9.7 ADEQUATE ASSURANCE OF DUE PERFORMANCE

9.7.1 Purpose of Rule

Practically speaking, it is not always easy to provide clear proof of a fundamental breach of contract except in exceptional cases, for instance, bankruptcy of the debtor or its express refusal to perform. Thus, the party threatened by future non-performance 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.  ⁵⁰⁰ 

Therefore, the notice of the party intending to declare the contract avoided demanding that the other party provide adequate assurance of the performance, as Art. 72(2) CISG allows in such a case, seems to be the best solution to relieve the former party from doubts about occurrence of the other party's breach and reduces the risk he would otherwise be taking. A similar rule is laid down in the first sentence of Art. 7.3.4 UPICC: "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"; as well as in Art. 8:105(1) PECL: "A party which reasonably believes that there will be a fundamental non-performance by the other party may demand adequate assurance of due performance and meanwhile may withhold performance of its own obligations so long as such reasonable belief continues".

Such rules are intended to protect the interests of a party who has reason to believe that the other will be unable or unwilling to perform the contract at the due date but who cannot or may be reluctant to terminate the contract immediately in case it transpires that the other party would after all have performed.  ⁵⁰¹  Consequently it 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 and in the meantime to withhold its own performance.

9.7.2 Non-receipt of Adequate Assurance

As to what adequate assurance is, it is comparable to that in the suspension mechanism under Art. 71 as discussed above (supra. 9.5.1). What constitutes an adequate assurance will depend upon the circumstances, including the standing and integrity of the debtor, its previous conduct in relation to the contract and the nature of the event that creates uncertainty as to its ability and willingness to perform. In some cases the debtor's declaration of intention to perform will suffice. In other cases it may be reasonable for the creditor to demand evidence of the debtor's ability to perform.  ⁵⁰² 

Rather, the way in which such adequate assurance is to be provided depends on the expected fundamental breach of contract. In practice, there will be very few cases where a mere statement of intention and ability to perform provides adequate assurance to the promisee. In most instances a new term of payment against documents, a guarantee by a reputable bank, or a letter of credit issued by a reputable bank will be required.  ⁵⁰³  The simplest means is to provide assurance by way of paying a sum, e.g. banker's guarantee. If there is serious doubt as to the seller's performing of his obligations, he could also provide a guarantee of performance. He could also explain in which way he can and will deliver the goods in time, in the agreed quality and free from third party rights or claims (e.g. use of sub-contractors, increase in the production capacity, cancellation of other obligations to deliver, acquisition of licenses, etc.).  ⁵⁰⁴  In any event, for such an assurance to be "adequate," it must give reasonable security to the promisee that either the promisor will perform in fact, or that the promisee will be compensated for all losses incurred in executing his own performance.  ⁵⁰⁵ 

There is a difference of opinion between commentators, however, on whether a failure or a refusal to produce adequate security where it has been demanded is in itself a fundamental breach or whether it may only be a clear indication that the other party will commit a fundamental breach.  ⁵⁰⁶  As discussed above, in the suspension mechanism under Art. 71 CISG, a failure to provide an adequate assurance does not automatically provide a right of avoidance and there is therefore no mechanism by which a party may demand an assurance of performance and treat a failure to respond with an adequate assurance as a fundamental breach. This matter under CISG Art. 72(2) remains unclear as that under Art. 71(3). Despite the absence of a clear guidance on this matter, considering the conditions required in Art. 72 are much harsher than that in Art. 71, it may be correct to say that the failure by a party to give adequate assurances that he will perform when properly requested to do so may, under CISG help it "clear" that he will commit a fundamental breach.

In this respect, Art. 7.3.4 UPICC and Art. 8:105 PECL may be of assistance in interpreting the interplay between Arts. 72 and 71 as Art. 7.3.4 UPICC and Art. 8:105 PECL make express provision for the innocent party to demand an adequate assurance where it reasonably suspects that there will be a fundamental non-performance. In terms of Art. 7.3.4 UPICC and Art. 8:105 PECL, it is clearly stipulated that a failure to provide this assurance within a reasonable period of time, entitles the other party to terminate (avoid) the agreement.  ⁵⁰⁷  In other words, if the aggrieved party does not receive adequate assurance of performance and still believes on reasonable grounds that performance will not be forthcoming, it may terminate the contract. Although whether this is possible in the light of the drafting history of the CISG, is debatable; the other party's failure to give the assurance requested is itself treated as a fundamental non-performance under the two sets of Principles, giving the aggrieved party the right to terminate the contract and also a right to damages where the deemed non-performance is not excused.  ⁵⁰⁸