The anticipatory breach clause under sale and purchase contract: is it necessary?

ARTICLES

The anticipatory breach clause under sale and purchase contract: is it necessary?

The doctrine of the anticipatory breach has been known to be derived from Hochster v De La Tour (1853) case of English contract law. Not only has it been brought into laws of most countries following the common law system, but the provision has also been stipulated in CISG 1980, an international trade convention. Applied to rule disputes over the anticipatory breach, either domestically or internationally, the feasibility and effect of anticipatory breach provisions have been proved. As to Viet Nam contract laws, however, there existed only some provisions analogous to that of CISG 1980 rather than covering all circumstances to the extent as under CISG 1980. This gives rise to an enquiry whether it is necessary for parties to reach an agreement on an anticipatory breach clause as a condition to perform any sales contract. If it is not so, to which circumstances should it be considered?

Nature of the anticipatory contractual breach

It is normally known to all that breaching contract means the failure of a party to fulfil his obligation, e.g. delivery of goods, on the due date, i.e. an actual breaching. Hochster v De La Tour (1853) case, however, raised a different legal issue that whether a refusal to contractual performance before the due date is deemed as a contractual breach. The case is that De La Tour (the defendant), on 12th April 1852, employed Hochster (the plaintiff) to travel with him on the continent of Europe as a courier for three months as of 1st June 1852. Nevertheless, the defendant had refused to perform the agreement prior to the promised date. It is given by Lord Campbell C.J. that “where there is a contract to do an act on a future day, there is a relation constituted between the parties in the meantime by the contract, and that they impliedly promise that in the meantime neither will do anything to the prejudice of the other inconsistent with that relation… and it seems to be a breach of an implied contract if either of them renounces the engagement”. As the result, the judgement was eventually ruled in favor of the plaintiff, stating that the repudiation of the contract by the defendant prior to the due date was a breach.    

CISG 1980: Conditions for the application and remedies

An anticipatory breach of contract occurs where there is evidence that a party will clearly breach his fundamental obligations or will be unable to perform a substantial part of a contract before a due date arrives. It can be seen in general that there are two factors that must be laid bare to regard the conduct as an anticipatory breach. The first one is that the time of the breach, as a necessary condition, must be prior to the performance date. The latter, as a sufficient condition, is that the party violation must be apparently or clearly about to happen. As the consequence of the breach, the other party is at his liberty to terminate the contract, claim for damages or suspend the contract until the breaching party is able to continue it. 

Article 71(1) of CISG 1980 allows a party to suspend a contract where “it becomes apparent” that, after the conclusion of the contract, the other party will fail to perform a substantial part of his obligations. Failure to perform should be deemed to be apparent where facts and evidence are somewhat objective and reasonable rather than a subjective and baseless fear. As to “a substantial part” of obligations, there is no specific standard to measure. It could be understood in common sense that such part of the obligation may considerably influence the progress of the contract performance if it cannot be done as promised. For instance, the seller fails to present a valid L/C from a bank, causing the concern of the buyer from the ability to process the payment. 

Nevertheless, not all the non-performance as abovementioned is considered to be a basis of suspension. It must also be a result of (i) a serious deficiency in the ability or creditworthiness of a party, or (ii) the preparation to perform or the performance of the contract. A deficiency in the seller’s ability to perform may arise for the seller, e.g. in the event of a forthcoming strike, an official order, a prohibition of export, embargo measures, etc., or that in the buyer’s creditworthiness can be the result of an FOB business where there is an insufficient storage room onboard a ship.

While to avoid a contract, Article 72 stipulates that it must be clear that, prior to the date for contractual performance, a party will commit a fundamental breach. Different from a substantial part of obligations, a fundamental breach is where it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract. The most difficult in interpreting the provision of Article 72 (as well as of Article 71) is to measure the possibility that a breach may occur. “In a 1992 German decision, the Landgericht [District Court] Berlin has given the best judicial exposition of the standards required under Article 72. It defined the words “it is clear” (“offensichtlich”) in terms of the probabilities that a fundamental breach will be committed. It stated that a very high degree of probability is required, but that this did not mean a probability almost reaching certainty”. 

How Vietnamese contract law governs anticipatory breach

As to suspension of a contract, Article 411(1) of the Civil Code 2015 provides that a party, who must perform obligations first, may postpone his performance if the other party’s ability to perform has substantially decreased that is not able to be performed as undertaken until the other party is able to perform its obligation or has a guarantor. The provision seemingly lowers the scope of cases where the suspension is applicable as compared to that of Article 71 of CISG 1980. The provision gives rise to an issue that a party who is not subject to perform obligations first is unable to suspend or terminate the contract even if it is apparent to him that the other party will be unable to perform that party’s obligations. He can only wait until the performance date is due to apply a remedy. This is wasteful in terms of economy as well as effort and time for the party who wants to suspend or terminate the contract. 

Commercial law 2005 has only one provision on the anticipatory breach, which regulates, however, only the circumstance where goods or services are delivered in multi instalments. Accordingly, a breach is deemed to happen before the due date where the failure of a party to perform its obligation serves as the basis for the other party to conclude that a substantial breach of the contract shall happen in subsequent deliveries of goods or services. It means that, for sales contracts where delivery of goods or services shall be made at once, the anticipatory breach is not governed under laws and a party must wait for the due date arrives to claim the breaching party even that the breach is clearly known to him long before.

Conclusion

For transactions where conditions to perform are somewhat difficult or, during specific events, namely Covid-19 pandemic, where adversely impacts most aspects of life, an anticipatory breach clause is highly recommended. It provides an exit for either party to suspend his obligations or terminate the contract to reduce the loss that he may suffer from.