Anticipatory Non-Performance and Underlying Values of the UNIDROIT Principles

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1 Anticipatory Non-Performance and Underlying Values of the UNIDROIT Principles Djakhongir Saidov * INTRODUCTION The doctrine of anticipatory breach or non-performance (hereafter referred to as anticipatory non-performance ) has been developed to deal with situations where one party has grounds to suspect that the other party s performance will not be forthcoming at the due date. The essence of the doctrine is that, in such situations, the party does not have to wait for the due date to have recourse to remedies but can exercise certain remedies 1 as soon as it has grounds 2 to believe that the other party s performance will not be forthcoming. This doctrine has a long history and has been extensively discussed in legal literature and cases in different legal systems. It originated in the English common law 3 and it is from the common law that it has found its way into various international instruments. 4 Although the doctrine has not ceased to attract the interest of scholars, 5 recent writings have focused principally on the provisions of the Vienna Sales Convention. This paper seeks to contribute to the * LLB (University of World Economy and Diplomacy, Uzbekistan), LLM, PhD (University of East Anglia, United Kingdom); Lecturer, School of Law, University of Birmingham (United Kingdom). The author would like to thank Professor Nelson Enonchong and Miss Sarah Green for their comments on earlier drafts. 1 The question of what remedies are available has to be answered in the context of the applicable law. 2 Legal systems and international instruments vary so far as the required degree of prognosis is concerned. 3 The English case with which the origin of the doctrine is usually associated is Hochster v. De La Tour (1853) 2 El. & Bl For the history of evolution of the doctrine in common law, see Sir Michael J. MUSTILL, Anticipatory Breach of Contract: The Common Law at Work, Butterworth Lectures ( ); K.A. ROWLEY, A Brief History of Anticipatory Repudiation in American Contract Law, 69 University of Cincinnati Law Review (2001), See M. VANWIJCK-ALEXANDRE, Anticipatory Breach and Instalment Contracts in the CISG, 3-4 International Business Law Journal (2001) 353, 355 (indicating the common law origin of the doctrine, so far as the CISG is concerned). For a similar statement in the context of the UNIDROIT Principles, see M. FONTAINE, The UNIDROIT Principles: An Expression of Current Contract Practice? in UNIDROIT Principles of International Commercial Contracts: Reflections on their Use in International Arbitration, ICC (2002), 96; O. Lando & H. Beale (eds.), Principles of European Contract Law: Parts I and II, Kluwer Law International (2000 ), 417 (in the context of the Principles of European Contract Law). For a discussion of the provisions on anticipatory breach in the ULIS, see E.J. COHN, The Defence of Uncertainty: A Study in the Interpretation of the Uniform Law on International Sales Act 1967, 23 International and Comparative Law Quarterly (1974), For the most recent work dealing with anticipatory non-performance in the CISG, see, e.g., M.A. DA SILVEIRA, Anticipatory Breach under the United Nations Convention on Contracts for the International Sale of Goods, 2 Nordic Journal of Commercial Law (2005), at: < Rev. dr. unif

2 Djakhongir Saidov discussion of the doctrine primarily by concentrating on the UNIDROIT Principles of International Commercial Contracts. The aim of this examination is to shed some light on the purposes and aspects of the doctrine of anticipatory non-performance as reflected in the UNIDROIT Principles and to highlight the connection and relationship between, on the one hand, a specific and somewhat technical rule of law and, on the other hand, values and policies underlying and promoted by a particular system of law. It is submitted that the relationship between the two is reciprocal. On the one hand, justification of the existence, interpretation and application of a particular rule will often depend on broader purposes and values underlying the system of law of which the rule is a part. On the other hand, it is the examination of a particular rule itself which sometimes tells us what the purposes and values of the system of law in question are. In this regard, the doctrine of anticipatory non-performance seems a good choice because, as is well-known, it has raised difficult questions about the reasons and purposes justifying its existence as well as how it needs to be applied in some particular circumstances. The author hopes, therefore, that this examination of the provisions on anticipatory non-performance will tell us something about the kind of values and policies that are or should be promoted by the UNIDROIT Principles. 6 This paper first discusses the reasons and policies which may justify the existence of these rules in the UNIDROIT Principles and analyses various criticisms that have been put forward with respect to this doctrine. The remaining sections will examine such issues as the nature of events giving rise to the right to terminate the contract on the grounds of anticipatory non-performance, standards of prognosis, the problem of the innocent party s readiness and willingness to perform, notification and adequate assurance, and the purpose of the remedy of withholding performance. 1. JUSTIFICATION OF THE DOCTRINE OF ANTICIPATORY NON-PERFORMANCE 1.1 General Despite agreeing that the doctrine has largely originated for practical reasons 7 or reasons of expediency, 8 the common law scholars have long struggled to provide a sound theoretical foundation for its existence. Taking this into account, it is important to examine possible reasons which may justify the existence of the rule on anticipatory non-performance under the UNIDROIT Principles. This exercise is important not only in terms of highlighting questions about the values pursued by the Principles but also for the interpretation and practical application 9 of the provisions 6 For a recent attempt to analyse values underlying the international sources of commercial law, see L. MARQUIS, International Uniform Commercial Law: Toward a Progressive Consciousness, Ashgate (2005). 7 A. ROTHSCHILD, Anticipatory Repudiation and Its Nullification State and Federal Courts, 21 Iowa Law Review ( ), 385; R.J. ROBERTSON, The Right to Demand Adequate Assurance of Due Performance: Uniform Commercial Code Section and Restatement (Second) of Contracts Section 251, 38 Drake Law Review ( ), MUSTILL, supra note 3, For a similar view (although in the context of US law) see L. VOLD, The Tort Aspect of 796 Unif. L. Rev. 2006

3 Anticipatory Non-Performance and Underlying Values of the UNIDROIT Principles on anticipatory non-performance. So, why do the UNIDROIT Principles allow a party to have recourse to remedies before the due date for performance of the other party s obligations? Is it not illogical, as has been argued by common law writers, to have a remedy in response to a breach which has not yet occurred? Is it not unfair in relation to the party under suspicion? These questions can be answered in a variety of ways. 1.2 Implied duty not to impair contractual expectations It can be argued that the term anticipatory non-performance is misleading because an innocent party is given a remedy not in response to a future non-performance (because such a non-performance logically cannot occur before the due date), but in response to a present non-performance. Having grounds to suspect that the contract or a part thereof will not be performed, the innocent party can argue that its expectation that the contract will be performed is impaired, that it cannot rely on the contract, and that it has found itself in an insecure position. 10 Therefore, the presence of grounds to suspect that a future performance of the contract will not be forthcoming violates everything that a contractual relation under the UNIDROIT Principles was intended to establish, i.e. the legal right to and security of future performance of the contract by the other party and the ability to rely on the contract. 11 Can it be said, therefore, that the rule on anticipatory non-performance in the UNIDROIT Principles can be justified, along the same lines as in Section 2-609(1) UCC, on the basis that there is an implied duty imposed on the parties not to impair each other s expectations that a contract will be performed? An obvious way of imposing such a duty is to argue that the duty flows from the duties of good faith and fair dealing. 12 It can be said that duties of good faith and fair dealing imply a party s continuous commitment to the bargain. 13 This justification places an emphasis on the protection of the parties expectations and Anticipatory Repudiation, (1928) 41 Harvard Law Review, 343 ( [T]he extreme divergence of opinions over details in the application of the law to facts of anticipatory repudiation of contracts challenges rational explanation [T]his legal confusion seems to be attributable largely to blind or groping uncertainty regarding the underlying vital fundamentals ); E.H. TAYLOR, The Impact of Article 2 of the U.C.C. on the Doctrine of Anticipatory Repudiation, 9 Boston College Industrial and Commercial Law Review ( ), 941 ( express announcement of the logical basis for the doctrine will at least result in a greater predictability as to its application by the courts ). 10 This is the reasoning that is most often used in common law to justify the existence of anticipatory breach. For instance, Section 2-609(1) of the Uniform Commercial Code imposes an obligation on each party that the other s expectation of receiving due performance will not be impaired. A similar reason has been advanced to justify the doctrine under the CISG (see H. BERNSTEIN / J. LOOKOFSKY, Understanding the CISG in Europe, 2 nd ed., Kluwer (2003), 132, n See Art. 1.3 UNIDROIT Principles. 12 See Art. 1.7 UNIDROIT Principles. 13 The connection between implying a duty not to impair contractual expectations and good faith has been pointed out on a number of occasions. See J.W. CARTER, Adequate Assurance of Due Performance (1996), 10 Journal of Contract Law, 6; E.A. FARNSWORTH, Contracts, 2 nd ed. (1990), Little, Brown and Company), 672. Rev. dr. unif

4 Djakhongir Saidov reflects a concern for certainty (which parties, arguably, need in respect of their legal position before the due date for performance) 14 and security 15 in international business Present value of future performance The anticipatory non-performance doctrine has also been justified on the basis that, in the marketplace, despite the fact that performance of the contract will take place in the future, the contractual relation may be used as an effective commercial resource which has a present value. 17 This becomes evident, for example, where contracts are relied upon to obtain credit 18 or where rights under the contract are assigned. 19 If this is correct, then it can be argued that the contractual relation has a present value which is impaired when there are grounds to suspect that the performance will not be forthcoming. 20 Like with the previous justification, the term anticipatory nonperformance would be misleading because it is something which is of present value that is being impaired. 1.4 Avoidance of waste and promotion of economic efficiency The existence of this doctrine is closely connected with the idea of the necessity of avoiding waste and promoting economic efficiency. 21 Where a party has grounds to 14 Similarly, in the context of some national legal systems, it has been argued that certainty regarding the parties legal status before the due date for performance is required by public policy considerations (see G. SHALEV, Remedies on Anticipatory Repudiation, 8 Israel Law Review (1973), 124). For the view that the doctrine of anticipatory breach was established for reasons of certainty, see J.J. ZE, Anticipatory Breach of Contract, the PRC System and English Comparisons, Lloyds Maritime and Commercial Law Quarterly (1993), For similar statements made in relation to the doctrine in national legal systems see, for example, D.W. ROBERTSON, The Doctrine of Anticipatory Breach of Contract, 20 Louisiana Law Review ( ), Concern for the innocent party is sometimes expressed from the standpoint of the notions of fairness and reasonableness, i.e. that it is unfair to and unreasonable for a party to be required to continue performing its part of the contract where there are grounds to believe that the performance of the other party will not be forthcoming. Since requiring the party to continue performing would impose an undue hardship on the party (see, for example, official commentary to Section UCC), it should be given legal rights to either suspend performance or terminate the contract. 17 See, for example, MUSTILL, supra note 3, A similar justification has been put forward in the context of the CISG (see M.G. STRUB, The Convention on the International Sale of Goods: Anticipatory Repudiation Provisions and Developing Countries, 38 International and Comparative Law Quarterly (1989), 480). 18 VOLD, supra note 9, 353 ( As a matter of course in the present business credit system promisees arrange their own commitments relying on the performance in good faith of pending contracts as the resource to meet their obligations. Established contractual relations may serve as the practical security for bank loans ). 19 J.C. GULOTTA, Jr., Anticipatory Breach A Comparative Analysis, 50 Tulane Law Review (1976), See VOLD, supra note 9, J.W. CARTER / A. PHANG / S.Y. PHANG, Performance Following Repudiation: Legal and Economic Interests, 15 Journal of Contract Law (1999), 100, , 121; VOLD, supra note 9, ; CARTER, supra 798 Unif. L. Rev. 2006

5 Anticipatory Non-Performance and Underlying Values of the UNIDROIT Principles suspect that performance of the contract will not be forthcoming, there is a risk that this party s continuing to perform its side of the bargain will lead to a waste of resources. All remedies available under the UNIDROIT Principles in case of anticipatory non-performance, be it withholding performance 22 or terminating the contract, 23 provide an innocent party with a means of avoiding waste. Under Article 7.3.4, a party may suspend incurring costs and expenses until, for example, it is reassured that the performance will be forthcoming. If it is not provided with adequate assurance, it may be able to terminate the contract 24 and move its resources in another direction or, at least, refrain from incurring further costs. Such an avoidance of waste has been said to be not only in the interests of the innocent party, but also in the interests of the community at large. 25 Although the question whether this analysis is applicable in the international context requires a more extensive examination, there certainly seems to be room for an argument that such an avoidance of waste and, thereby, promotion of efficiency may have a beneficial effect for the world community as a whole. Thus, if the existence of the rule on anticipatory non-performance manifests, at least in part, the considerations of economic efficiency, then this may be an indication that promoting efficiency is a policy or a value underlying the UNIDROIT Principles Deterring future non-performance It can be argued that the existence of remedies for anticipatory non-performance may have the effect of deterring parties from committing anticipatory non-performance. The UNIDROIT Principles have been said to be based on a policy of preserving the contract in existence as much as possible (favor contractus) 27 and deterring parties from breaching their contracts is, therefore, in line with this policy. note 13, 6. This view has already been expressed in the context of the CISG (see J.E. MURRAY / H.M. FLECHTNER, Sales, Leases and Electronic Commerce: Problems and Materials on National and International Transactions, 2 nd ed. (2003), 300, cited in T. SELIAZNIOVA, Prospective Non-Performance or Anticipatory Breach of Contract (Comparison of the Belorusian Approach to CISG Application and Foreign Experience), available at: < 22 See Art UNIDROIT Principles. 23 See Arts and UNIDROIT Principles. 24 If adequate assurance is not provided within a reasonable time (Art UNIDROIT Principles). 25 CARTER / PHANG / PHANG, supra note 21, 100, Official Comment 1 to Art UNIDROIT Principles, for example, also acknowledges the importance of economic considerations. Some writers have also highlighted the economic efficiency consideration (see, for example, A. ROSETT, UNIDROIT Principles and Harmonization of International Law: Focus on Chapter Seven, Unif. L. Rev. / Rev. dr. unif. (1997), 442; also at: < english/publications/review/articles/ htm>). 27 M.J. BONELL, An International Restatement of Contract Law: The UNIDROIT Principles of International Commercial Contracts, 3 rd ed., Transnational Publishers (2005), ; J.M. PERILLO, UNIDROIT Principles of International Commercial Contracts: The Black Letter Text and a Review, 43 Fordham Law Review (1994), 303. Rev. dr. unif

6 Djakhongir Saidov 1.6 Balance As will be shown below, one aim of the remedy of withholding performance is to maintain the balance between the interests of the parties. 28 The question that arises, therefore, is whether maintaining the balance between the interests and positions of the parties is a consideration underlying the provisions on anticipatory nonperformance and the UNIDROIT Principles as a whole. On the one hand, the drastic nature of the remedy of termination for anticipatory non-performance (coupled with the absence of the notification requirement) 29 may appear to disrupt the balance between the two parties. On the other hand, it can be argued that, for the reasons mentioned above, 30 there are good grounds justifying the existence of the right to terminate in case of anticipatory non-performance and that this remedy is confined only to the expectation of a fundamental non-performance. In addition, it may often be the case that a party suspected of a future fundamental non-performance will be given an opportunity to provide adequate assurance. Therefore, it is possible to view the provisions on anticipatory non-performance as evidencing an insignificant degree of imbalance in favour of the party relying on anticipatory non-performance. It is submitted that regardless of what the true assessment of the provisions is, the necessity of maintaining a fair balance between the two parties should be regarded as a consideration underlying the provisions in question as well as the UNIDROIT Principles in general. It follows from the need to minimise the risk of abusing significant powers afforded by the anticipatory non-performance provisions, 31 the Principles purpose of maintaining fairness in international commerce, 32 an element of uncertainty inherent in the nature of the doctrine of anticipatory non-performance, and the Principles policy of favor contractus that the need for the balance between the two parties cannot be ignored See infra Section ( Withholding performance ). 29 See infra Section 3.5 ( Absence of the notification requirement ). 30 See supra Sections For the arguments in favour of the risk of abuse of rights being taken into consideration, see next Section. 32 See UNIDROIT Principles of International Commercial Contracts (1994), Introduction. 33 Perhaps it can also be argued that other provisions of the UNIDROIT Principles such as those dealing with hardship (see Arts , 6.2.3; also H. VAN HOUTTE, The UNIDROIT Principles of International Commercial Contracts, 2 International Trade and Business Law Annual (1996), 14) and gross disparity (Art. 3.10) can be regarded as indications of the Principles general policy in favour of maintaining such a balance. See also MARQUIS, supra note 6, 139 (advocating the value of maintaining equilibrium in international commercial law). The notion of balance can be discussed in a much wider context which relates to balancing commercial interests with other societal values (see Sir Roy GOODE, Rule, Practice, and Pragmatism in Transnational Commercial Law, International and Comparative Law Quarterly (2005), 560, noting that it is not the function of international instruments simply to reproduce provisions found in standardterm contracts. [T]he function of any transactional law is to maintain a balance of interests ). 800 Unif. L. Rev. 2006

7 Anticipatory Non-Performance and Underlying Values of the UNIDROIT Principles 2. CRITICISM OF THE DOCTRINE 2.1. Inequality, disparities, and possible abuse of rights It is submitted that the criticisms that have been put forward with respect to this doctrine need to be taken into consideration in interpreting the provisions on anticipatory non-performance. First, these criticisms, to a certain extent, challenge the existence of the doctrine and, therefore, need to be addressed in the process of justifying the doctrine. To put it differently, meeting the criticisms becomes, in itself, part of the justification. Second, as will be seen below, these criticisms raise important questions about values and policies to be promoted by the law. Therefore, although the criticisms did not prevent the doctrine from coming into existence, they nevertheless may be sufficiently serious to justify injecting, through the process of interpretation, certain values into the UNIDROIT Principles and thereby influencing the way the rules on anticipatory non-performance are applied. One of the main criticisms of the doctrine stems from the concern that it gives too much power to the party intending to rely on the other party s anticipatory nonperformance. Such an empowerment is said to be dangerous and may lead to abuse. 34 Thus, rules on anticipatory non-performance may provide a party with an opportunity to exploit the other party s unstable position. The party, for example, may want to escape from what turned out to be an unprofitable bargain and the right to terminate under the UNIDROIT Principles could offer the party the legal means of doing so. 35 Many of these points were emphatically made during the 1980 Vienna Diplomatic Conference by the representatives of some developing countries. From the developing countries perspective, it has been argued that the conditions of economic and political instability in which many of these countries often find themselves exacerbate the appearance of instability and, therefore, greater room for abuse exists in relation to developing countries participants in international trade. 36 Furthermore, it has been 34 See, for example, statements made by some delegates at the 1980 Vienna Conference (Inaahullah during the 27 th meeting, < and Shafik during the 34 th meeting, < 35 See J. VILUS, Provisions Common to the Obligations of the Seller and the Buyer in Sarcevic / Volken (eds.), International Sale of Goods: Dubrovnik Lectures, Oceana (1986), 242, , also available at: < (making similar points in relation to both Art. 71 and Art. 72 CISG). It has been argued that even withholding performance may, in some cases, cause serious damage (see STRUB, supra note 17, 477). 36 See STRUB, supra note 17, 477. A similar argument, however, has been made even outside the context of differences between the circumstances of developed and developing countries. Thus, Professor Komarov has argued that the doctrine has a particular social orientation : In its essence, these norms do not so much protect the material interests of an injured party as aggravate the economic position of a party to the contract who, in a particular case, could not use the opportunities offered by a market economy system. As a rule, it is small businesses which are the most vulnerable to economic fluctuations Large enterprises, having strong positions at the time of the conclusion of the contract, get another legal means of competing which allows them to deprive the other parties to the contract, which experience financial difficulties, of economic benefits that the latter expected to receive (A.S. KOMAROV, Liability in Rev. dr. unif

8 Djakhongir Saidov argued that the consequences of reliance on the rules of anticipatory non-performance and, in particular, the exercise of the right to terminate the contract may impose harsher consequences on commercial men from developing countries. For example, it has been stated that: [i]n world-wide transactions, efficient communication and storage facilities for the preservation of goods are not always guaranteed. At seaports where adequate storage facilities do not exist one may see piles of industrial products on the ground, exposed to the weather. These conditions intensify the harshness that results from immediate cancellation by buyer or seller. On the other hand, in countries like the United States, where merchants enjoy efficient systems of communication, preservation, storage and transportation, a rule permitting immediate cancellation for any sort of breach may be less harsh. 37 In short, the underlying concern is that the rules on anticipatory non-performance reinforce the weaker bargaining position of developing countries in international trade. 38 In this regard, it is suggested that, in interpreting and applying the provisions on anticipatory non-performance, the existing disparities and possibilities of abusing the rights flowing from these provisions need to be taken into account. This seems necessary for the UNIDROIT Principles to be applied in accordance with their purpose of ensuring fairness in international commercial relations 39 and the underlying ideas of good faith and fair dealing. 40 Thus, it is submitted that the rules on anticipatory non-performance should not be used as an instrument for providing parties with a legal route for escaping from a bargain or abusing their position and, thereby, exploiting the unstable circumstances of the other party. Such an approach may have a far-reaching impact on the interpretation and application of the rules on anticipatory non-performance. 2.2 Extension of obligations and acceleration of liability The doctrine has also been said to be unfair because it leads to the extension of obligations assumed by a party under the contract and to an acceleration of liability. For example, although the party is not compelled to provide adequate assurance under the UNIDROIT Principles, it is certainly in this party s interests to provide such an assurance to minimise the risk of the other party s terminating the contract. In this sense, the party s own interests demand that it provide adequate assurance, which Commercial Turnover/Otvetstvennost v. kommercheskom, oborote, Juridical Literature Moscow (1991), 104 (the quotation and title were translated by the author). 37 S. MICHIDA, Cancellation of Contract, 27 American Journal of Comparative Law (1979), STRUB, supra note 17, UNIDROIT Principles of International Commercial Contracts (1994), Introduction. 40 Comment 2 on Art. 1.7 UNIDROIT Principles expressly recognises that abuse of rights is contrary to principles of good faith and fair dealing. 802 Unif. L. Rev. 2006

9 Anticipatory Non-Performance and Underlying Values of the UNIDROIT Principles means doing more than the contract itself requires. 41 Finally, if, upon termination and before the due date an innocent is awarded damages, the other party s liability can be said to have been accelerated. 42 It seems that these are valid points and therefore need to be taken into account in interpreting the respective provisions EXAMINATION OF THE RULES IN ARTICLES AND General The UNIDROIT Principles contain two provisions relating to anticipatory nonperformance. According to Article 7.3.3, [w]here 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. Article further provides that [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. The following sections will examine these provisions by concentrating on such issues as the nature of events giving rise to the right to terminate the contract on the grounds of anticipatory non-performance, standards of prognosis, the problem of the innocent party s readiness and willingness to perform, notification and adequate assurance, and the purpose of the remedy of withholding performance. It also needs to be noted that, as of the time of writing, no reported case dealing with these provisions of the UNIDROIT Principles has been found. Therefore, in identifying and examining the problems relating to anticipatory non-performance, this paper will rely on the experience of different legal systems and on cases and scholarly writings on the anticipatory non-performance doctrine as reflected in the CISG Nature of events giving rise to the right to terminate under Article According to the UNIDROIT Principles, only an anticipated fundamental nonperformance gives a party the right to terminate the contract. To decide whether a non-performance is fundamental, regard must be had to the factors listed in Article 7.3.1(2). Although Article does not specify the nature of events which may give rise to the right to terminate the contract, there is little doubt that any circumstance which results in the expectation that a fundamental non-performance will occur is 41 CARTER, supra note 13, 5; J.W. CARTER, Suspending Contract Performance for Breach, in J. Beatson / D. Friedman (Eds.), Good Faith and Fault in Contract Law, Oxford University Press (1995), See G.H. TREITEL, The Law of Contract, 11 th ed., Sweet & Maxwell (2003), 859 ( [the defendant] will have to pay damages now, even though under the contract he was not to perform until some future time ); TAYLOR, supra note 9, These points may be particularly relevant for dealing with such issues as the definition of adequate assurance under Art UNIDROIT Principles. 44 See Arts CISG. Rev. dr. unif

10 Djakhongir Saidov covered by this provision. Generally, it may be clear that a fundamental nonperformance will occur as a result of the other party s actions or words evidencing its unwillingness or inability to perform or some external factors such as destruction of the seller s factory, imposition of embargo or monetary restrictions, 45 strikes, 46 etc. It may be noteworthy that, in the context of Article 71 CISG, the question has been raised of whether what constitutes a substantial part of obligations needs to be determined from the standpoint of an innocent party s state of mind and subjective intentions or on the basis of the (often believed to be more objective) standard of a reasonable man. According to the prevailing view, to minimise the risk of abuse of rights under Article 71 and to maintain a fair balance between the interests of the parties, it is important that the requirement of a substantial part of obligations be interpreted from the standpoint of the reasonable man. Since the possibility of abuse of rights and the need for a balance between the two parties have also been stressed in this paper, does a similar question arise in the context of the anticipated fundamental non-performance under the UNIDROIT Principles? The answer is probably no, because the question of a perspective from which fundamentality is to be judged has been covered by the definition of fundamental non-performance. First, it is the innocent party s expectations under the contract that are relevant. This interpretation will probably involve, to a certain extent, an inquiry into the party s subjective expectations. 47 However, an important proviso in Article 7.3.1(2)(a) unless the other party did not foresee and could not reasonably have foreseen such result seems to contribute to maintaining the balance between the innocent party s expectation and the need to avoid reliance on subjective considerations. The need to take account of additional factors in Article 7.3.1(2) is also likely to reduce the problem of reliance on the aggrieved party s subjective expectations and intentions. 48 Thus, although it may not be entirely clear whether the Principles definition of fundamental non-performance will eliminate the concern for the existence of a more objective standard in order to minimise the risk of an innocent party abusing its rights and maintain the balance between the two parties, the cumulative effect of factors relating to the definition of a fundamental non-performance appears to reduce such a risk. 45 These examples have been given in the context of the CISG (see Secretariat Commentary on Art. 62 of the 1978 Draft, < 46 See E.W. HORNUNG, in P. Schlechtriem / I. Schwenzer (eds.), Commentary on the UN Convention on the International Sale of Goods (CISG), 2 nd English ed., Oxford University Press (2005), This is how this issue has been dealt with in the context of Art. 25 CISG: To determine the degree of a given detriment, to draw the line between substantial and insubstantial, is no longer left to the judge s sole and sovereign appreciation, but tied to the expectations of the injured party, while those expectations, in turn, are not left to a party s inner feelings but instead tied to the terms of the existing contract (M. WILL in C.M. Bianca / M.J. Bonell (eds.), Commentary on the International Sales Law: the 1980 Vienna Sales Convention, Giuffrè Milan (1987), 214). 48 See Art (2)(b),(c),(d), and (e) UNIDROIT Principles. 804 Unif. L. Rev. 2006

11 Anticipatory Non-Performance and Underlying Values of the UNIDROIT Principles 3.3 Standard of prognosis General Similar to Article 72 CISG, the UNIDROIT Principles permit the right to terminate to be exercised where it is clear that a fundamental non-performance will occur. 49 It is a probability standard which must be relied upon to make judgements about the future state of affairs. This standard is important as far as the scope and effectiveness of Article are concerned. For example, if the standard is interpreted too strictly or narrowly, then the utility of Article can be reduced. 50 Since it is not entirely clear what degree of prognosis is required by the standard of being clear, this standard leaves room for the exercise of a policy and value judgement by an arbitrator or a judge. Bearing this in mind, it is argued that in applying Article both the justifications and the criticisms of the rule on anticipatory non-performance need to be taken into account. 51 The UNIDROIT Principles do not provide any additional guidance as to what is meant by the standard of being clear. In this regard, it seems that because Article 72 CISG employs a similar standard, the experience of the application of the CISG may be helpful in examining this standard under the UNIDROIT Principles. Thus, the following treatment of the standard in Article 72 CISG has been gaining acceptance: the probability of a future breach of contract has to be very high and obvious to everybody, but [does] not require almost complete certainty. 52 Such a treatment seems in line with the position of the Official Comments on the UNIDROIT Principles, according to which a suspicion, even a well-founded one, is not sufficient. 53 Further, as alluded to in the previous paragraph, such considerations as the need for maintaining the balance between the parties and minimising the risk of abusing the right to terminate need to be taken into account. In practical terms, this means that the standard of clear needs to be interpreted from the standpoint of a reasonable person and not from the standpoint of the innocent party. 54 Finally, it must be stressed that the question of what makes it clear that a fundamental breach will occur depends on the circumstances of a particular case. 49 Art UNIDROIT Principles. 50 For a similar statement in the context of Art. 72 CISG, see VANWIJCK-ALEXANDRE, supra note 4, 366 ( [a]n over-cautious attitude would risk defeating the object of Art. 72 as well as any benefit which the parties may derive from it ). 51 Ibid. 52 District Court Berlin 30 Sept (Germany), at: < g1.html>. For references to this standard in scholarly commentaries, see HORNUNG, supra note 46, 721; S. EISELEN, Remarks on the manner in which the UNIDROIT Principles of International Commercial Contracts may be used to interpret or supplement Arts. 71 and 72 of the CISG, < 53 Official Comment on Art UNIDROIT Principles. 54 For a similar view in the context of the CISG, see HORNUNG, supra note 46, 722. Rev. dr. unif

12 Djakhongir Saidov Specific cases : overview of the CISG experience There have been a number of cases where the standard of clear in the context of the CISG has been dealt with. A brief overview of the experience of the application of the CISG could, perhaps, be indicative in terms of what can be expected from the future application of Article UNIDROIT Principles and illustrative of problems of interpretation that may potentially arise. In several cases, the fact that the buyer had failed to pay for previous deliveries was deemed to have made it clear that the buyer would commit a fundamental breach by not paying the price. 55 In one case, the buyer s refusal to establish a letter of credit was regarded as sufficient to meet the standard of being clear. 56 Other cases also provide examples where the buyer has been found to have had the right to terminate. These cases include situations where, for instance, before taking delivery of the goods, the buyer concluded that a fundamental breach would occur on the basis of testing the samples provided by the seller 57 or because of defective drawings, provided by the seller, on the basis of which the goods were to be manufactured. 58 As a matter of general guideline (in addition to the one mentioned in the previous section), 59 it has been suggested that it is necessary that the party in breach shall have denied performance of its contractual obligations in a serious, express and unambiguous manner. 60 Some of the frequently discussed cases are those where one party insists on or suggests performing the contract on terms different from those agreed to in the original contract. It needs to be stressed, once again, that whether or not a party s demand for performance on new terms makes it clear that a fundamental breach will occur depends on the circumstances. Nevertheless, the following points may prove useful. If a party expressly and unequivocally states that it will perform only on new terms, there is little doubt that it should be clear to the other party that a fundamental breach will occur. In this regard, one court s treatment of a party s express and unambiguous conditioning of its performance on changing the terms of 55 District Court Berlin, supra note 52; District Court Krefeld 28 Apr (Germany), at: < ( [E]ven before the delivery of the shoes it was clear that the buyer would not pay the purchase price and would thereby commit a fundamental breach of contract. The Court took into account that the buyer had not yet performed under the prior contract although the seller had requested it several times to do so and had even commenced a legal action ); Appellate Court Düsseldorf 14 Jan (Germany), at: < 56 Downs Investments v. Perwaja Steel, Supreme Court of Queensland, 17 Nov (Australia), at: < 57 Helsinki Court of First Instance, 11 June 1995 and Helsinki Court of Appeals, 30 June 1998, (Finland), at: < 58 ICAC arbitration proceeding 161/1994, 25 Apr (Russia), at: < cases/950425r3.html>. 59 See supra note 52 and accompanying text. 60 Appellate Court Düsseldorf, 22 July 2004 (Germany), at: < g1.html>. 806 Unif. L. Rev. 2006

13 Anticipatory Non-Performance and Underlying Values of the UNIDROIT Principles letter credit as a fundamental anticipatory breach is correct. 61 However, a mere request to renegotiate the terms of the contract is unlikely to make it clear that a fundamental breach will occur. 62 Similarly, the mere expression of a desire not to perform may not be sufficient to meet the requirement of being clear. In one case, the seller expressed a wish to discontinue deliveries in connection with which the parties entered into negotiations. The arbitrator held that a mere expression of a desire not to perform coupled with the fact of continuous negotiations on this matter between the parties hardly constituted any alarming development in the Parties relationship tantamount to any clear indication of anticipatory breach. 63 The question may also arise as to whether the reason for a party s demand for new terms is relevant for the purposes of determining whether it is clear that a fundamental non-performance will occur. Thus, in common law systems it is often argued that where a party s demand for performing on different terms is a result of erroneous interpretation or a genuine disagreement about the terms of the contract, the courts should be reluctant to treat such a refusal to perform on original terms as an anticipatory repudiation. 64 This argument is based on concern for the breaching party who acts in good faith but who incorrectly interprets the terms of the contract. On this view, it may seem too harsh and unfair on such a party to allow the drastic consequence of termination to occur. Should Article UNIDROIT Principles be interpreted in such a way? This is a difficult question and, because the Principles do not contain a provision to this effect, it is difficult to give a definite answer. What is suggested is that judges and arbitrators interpret Article in line with policies, values and considerations underlying the doctrine of anticipatory non-performance in the UNIDROIT Principles. This approach, however, raises a number of considerations. On the one hand, the concern for fairness in relation to the non-performing party is important in order to maintain the balance between the two parties, and it may be the case that allowing 61 The breaching party stated that it would no longer feel obligated to perform and would sell the material elsewhere (Magellan International v. Salzgitter Handel, Federal District Court Illinois, 7 Dec (United States of America), at: < See a similar view taken by one arbitration tribunal in the case involving an instalment contract (Hamburg Arbitration proceeding, 29 Dec (Germany), at: < 62 See J. HONNOLD, Uniform Law for International Sales under the 1980 United Nations Convention, 3 rd ed., Kluwer Law International (1999), The arbitrator also took into account the fact that at no time was there any mention of avoidance of the contract and that, one point, the buyer requested performance from the seller (ICC Arbitration Case No. 8574, Sept.1996, at: < 64 See, for example, M. FURMSTON, Cheshire, Fifoot and Furmston s Law of Contract, 14 th ed. (2001), 597; M. CHEN-WISHART, Contract Law, Oxford University Press (2005), 499; J.C. SMITH, Anticipatory Breach of Contract, in E.Z. Lomnicka / C.G.J. Morse (eds.), Contemporary Issues in Commercial Law: Essays in Honour of Professor AG Guest, Sweet & Maxwell (1997), ; TAYLOR, supra note 42, 921 ( demand based on incorrect interpretation is not anticipatory breach ). But see E.A. FARNSWORTH, Contracts, 2 nd ed., Little, Brown and Company (1990), 663 ( The traditional view is that the other party s good faith will not prevent the statement from amounting to a repudiation. A party therefore acts at its peril if that party, insisting on what it mistakenly believes to be its rights, refuses to perform its duty ). Rev. dr. unif

14 Djakhongir Saidov one party to terminate the contract on the basis of the other party s good faith but erroneous interpretation will be seen as disrupting this balance. In addition, it can also be argued that not treating a party s erroneous interpretation as a fundamental anticipatory non-performance is in line with the Principles policy of keeping the contract alive as much as possible (favor contractus). On the other hand, a concern for the innocent party and a central purpose of the doctrine of anticipatory nonperformance to provide certainty and security to this party may point towards ignoring the fact of the other party s good faith error. In addition, it may be argued that, in practice, it may be difficult to differentiate between the situations where there is a genuine error and where the party deliberately misinterprets the contract and thereby attempts, for example, to modify its terms. 65 It can also be argued that if a signal is sent that the interpretation of the standard of clear under the UNIDROIT Principles depends on whether the non-performing party appeared to be acting under a good faith error, potential non-performing parties are more likely to abuse their position by trying to appear to misinterpret the contract. 66 This would, arguably, reduce the effectiveness of the remedy in Article and could encourage what can probably be called bad faith behaviour in international commerce. Although, in light of this complex interplay of conflicting policies, it is difficult to give a categorical answer to the question whether the approach advocated in the context of common law should be taken to interpreting Article 7.3.3, it would seem that, on balance, it is the second view which offers a stronger case. On this basis, it is suggested that whether a party s demand for new terms was based on a good faith error should be irrelevant for the interpretation of Article Innocent party s readiness and willingness to perform In the context of common law, it is sometimes said that for a party to have the right to terminate the contract for anticipatory breach, it is necessary for this party to be, at the time of terminating the contract, ready and willing to perform its part of the contract Perhaps an example of this difficulty can be found in one case decided under the CISG. In this case, the contract contained a provision according to which the vessel could not be used for transportation of any cargo other than the contract goods. The seller, however, argued that the buyer misinterpreted the provision on the exclusive use of the vessel and that the contract allowed transportation of goods of the same type as the contract goods. Although the tribunal held that the seller could not have been unaware that the contract disallowed transportation of any goods other than the contract goods, it is still not entirely clear from the decision whether the seller s misinterpretation of the contract was genuine or whether the seller deliberately misinterpreted the contract for the purposes of a defence and/or gaining an additional benefit by getting an opportunity to transport other goods (see ICAC Arbitration proceeding 238/1998, 7 June 1999 (Russia), at: < 66 For example, for the purposes of trying to modify the contract or delaying their performance. 67 Foran and Another v. Wight and Another (1989) 88 A.L.R. 413 (see the following statement by Mason CJ: Properly understood, the English and Australian cases to which I have referred support the view that the readiness and willingness requirements goes to the existence of the plaintiff s cause of action Absent proof of readiness and willingness, the plaintiff has no cause of action ). See also the discussion in K.C.T. SUTTON, Sales and Consumer Law, 4 th ed., LBC Information Services (1995), Unif. L. Rev. 2006

15 Anticipatory Non-Performance and Underlying Values of the UNIDROIT Principles This position appears to be somewhat controversial and it seems that, more frequently, the innocent party s readiness and willingness to perform is treated as relevant in calculating damages rather than as a precondition for the cause of action. 68 Nevertheless, a similar question may arise in the context of Article 7.3.3: is the innocent party s readiness and willingness to perform a necessary precondition for the exercise of the right to terminate for anticipatory non-performance? The main reason underlying this requirement seems to be connected with the idea of fairness. It is not fair for the party to benefit from terminating the contract if this party itself would not have performed its obligations and, therefore, would have been held liable for non-performance. It can, therefore, be argued that by imposing the requirement that the innocent party be ready and willing to perform, the law promotes fairness and responsible contracting 69 and minimises the risk of the parties escaping from a contract the performance of which turned out to be undesirable or impossible. The underlying ideas and possible effects of the imposition of this requirement appear to be valuable and desirable. The question that arises, therefore, is whether such a requirement can and should be imposed as a prerequisite of the right to terminate under Article There can be two objections to introducing this requirement. First, Article does not impose such a requirement and, no matter how desirable it may be, imposing it would be contrary to the text of the UNIDROIT Principles. Second, meeting this requirement may be difficult in practice because the inquiry will have to be made into the hypothetical future. 70 The second objection does not seem to be capable of preventing the imposition of this requirement because difficulties of proof, in this situation, should not prevent introducing a rule so long as there are sufficient grounds for its existence. The first objection is more serious. Indeed, the Principles do not contain such a requirement and it can be argued that it is inadmissible to read it into Article At the same time, however, it can be suggested that such a requirement could be imposed on the basis of general principles of good faith and fair dealing and in light of the Principles purpose to promote fairness in international commerce. After all, if the Principles general principles constitute a true foundation for this system of law, there 68 See, for example, the discussion in Sir Roy GOODE, Commercial Law, 3 rd ed., Penguin (2004), ; Chitty on Contracts (29 th ed. 2004), 1385; J.C. GULOTTA, Jr., Anticipatory Breach A Comparative Analysis, 50 Tulane Law Review (1976), 933; FARNSWORTH, supra note 64, 667; H. BEALE, Remedies for Breach of Contract, Sweet & Maxwell (1980), By preventing reliance on anticipatory non-performance in cases where the non-breaching party itself would not have been able to perform, the law sends the signal that the parties will not be able to escape without liability from transactions the performance of which has become undesirable or impossible. This seems to encourage the parties carefully to plan the transactions to which they enter. 70 See M.G. LLOYD, Ready and Willing to Perform: The Problem of Perspective Inability in the Law of Contract 37 Modern Law Review (1974), 121 (pointing out the necessity of a future hypothetical inquiry). 71 In one case decided under the CISG, the court appeared to regard proof of the innocent party s readiness and willingness as a precondition of the innocent party s right under Art. 72 (see Downs Investments v. Perwaja Steel, Supreme Court of Queensland, 17 Nov (Australia), at: < cases/001117a2.html>). Rev. dr. unif