisee does not need to give the promisor a chance to provide the assurance in the case of renunciation.Footnote 81 As pointed out earlier, the mechanism of adequate assurance regulated in Article 72(2) CISG does not have an equivalent in the UCC. As opposed to the procedure regulated in Section 2-609 UCC, the solution adopted in Article 72(2) CISG is not meant to remove an uncertainty experienced by the promisee—a request for adequate assurance based on Article 72(2) CISG is only justified where the future occurrence of a fundamental breach has already become clear. The provision of adequate assurance functions as the promisor's defence against avoidance of the contract.Footnote 82 If the promisor fails to provide the assurance, they miss the opportunity to protect their own interests. Avoidance based on Article 72(1) CISG is conditional upon offering the promisor a chance to provide the assurance.Footnote 83
The rationale for the adequate assurance procedure regulated in Article 72(2) CISG is that the party whose breach is anticipated may often be in a weaker position than the innocent party and this may lead to abuse. The requirement that the promisee must give the promisor a chance to provide assurance reduces the risk of the promisee taking advantage of the anticipatory breach doctrine to escape a bad bargain. The role of the adequate assurance mechanism as an instrument strengthening the position of the promisor can be clearly seen in the drafting history of Article 72 CISG. Article 63 of the draft CISG of 1978, the equivalent of the current Article 72 CISG, did not originally provide for an adequate assurance mechanism or a notification requirement. It merely stated: ‘If prior to the date for performance of the contract it is clear that one of the parties will commit a fundamental breach, the other party may declare the contract avoided.’Footnote 84
At the 1980 Diplomatic Conference, the provision generated significant opposition from developing countries, which were unfamiliar with the doctrine of anticipatory breach.Footnote 85 Their criticism focused on the fact that Article 63 of the draft placed the promisee in a very strong position. The delegates from developing countries argued that the provision penalises the promisor too severely by denying them notice. Consequently, the promisor is left with no opportunity to provide adequate assurance and thus to prevent avoidance of the contract by the promisee which may put their interests at risk.Footnote 86 The Egyptian delegate asserted that the promisor should be given a chance to re-establish themselves. He explained that even in the case of bankruptcy, a receiver appointed by the court may be in a position to perform the contract and should have the right to do so.Footnote 87
It was argued that the lack of mandatory notification and an opportunity to offer assurance may be particularly detrimental to businesses from developing countries. The economic and political conditions in these countries may create an impression that the situation of a contracting partner from one these countries is unstable.Footnote 88 A lack of an opportunity to provide assurance in order to prevent avoidance for anticipatory breach reduces the already weaker bargaining power of businesses originating from developing countries as compared to their international partners.Footnote 89 The delegates who were against a mandatory notification requirement claimed that it may be too burdensome on the promisee, who in some cases may need to take an immediate action to avoid losses.Footnote 90 As a compromise,Footnote 91 it was stated in the final draft of the provision that the innocent party must give reasonable notice to the promisor and permit them to provide adequate assurance ‘if time allows’.
The drafting history of Article 72 CISG unambiguously shows that the purpose of regulating the notification requirement in this provision, accompanied by the adequate assurance mechanism, was to protect the interests of the promisor. In fact, the drafters of the Convention were concerned that the procedure regulated in Article 72(2) CISG may put the interests of the innocent party at risk. It thus follows that the character of the adequate assurance mechanism under Article 72(2) CISG is completely different than that under Section 2-609 UCC.
D. The applicability of the PICC
It has been suggested that Article 7.3.4 of the UNIDROIT Principles of International Commercial Contracts may be used to ‘interpret the interplay between Articles 72 and 71 CISG’ and to justify the promisee's right of avoidance where the requested adequate assurance is not provided.Footnote 92 According to Article 7.3.4 PICC, ‘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. Where this assurance is not provided within a reasonable time the party demanding it may terminate the contract.’ Contrary to the CISG, the PICC combines the remedies of suspension and avoidance for anticipatory breach in a manner similar to the UCC. Furthermore, the PICC allows for a suspension of performance only where the anticipated breach is of a fundamental nature. For these reasons, Article 7.3.4 PICC may be more relevant to the interpretation of Article 72 than to that of Article 71 CISG. The solution adopted in Article 7.3.4 PICC could be referred to in cases in which a fundamental breach is anticipated but its occurrence is not ‘clear’. The promisee could then demand adequate assurance and avoid the contract if their request is not answered.
The Preamble of the PICC states that they may be used to interpret or supplement international uniform law instruments. On this basis, it has been claimed that the Principles may play a role in interpretation of the CISG.Footnote 93 The use of the Principles may be justified in two ways. First, the PICC may be considered a ‘general part’ of the transnational law of obligations.Footnote 94 In such a case, the CISG would be considered a branch of the same covering international sales contracts. Understood in this way, the PICC would apply in relation to those elements of an international sales contract which are not regulated by the CISG, such as vitiating factors.
Another way of applying the PICC in the context of the CISG is to consider the PICC as ‘external’ general principles of the CISG. Article 7 of the CISG indicates that the autonomous and international interpretation of the Convention has priority over the law applicable by virtue of the rules of private international law. Accordingly, if matters governed by the Convention are not expressly settled in it, they are to be settled in conformity with the general principles on which the Convention is based. It has been argued that the principles may be both ‘internal’ to the Convention and ‘external’ to it.Footnote 95 ‘External’ principles can be taken inter alia from other uniform law instruments, which is particularly justified where the two instruments ‘can form a coherent body of rules, using the same concepts for similar purposes’.Footnote 96 This debate is of primary significance in relation to the role of the PICC as general principles of the CISG.Footnote 97
The applicability of the PICC in the interpretation and supplementation of the CISG is not without controversy.Footnote 98 A detailed analysis of this issue is, however, beyond the scope of this article. What needs to be examined here is whether, assuming that the PICC can play a supplementary role in the interpretation of the CISG, a reference to the Principles in cases in which the occurrence of fundamental breach is anticipated but not yet ‘clear’ could entitle the promisee to avoid the contract where the adequate assurance is not provided.
It is submitted that such an outcome could not be reached. Regardless of whether the PICC are to be considered a ‘general part’ of the transnational law of obligations or ‘external’ general principles on which the CISG is based, they can only be of use where there is a gap or an ambiguity in the Convention. Article 72 CISG, regulating the right of avoidance for anticipatory breach, leaves no gap to be filled. For there to be a gap, the adequate assurance mechanism regulated in Article 72(2) CISG would need to be understood in the same way as the adequate assurance procedure known from the UCC, ie as an instrument meant to ensure certainty on the side of the promisee. However, as explained above, the purpose of Article 72(2) CISG is different; the provision applies where it is already clear that a fundamental breach will occur. It aims to offer the promisor an opportunity to re-establish themselves by providing assurance in order to prevent the promisee from avoiding the contract. The content of Article 72 CISG allows for this purpose to be fully satisfied. It is left to the promisor to decide whether or not they will make use of the chance to provide assurance. If they decide to do so and the assurance provided is adequate, the promisee cannot avoid the contract.
Article 72(2) CISG thus protects the interests of the promisor by offering them a choice: they can provide adequate assurance and prevent avoidance of the contract, or remain passive (or otherwise provide assurance of an unsatisfactory standard) and let the promisee continue with the avoidance procedure. Understood in this way, Article 72 CISG regulates the adequate assurance mechanism in an exhaustive manner and creates no gap for which supplementary interpretation would be required.
Article 7.3.4 PICC clearly assigns the same role to the adequate assurance procedure as Section 2-609 UCC. The demand for assurance under Article 7.3.4 PICC aims to eliminate the uncertainty experienced by the promisee. This is plainly visible when one compares this provision to the directly preceding Article 7.3.3, which states: ‘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’. It has been explained in the Official Comment to the PICC that Article 7.3.4 protects the interests of the promisee in the event that the occurrence of a breach is not clear, but the promisee has reason to believe that the promisor will not perform.Footnote 99 In contrast to Article 7.3.3 PICC, Article 7.3.4 thus applies where there is still a possibility that the promisor will perform. The Official Comment continues by explaining that in such a case the promisee:
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 … Consequently, this Article 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.Footnote 100
The rationale for introducing the right to demand assurance in Article 7.3.4 PICC was therefore similar to the rationale justifying the procedure adopted in Section 2-609 UCC. At the same time, it was completely different to the rationale underlying Article 72(2) CISG. The claim that Article 7.3.4 PICC can be used to supplement the interpretation of Article 72(2) CISG is based on a false assumption that the two provisions regulate an analogous procedure, whereas the mechanisms regulated in these provisions are in fact substantially different. Article 72(2) CISG leaves no gap. It simply serves different purposes to Article 7.3.4 PICC. Consequently, there is no room for supplementary interpretation of Article 72(2) CISG by way of applying the solution adopted in Article 7.3.4 PICC.
IV. THE DOCTRINE OF ADEQUATE ASSURANCE AS A FAUX AMI
It has been pointed out in the literature that the interpretation of a uniform law convention may present the risk of faux amis, ie ‘false friends’. The concept of faux amis has been used to describe terms which seem familiar to an interpreter but which, in fact, are defined differently in the uniform law instrument to in the domestic legal system the interpreter is used to.Footnote 101 Several instances of faux amis may be identified on the basis of the CISG. One major example is the mechanism regulated in Article 47 CISG, which was referred to as a ‘Nachfrist’ rule in the Secretariat's Commentary to the 1978 draft of the Convention.Footnote 102 This mechanism has been equated by some German courts to the German doctrine of Nachfrist. As a result, the doctrine has been wrongly understood by these courts as giving a right for the seller and imposing a duty on the buyer, rather than providing an optional right for the buyer.Footnote 103
Another example of a faux ami can be found in the US case of Delchi Carrier SpA v Rotorex Corp.,Footnote 104 which required an interpretation of Article 74 CISG. This provision states that ‘damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract’. The US court understood this rule as a reference to the ‘familiar principle of foreseeability established in Hadley v Baxendale’.Footnote 105 Hadley v Baxendale is the leading English case on remoteness of damage and has also gained recognition in the US.Footnote 106 Rather than referring to the preparatory works and other materials examining the specific meaning of the foreseeability rule under the CISG, the court thus reached for an analogy from its own jurisdiction.
The concept of ‘fundamental breach’ as defined in Article 25 CISG is another instance where the problem of faux amis may arise.Footnote 107 The term ‘fundamental breach’ has also been used in common law jurisdictions—which are more receptive to avoidance than the CISG.Footnote 108 It has been strongly emphasised in the literature that solutions adopted in common law systems ‘should not be looked at … to determine the meaning of fundamental breach in article 25’ CISG.Footnote 109
It has been shown in this article that the mechanism of adequate assurance constitutes another instance where the problem of faux amis may occur. Even though the same words are used in both the CISG and the UCC, the doctrine regulated in the Convention has a different meaning and serves a different purpose to that of the UCC. As a result, it also leads to different legal consequences to its UCC counterpart. It has been stated in a number of court decisions that ‘case law interpreting analogous provisions of Article 2 of the UCC may also inform a court where the language of the relevant CISG provisions tracks that of the UCC’.Footnote 110 It was shown in this article that this approach is not justified, particularly in the context of the doctrine of adequate assurance. The need for an autonomous interpretation of the Convention stressed in its Article 7(1) requires a clear line to be drawn between the rules governing the adequate assurance procedure under the CISG, on one hand, and under the UCC and other legal acts inspired by the latter, on the other.
V. CONCLUSIONS
The conclusions arrived at in this article on the role of adequate assurance of performance in the CISG can be summarised as follows:
I. A failure to provide adequate assurance requested under Article 71(3) CISG does not justify per se an avoidance of a contract; it can only be seen as one of the circumstances taken into account in the assessment of the probability that a fundamental breach will occur.
II. The adequate assurance mechanism regulated in Article 71(3) CISG protects the interests of the promisor by allowing them to prevent suspension of performance by the promisee. The provision also protects the interests of the promisee, however, this protection is much weaker than that offered under Section 2-609 UCC.
III. The different ways in which the doctrine of adequate assurance operates under Article 71(3) CISG and under Section 2-609 UCC result from the general differences between the systems of remedies adopted in the two legal acts. While the UCC adopts the perfect tender rule and allows the buyer to immediately reject the goods regardless of the seriousness of the non-conformity, the CISG is based on the principle of favor contractus and allows for avoidance only in cases of fundamental breach. As a result, the adequate assurance procedure regulated in Article 71(3) CISG cannot offer the same benefits as its UCC counterpart. As such, it can be seen as a failed legal transplant.
IV. The purpose of the adequate assurance mechanism regulated in Article 72(2) CISG is solely to protect the interests of the promisor. The right to provide adequate assurance gives the promisor a chance to re-establish themselves and prevent the avoidance of a contract by the promisee. The adequate assurance procedure regulated in Article 72(2) CISG is not meant to remove an uncertainty experienced by the promisee—it only applies where the occurrence of a future fundamental breach is clear. The mechanism regulated in Article 72 CISG thus plays a very different role to the procedure regulated in Section 2-609 UCC.
The differences between the adequate assurance mechanism regulated in the CISG and the one regulated in Section 2-609 UCC may become very visible in the context of the current COVID-19 crisis. The outbreak of the pandemic arguably provides reasonable grounds for insecurity with respect to the performance of a significant number of sales contracts. At the same time, however, the occurrence of a future breach can only rarely be ‘clear’ given the unpredictable development of the pandemic and the fact that national governments are constantly updating the relevant restrictions. The probability standard required for avoidance of a contract under Article 72 CISG will thus not often be satisfied. The adequate assurance procedure regulated in Section 2-609 UCC may prove to be a helpful tool in the current climate by allowing the promisee to remove the uncertainty involved and escape the contract where adequate assurance is not provided within a reasonable time. By contrast, the usefulness of the adequate assurance mechanism regulated in Article 71(3) CISG is limited in this context. If adequate assurance is not provided, the promisee can merely continue with suspension of their performance, which may generate further uncertainty.
A more general conclusion regarding the interpretation of international conventions can be drawn from this analysis. An interpretation of an international uniform law convention, such as the CISG, must be based on the assumption that the expressions used by the drafters are intended to be independent and neutral. Recourse to the understanding of a given concept in a domestic legal system is only justified where it is clear from the legislative history that this is what the drafters intended.Footnote 111 The choice of expressions employed in an international convention is always a result of a compromise. At the same time, the range of interests that need to be balanced in the process of drafting an international convention are different to those implicated in drafting national legal rules. The adequate assurance procedure regulated in Article 72(2) CISG offers a very good example of this. As explained in this article, the provision was included in the Convention at the request of delegates from developing countries who feared that, in the case of international sales, the promisor may often be in a weaker position than the promisee—a consideration which is unlikely to be relevant in a national context. Concepts employed in an international convention should therefore not be associated with those employed in a domestic legal system—even if they are textually the same.
