In the case of international contracts for the sale of goods regulated by the Convention on Contracts for the International Sale of Goods (CISG Convention), the contracting parties may, in certain cases, withhold their obligations.
The general principle of simultaneous and equivalent performance in sales contracts is legally established. The purpose of these rules is to ensure that the parties receive a consideration of equal value to that offered. However, for example, sometimes the principle of simultaneity is not or cannot be applied e.g. in the case of deferred payment sales. Therefore, the law moves forward in situations where a party to the contract has real fears of a real threat to the fulfillment of the contract by the other party. Such fear will be evaluated by the court in a possible trial and should be regarded as justified by the circumstances of the case, assuming a reasonable person's pattern of conduct.
According to Article 71 of the CIS Convention, a party may suspend the fulfilment of its obligations if, after the signing of the contract, it turns out that the other party has failed to fulfil a significant part of its obligations because of this:
- a serious lack of capacity or solvency of that party, or
- its behaviour during the preparation for performance or during performance of the contract.
If the seller has shipped the goods before the reasons described in the preceding paragraph become known, the seller may oppose the delivery of the goods to the buyer, even if the buyer has a document authorising him to receive them. This paragraph applies only to rights to goods in the relationship between the buyer and the seller.
The withholding party shall immediately, before or after shipment of the goods, notify the other party of the suspension of performance and shall continue fulfillment if the other party provides adequate safeguards for the proper fulfillment of its obligations.
In the light of the content of this provision, it is worth noting the following points.
First of all, abstention is allowed when, after the signing of the contract, there is a fear of non-fulfilment of the contract. This means that the circumstances giving rise to concern must arise after the conclusion of the contract or be unknown to the other contracting party at the time of the conclusion of the contract.
Secondly, the threat of breach of contract must relate to a “significant part of the obligations”. In this case, we will apply a quantitative and qualitative proportion. It will also be important which obligations were most important for the parties.
The fear of non-fulfilment must be linked to the events specified in the Convention:
- serious inability to fulfil, e.g. due to strike, armed conflict,
- lack of solvency, e.g. long-term lack of liquidity resulting in non-payment; lack of solvency may affect both the buyer and the seller,
- the other party's wrongful behaviour.
The necessity of proving the existence of conditions enabling the exercise of the right of withholding lies with the entity which made use of the right of withholding.
In the case of an entitled party withholding the performance, the other party is obliged to secure it. The deadline for performance of the obligation is postponed until the security is deposited.
Ewa Kosowska- Czapla
Attorney-at-law/ Restructuring adviser