1. Germany

Suspension doctrine in Germany is characterized by clarity and simplicity. It is expressed in Bundesgesetzbuch (BGB) section 320, entitled Enrede des nicht erfüllten Vertrags (defense of failure to perform the contract). Section 320 states:

BGB section 320(1) restricts the application of the exceptio to synallagmatic contracts, ie those where each party's promised performance is simultaneously exchanged for the other's.Footnote ¹⁹ Moreover, the obligation suspended by the creditor must be related synallagmatically to the obligation breached by the debtor.Footnote ²⁰ German law thus resolves the two issues of contingency and order of performance in one step by limiting the exceptio to synallagmatic contracts. If the contract specifies a particular order of performance or belongs to a class of nominate contracts in which sequential performance is the rule, then the party performing first may not suspend performance.

Restricting the exceptio to cases of synallagmatic contracts means that suspension is available in a smaller range of contractual disputes than in other countries. However, the right of retention (Zurückbehaltungsrecht) is available in a wider set of circumstances under German law than in other civil law systems, so the difference in the rights of creditors is not as great as it would appear from looking at the exceptio alone.

With respect to the debtor's breach, it merely needs to be non-trivial. Any non-performance entitles the creditor to suspend, subject only to the principle de minimis non curat lex.Footnote ²¹ In the Germanic family of legal systems generally, the extent of breach required to justify suspension is largely immaterial. This rule exemplifies the doctrinal simplicity of German law with respect to suspension of performance, as it avoids the problem of distinguishing more and less serious breaches.Footnote ²²

Instead, German law regulates the availability of the exceptio according to the creditor's conduct. Specifically, BGB section 320(2) provides that the creditor may not refuse to perform if ‘the refusal would constitute bad faith’. The rule is one of proportionality: if the performance suspended by the creditor is substantially greater than the breach committed by the debtor, German courts will give effect to the exceptio only to the extent of the debtor's breach. Moreover, if the breach is not de miminis but still relatively minor, courts may not permit the creditor to invoke the exceptio at all.Footnote ²³ German law, therefore, focuses on whether the creditor's suspension of performance was proportionate; the extent of the breach is relevant to this determination but is not decisive.

2. France

The use of the exceptio in French law is explicable only in contrast to the rules regarding termination (résolution). The right to terminate exists in all bilateral contracts under Code Civile (CC) article 1184, but a party cannot simply give notice that it is terminating a contract, as in other legal systems. Rather, a creditor must first serve upon the debtor a mise en demeur, which is a formal notification of the delinquency, then launch an action en résolution. Termination does not occur until a court orders it. There are only two exceptions to this lengthy and occasionally expensive process: the inclusion in the contract of a termination clause or conduct by the debtor so poor that continuing the contractual relationship would be impossible or unconscionable.Footnote ²⁴

In contrast, the exceptio may be relied on without judicial process. If the debtor sues the creditor, the court must give effect to the exceptio if the circumstances justify the creditor's refusal to perform. Thus, invocation of the exceptio is a particularly attractive option in France; it is regularly invoked even in cases of a breach severe enough that a court would grant résolution.Footnote ²⁵

The exceptio is not expressed in the French CC as a general principle underlying all contractual relationships. Instead, provisions dealing with certain nominate contracts contain separate expressions of the exceptio: sales contracts, (articles 1612 and 1653), échanges (article 1704)Footnote ²⁶ and dépôts (article 1948).Footnote ²⁷

As is typical of the CC, each of these articles states the relevant principle but provides little detail. For example, article 1612, pertaining to sales, reads in full: ‘The seller is not obliged to deliver the thing where the buyer does not pay the price of it unless the seller has granted him time for the payment.’Footnote ²⁸ Consequently, specific rules limiting use of the exceptio have been developed by the courts and by commentators.

The contract must be bilateral but need not be synallagmatic.Footnote ²⁹ With respect to order of performance, it is presumed that performance in bilateral contracts is simultaneous, although this can be overridden by express terms or trade usages.Footnote ³⁰ For nominate contracts, order of performance is determined statutorily. For example, under CC article 1612, performance in sales contracts is simultaneous unless the goods are bought on credit or payment is not due until a later date. In such cases, the seller performs first.

In France and the jurisdictions influenced by it, the severity (‘gravité’) of the breach is an important factor; the breach must be ‘suffisament grave’.Footnote ³¹ The focus is on the effect of the breach on the creditor, not its severity in the abstract. A common formulation is that the breach must be such that, ‘if the aggrieved party had known of it, he would not have entered into the contract’.Footnote ³²

In practice, the requirement of a serious breach is subsumed within the separate requirement that creditors suspending performance must do so in good faith, ie proportionately. Indeed, some commentators describe the requirement of a serious breach to be an aspect of the general rule of good faith: it would be in bad faith for a creditor to suspend performance in response to a relatively minor breach.Footnote ³³ Specifically, partial breach or breach of some of the debtor's obligations cannot release the creditor from all of its obligations,Footnote ³⁴ while suspension of any performance in response to a breach that causes minimal harm is disproportionate.Footnote ³⁵

1. England

Mustill cites a 1976 International Chamber of Commerce (ICC) arbitration awarded to the effect that a serious breach gives rise to a right of termination, but not suspension.Footnote ³⁹ Such a position may still be operative under English law. In 1992, the Court of Appeal stated, ‘there is not yet any established doctrine of English law that [a creditor] may suspend performance, keeping the contract alive’.Footnote ⁴⁰ Nevertheless, English courts do permit suspension of performance in certain circumstances.

England provides the counterpoint to Germany's doctrinal simplicity. The legal issues are clouded by overlapping terms and a lack of consensus on the tests to be applied. Treitel writes, ‘Discussions of this problem are often widely scattered in the books, with the result that very different solutions are proposed for problems which appear to be basically similar.’Footnote ⁴¹ Despite the confusion, English suspension doctrine is streamlined in one sense: issues of order of performance, conditionality of performance, and extent of breach are essentially coterminous. To understand the current state of affairs, a historical perspective is required.

In Boone v Eyre,Footnote ⁴² Lord Mansfield elaborated on the doctrine he laid down in Kingston. Boone involved a contract for sale of a plantation, including the slaves who worked on it. After discovering that the seller did not have title to all of the slaves, the buyer refused payment. The court held that the obligation at issue—to deliver title to the slaves—did not go to the heart of the bargain and therefore that the buyer could not avoid his obligation to pay the purchase price. Setting out the rule, Lord Mansfield held that, ‘where mutual covenants go to the whole of the consideration on both sides, they are mutual conditions, the one precedent to the other. But where they go only to a part, where a breach may be paid for in damages, there the defendant has a remedy on his covenant, and shall not plead it as a condition precedent.’Footnote ⁴³

Later cases extended this concept to recognize the existence of ‘concurrent’ conditions (also called ‘interdependent’), which exist when performance is to be simultaneous.Footnote ⁴⁴ Thus, with respect to order of performance, ‘Where the obligations are concurrent or the breached obligation is a condition precedent of the other party's obligation’, the breach may justify withholding performance.Footnote ⁴⁵

In the Victorian era, courts came to categorize contractual obligations as either ‘conditions’ or ‘warranties’. The breach of a ‘condition’ would allow the aggrieved party to withhold his performance, whereas the breach of a ‘warranty’ would give rise only to a claim for damages. This terminology was codified in the Sale of Goods Act 1893.Footnote ⁴⁶

Whether English courts spoke of conditions versus warranties or (following the terminology in Kingston) dependent versus independent obligations, the main factor by which suspension was regulated was the importance of the contractual term breached by the debtor. The conditionality of the parties' obligations was typically reasoned backward from this point, so that collateral or relatively unimportant obligations would be characterised as warranties while obligations going to the heart of the benefit the creditor expected to receive were conditions.Footnote ⁴⁷

In determining whether an obligation constitutes a condition, English courts looked first to evidence of the parties' intent, in particular for any terms designated ‘of the essence’. Absent such evidence, English courts have tended to rely on characterizations adopted by previous case law in relation to specific types of contracts. In this manner, English law came to resemble the civil law distinctions between different nominate contracts. Thus, for example, under employment or construction contracts, work by the employee or builder is considered a condition precedent for payment.Footnote ⁴⁸

The focus on the importance of the term breached persisted until the 1962 judgment in Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha.Footnote ⁴⁹ This case involved a charterparty in which the ship's owner covenanted to maintain the ship in ‘seaworthy’ condition. The charterer withheld payment, alleging breach of the seaworthiness term for missing equipment and lack of a competent crew. Lord Diplock shifted his analysis away from the question of conditions versus warranties, observing that complex obligations such as ensuring seaworthiness, which are endemic in modern contracts, cannot be a priori divided into the two categories. Instead, he set out a standard that focuses on the effect of the breach on the creditor, not the centrality of the term breached:

Since Hong Kong Fir Shipping, contractual terms have been considered innominate as a general rule—neither conditions nor warranties—unless the contract says differently. (Certain types of contractual terms are presumed to be conditions by operation of statute or by common law. For example, as will be discussed below, the Sale of Goods Act 1979 specifically classifies some implied terms to be ‘conditions’.) Today, whether performance may be suspended depends primarily on the seriousness of the breach and its consequences for the creditor. Hong Kong Fir Shipping places English law on a course familiar to civil lawyers, where the consequences of the breach to the creditor is a key factor.

Despite this holding, the law remains unsettled. The test set out by Lord Diplock in Hong Kong Fir Shipping is cited as the controlling one by various later cases and by the official comment to article 9:201 of the PECL. However, some English courts and commentators continue to look to the importance of the term breached and continue to speak of independent versus dependent conditions or conditions versus warranties. For example, the Sale of Goods Act 1979 contains a section entitled ‘when condition to be treated as warranty’Footnote ⁵¹ and specifically designates as ‘conditions’ certain implied terms, such as those describing the goodsFootnote ⁵² or requiring them to be of a particular quality.Footnote ⁵³

As noted above, there is no general distinction made in England between breaches that justify termination of a contract and those that justify only suspension. However, it should be noted that circumstances do exist in which a creditor may suspend performance without terminating. Perhaps most importantly, when a breach occurs, the creditor need not declare termination immediately, but can negotiate with the debtor regarding a cure of the breach. While negotiations are ongoing, the creditor need not continue to perform.Footnote ⁵⁴ In addition, Goode identifies four circumstances where there is no breach that justifies termination but where the creditor may nevertheless suspend performance. Of these, two have been discussed: where the contract provides for such a right and where the creditor is to perform after the debtor and its performance is conditional on the debtor's (or where the parties are to perform simultaneously obligations are mutually dependent). In addition, suspension may be permitted where the debtor does not object to the suspension, or where the creditor's performance is hindered (such as by the debtor's breach, the imposition of additional requirements beyond the terms of the contract, or the failure of the debtor to cooperate in a manner necessary for the creditor's performance).Footnote ⁵⁵

The overall lack of distinction made between breaches justifying termination and those justifying suspension, combined with the lack of a general duty of good faith in English contract law, means that little attention is paid to the creditor's conduct. Proportionality only matters in one sense: if the obligation breached by the debtor is severable, its breach justifies suspension of only the equivalent aspects of the creditor's obligations that remain unperformed.Footnote ⁵⁶ This is most likely in long-term relationships like distributorships or construction contracts where performance is in stages or instalments.

2. The United States

In the United States, there is less linguistic confusion than in England. The non-occurrence of any precedent or concurrent condition will entitle a party to suspend performance. In addition, performance is presumed to be mutually conditional and simultaneous in all bilateral contracts, under the doctrine of ‘constructive conditions of exchange’.Footnote ⁵⁷ Unlike in England, therefore, the bar is low for a finding that an obligation is conditional on the other party's performance. Thus, the Restatement provides:

Summing up the American jurisprudence, Farnsworth states:

Thus, proving the conditionality of its obligations is seldom problematic for an American creditor seeking to justify suspension of performance. Furthermore, absent circumstances that indicate a particular order of performance, US courts will generally construe all bilateral contracts to require simultaneous performance.Footnote ⁶¹ In keeping with its more permissive attitude towards self-help, American law applies the doctrines relating to suspension of performance in all bilateral contracts.

Balancing these presumptions, which favor creditors, are strict rules relating to the severity of the breach required to justify suspension, namely the doctrine of material breach. Only a material breach by the debtor justifies suspension or termination. Under the Restatement, five factors ‘are significant’ in a determination of material breach:

It should be noted that the first four factors relate to the effects of the breach upon the creditor rather than to the importance of the term breached. They are thus in line with the trend in English law that follows from Hong Kong Fir Shipping.

In theory, US courts do not distinguish between different levels of breach to justify suspension and termination.Footnote ⁶³ However, American courts may in fact set different standards for suspension and termination. The Restatement indirectly promotes a differential standard by focusing on what happens after the breach. Factor (d) of the five factors in section 241 is ‘the likelihood that the party failing to perform … will cure his failure’. Furthermore, section 237 states that it is a condition of a party's remaining performance that there be no ‘uncured material failure’ of the other party's performance (emphasis added). Finally, section 242 states that, when determining how long a creditor must wait before its obligations are discharged, the factors in section 241 are relevant, as well as ‘the extent to which it reasonably appears to the injured party that delay may prevent or hinder him in making reasonable substitute arrangements’.

It thus appears that, if a material breach is incurable or if a delay in performance would prevent the creditor from concluding a substitute transaction, the creditor may treat the material breach as ‘total’ and terminate the contract immediately.Footnote ⁶⁴ In other words, in cases where a material breach may be cured within a reasonable period of time, ‘such a breach would justify only suspension of performance by the injured party: he is only discharged if the breach is not cured within the time allowed by law’.Footnote ⁶⁵ In this way, although suspension and termination are not doctrinally distinguished in American law, they have evolved into separate dilatory and permanent remedies, just as in the civil law, dilatory (the exceptio) and permanent (termination) withholding of performance are distinct remedies.Footnote ⁶⁶

US law dwells little on the creditor's conduct. Despite some notable exceptions, American courts will permit a party ‘to refuse non-conforming performance to avoid suffering an uncompensated loss even though the refusal imposes a disproportionate loss on the defaulter’.Footnote ⁶⁷ As in England, the relevant jurisprudence deals primarily with contracts that involve severable obligations. Thus, a breach with respect to one instalment will justify suspension only the creditor's performance relating to that instalment, while a creditor's suspension of its entire performance will be upheld only if a breach with respect to one or more instalments ‘substantially impairs the value of the whole contract’.Footnote ⁶⁸

1. Applicability and construction

The major international contract law instruments were all drafted by representatives of both common and civil law jurisdictions. These instruments take one of two forms: conventions that mimic domestic statutes or compilations of principles in the manner of the American Restatements. As to the conventions, parties may apply them to directly their contracts by including choice of law clauses invoking them. More commonly, however, they apply when the parties are domiciled in different states and choice of law analysis leads to the law of state party to the convention.Footnote ⁶⁹ Generally, the domestic choice of law rules of contracting states provide that the convention will apply to contracts between parties from that state and another contracting state.

The two most prominent examples of this type of international instrument are the CISG and its predecessor, the Uniform Law for International Sales (‘ULIS’). These two instruments apply only to contracts for the sale of goods for commercial use. The CISG applies to contracts that have both sales and non-sales aspects so long as the sales aspects form the ‘preponderant part’ of the parties' obligations.Footnote ⁷⁰ If a contractual relationship consists of two or more separate contracts, then the CISG applies to the contract of sale and the appropriate domestic law applies to any other contracts.Footnote ⁷¹

The second type of international contract law instrument, the compilations of principles, are usually drafted by representatives of states but are not conventions to be ratified. The two best known are the UNIDROIT Principles and the PECL. These instruments are usually applied to contracts indirectly, as embodiments of general principles of international private law.Footnote ⁷² The UNIDROIT Principles or PECL may apply directly as the governing law of the contract if the parties so designate, but this is rare in practice.

Moreover, under the 1980 EC Convention on the Law Applicable to Contractual Obligations (‘Rome Convention’)Footnote ⁷³ and under the Rome I RegulationFootnote ⁷⁴ (applicable to contracts concluded after 17 December 2009), courts of member states cannot apply international instruments. Under the Rome Convention, a contract may be governed by ‘the law chosen by the parties’, or, in the absence of such choice, by ‘the law of the country with which [the contract] is most closely connected’. Similar rules obtain under the Rome I Regulation, except that, if the parties do not make a choice of law, a series of rules applicable to particular cases determine the governing law in most situations.Footnote ⁷⁵ Because international instruments are considered ‘rules’, not ‘laws’, State courts have interpreted these words to require application of a national law, even if the parties explicitly choose non-State rules.Footnote ⁷⁶ Despite this, the UNIDROIT Principles and PECL have proved influential; for example, the 2001 Civil Code of Lithuania contains ‘many clauses [that] repeat almost word for word sections of the [PECL] or UNIDROIT Principles’.Footnote ⁷⁷

International instruments should be construed ‘autonomously’, without reference to any national principles. General principles of international law are frequently cited in the interpretation of these instruments. CISG article 7 states:

The other three instruments all contain similar language, making them amenable to the importation of general principles of international law, either to fill gaps or to interpret their provisions.Footnote ⁷⁸ In particular, the UNIDROIT Principles and PECL are frequently invoked as sources of general principles of international law and are used to interpret and supplement the provisions of the CISG and the ULIS.Footnote ⁷⁹

With respect to termination, all four instruments are similar to the point of using the same terminology. They all distinguish between ordinary and fundamental breaches of contract and limit termination to cases of fundamental breach, differing only in whether they define fundamental breach according to ‘general interpretive guidelines’ (the CISG and ULIS) or lists of factors relevant to such a determination (the UNIDROIT Principles and PECL).Footnote ⁸⁰ They also all contain specific provisions governing instalment contracts, to the effect that a fundamental breach of one instalment can only lead to termination with respect to that instalment, unless the breach gives rise to a legitimate concern that fundamental breach will recur in future instalments.

On suspending performance, however, they differ. Most importantly, the UNIDROIT Principles and PECL state a general right to suspend performance, while the CISG and ULIS permit suspension only in limited circumstances, if at all.

2. The UNIDROIT Principles and PECL

In both the UNIDROIT Principles and PECL, suspension of performance is governed primarily by a single provision. UNIDROIT Principles article 7.1.3 states:

Thus, availability of suspension to a creditor is dealt with in a single step. This provision works together with article 6.1.4, which creates a presumption of simultaneous performance but provides that, if only one party's performance is to be rendered over time, that party is deemed to perform first. The conditionality of the creditor's obligations is regulated implicitly, in that contracts are presumed to be bilateral and no requirement of synallagma is expressed. In addition, the UNIDROIT Principles follow the Germanic position in that no minimum severity of breach is required. Finally, while the creditor's conduct is not addressed, the official comment makes clear that the creditor must conform to the overriding requirement of good faith and fair dealing stated in article 1.7.

The PECL's suspension of performance regime is similar. Article 9:201(1) states:

Performance is presumed to be simultaneous unless ‘circumstances indicate otherwise’.Footnote ⁸¹ Thus, the only significant difference with the UNIDROIT Principles is that the requirement of reasonableness on the part of the creditor is explicit. The official comment to article 9:201 makes the matter even clearer: the breach need not be ‘fundamental’, but the performance suspended must not be ‘wholly disproportionate’ to the obligation breached.

3. The CISG and ULIS

The CISG and ULIS concern only contracts for the sale of goods, which are by nature bilateral and synallagmatic. They both presume that performance is simultaneous but permit the parties to agree otherwise.Footnote ⁸²

Whether, under the CISG a creditor may suspend performance for nonperformance by the debtor is a matter of debate. The only CISG provision that has ever been held to permit suspension is article 71, which is entitled ‘suspension of performance’:

Notwithstanding its title, article 71 does not create a general right to suspend performance. It may only be invoked before performance is due and thus before any breach could occur.Footnote ⁸³ In other words, article 71 is available only for cases of ‘prospective failure of performance’.Footnote ⁸⁴ As suspension is to termination, article 71 is to anticipatory repudiation.

The Polish Supreme Court has recently reaffirmed this view. It held that article 71 ‘regulates the right to suspend the performance of obligations in the case of an anticipatory breach of contract whereby it becomes apparent that the other party will not perform a substantial part of his obligations.’Footnote ⁸⁵ Moreover, the difference between suspension of performance and the remedy described in article 71 is underlined by the provision's legislative history, which makes clear that it was designed to address such situations as when goods are purchased on credit but the buyer becomes insolvent prior to delivery.Footnote ⁸⁶

Nevertheless, at least two courts have applied article 71 to find a right of suspension in cases where breach has already occurred.Footnote ⁸⁷ Therefore, some discussion of the circumstances under which article 71 might permit suspension is warranted. Here, too, there is disagreement. Article 71 states that the prospective nonperformance must constitute a ‘substantial part’ of the debtor's obligations, a standard that is not defined and appears only in one other article of the CISG.Footnote ⁸⁸ On the other hand, fundamental breach is explicitly defined in article 25 and appears in several articles. Article 71's travaux préparatoires provide no guidance; debate on its wording focused on the degree of certainty with which the prospective nonperformance must be foreseeable.Footnote ⁸⁹

Heuzé argues that, to define ‘substantial’ in article 71, one should analogise to CISG article 46, which permits a buyer to demand cure only if the seller's breach is fundamental; therefore, a requirement of prospective fundamental breach is implied by article 71.Footnote ⁹⁰ However, one could as reasonably analogize to the remedy of price reduction under CISG article 50, which does not require fundamental breach.Footnote ⁹¹ More importantly, article 71 does not use the term ‘fundamental’, while article 72, which deals with anticipatory repudiation, refers specifically to prospective fundamental breaches. Thus, whatever ‘substantial’ means, it must be something less than ‘fundamental’.Footnote ⁹²

When it comes to regulating the creditor's conduct, nothing in the text of article 71 states the extent to which performance may be suspended; there is no mention of proportionality. The CISG does not even contain a general provision requiring the parties to act in good faith.Footnote ⁹³ Schlechtriem maintains, in line with CISG article 50, that prospective suspension of performance under article 71 must ‘correspond with the disadvantage caused by the nonconformity’.Footnote ⁹⁴ However, he cites nothing the text or the travaux of article 71 to support this conclusion.

The relevant rules under the ULIS are essentially identical to the CISG. The ULIS does not create a general right of suspension of performance but does include, in article 73, an analogue of CISG article 71. Also like the CISG, the ULIS contains a buyer's right to reduce the purchase price; however, as noted above, this should not be construed as a specific instance of suspension of performance.

1. ICC Case no 4629 of 1999Footnote ¹⁰⁰

The tribunal considered a construction contract containing an express choice of Swiss law. It acted as a court would have and applied Swiss law; where a contract contains a clear and valid choice of law clause invoking a particular national law, there is little leeway for a court or an arbitral tribunal to choose a different law.

This award is also paradigmatic of an arbitral tribunal following the approach of a national court in applying the law: the tribunal decided the suspension of performance issue in accordance with the relevant provision of the Swiss Code of Obligations (CO), article 82, and referred only to Swiss authorities to interpret article 82.

The contract called for the claimants to construct a hotel for the respondent, a Middle Eastern hotel developer. The respondent was, among other things, to obtain import licenses and regulatory authorisations and to fulfill various credit conditions set by the claimants' bank. The claimants began work, but soon suspended performance on the ground that the respondent had failed to fulfill its obligations. When the respondent drew down a performance bond that the claimants had issued, the claimants initiated arbitration.

The tribunal held that the respondent had breached its obligations, so it ‘could not reasonably insist’ that the contractors finish by their deadline. It analysed the propriety of the claimants' suspension under CO article 82, which it characterised as embodying the exceptio, and which it found to apply when the parties are to perform simultaneously. The tribunal further cited the Swiss federal court to the effect that article 82 is inapplicable to breaches of collateral obligations, but found that the obligations breached by the respondent were not collateral. Finally, the tribunal held that, under CO article 108(1), the claimants would have been entitled to terminate the contract as soon as the respondent refused to remedy its non-performance, so the claimants ‘were a fortiori justified in suspending their work’. Such a ruling is consistent with the Swiss approach, which requires a more severe breach to justify termination than suspension of performance.

2. Klöckner Industrie-Anlagen GmbH (FR Germany) v United Republic of CameroonFootnote ¹⁰¹

Klöckner entered into several contracts in the 1970s with the government of Cameroon to supply and construct a fertilizer plant, then provide technical and commercial management for the plant. The contracts contained no choice of law term.

Arbitration was in front of a tribunal of the International Center for the Settlement of Investment Disputes (ICSID). The parties agreed that Cameroonian law applied. However, Cameroon has a dual judicial heritage, different parts of the country having been colonies of France and the UK. The two systems of law remain; disputes between parties from the same region are decided under the law historically in force in that region. Since the fertilizer plant was located and the contracts negotiated in eastern Cameroon, where the law is French, the tribunal applied French-derived Cameroonian law. This appears to be the approach a Cameroonian court would have taken.

After nineteen months, the plant shut down. Klöckner instituted arbitration for the outstanding portion of the contract price. Cameroon defended on several grounds under French-derived law, including the exceptio, alleging various breaches by Klöckner. Although the tribunal's analysis referred to French law, it did note that ‘English law and international law reach similar conclusions’.

The tribunal (composed of Uruguayan, American and French arbitrators), found the exceptio to embody a general principle of ‘French, English and international law’. Its characterisation of the exceptio under French law will be discussed below.

As to English law, the tribunal cited a single ICC arbitration award,Footnote ¹⁰² in which the sole (English) arbitrator wrote that, given the ‘mutuality’ inherent in all contracts, ‘if the seller does not [perform], the buyer may release himself from his obligation to pay’. The tribunal cited no English statute or case law to the effect that the exceptio constitutes a general principle under English law. Had an English court decided the issue, it is unlikely to have made such a statement, since the necessary ‘mutuality’ is not presumed under English law. Instead, an English court would likely have inquired first (following Hong Kong Fir Shipping) whether the debtor's breach substantially deprived the creditor of the benefit it expected to receive under the contract or (according to the older formulation) whether the obligation breached constituted a condition of the creditor's performance.

The tribunal also cited an opinion of the Permanent Court of International Justice in the Diversion of Water from the Meuse case,Footnote ¹⁰³ which, the tribunal alleged, held that the maxim inadimplenti non est adimplendum constitutes a general principle of international law. This citation is dubious. First, the tribunal did not address the distinction between general principles of public and of private international law; the Meuse case dealt with the treaty obligations of states, not the contractual obligations of private parties. Second, it failed to note that the opinion cited, that of Judge Anzilotti, was a dissent. Third, it did not distinguish between the wider maxim of inadimplenti non est adimplendum and the more specific exceptio non adimplenti contractus.

Satisfied that it could recognise the exceptio in principle, the tribunal turned to the circumstances in which it might apply. Citing French commentaries and judgments, the tribunal held that the debtor's breach must be of more than ‘slight importance’, that partial non-performance by the debtor does not justify suspension of the entirety of the creditor's performance and that the tribunal must ‘measure the relative effect of the refusal to perform against the seriousness of the faulty performance’. This approach corresponds to what a French (or Cameroonian) court would likely do.

However, the tribunal also found that, given Klöckner's defective performance, it was not entitled to any more payment than it had already received; that is, Klöckner's breaches partially discharged Cameroon's obligations. No authority was cited for this, and indeed a French court is unlikely to have reached the same conclusion. As discussed above, the exceptio is a dilatory plea; it permits a creditor to withhold payment temporarily but cannot lead to the discharge of any party's obligations.

Klöckner moved for annulment of the award. The ad hoc annulment committee (composed of Swiss, Egyptian and Austrian arbitrators), annulled the award on several grounds, including its treatment of the exceptio.Footnote ¹⁰⁴ It declined to consider whether the award correctly construed the requirements for invocation of the exceptio, so it is unclear whether the annulment committee agreed that the exceptio constitutes a general principle of French, English or international law. However, the annulment committee did find that the tribunal misunderstood the effects of the exceptio:

3. Zurich Chamber of Commerce Case no. 273/95 of 31 May 1996Footnote ¹⁰⁵

Pursuant to a series of contracts, the Russian respondent was to supply materials to Claimant 1, a Hungarian enterprise, and Claimant 2, an Argentine conglomerate. The respondent also took a minority share in both claimants. At the time of contracting, the respondent was a government entity, but it was later privatised; its new owners ceased delivery on the contracts. The claimants initiated arbitration, seeking specific performance. The respondent argued that its cessation of delivery was justified by prior breaches of the claimants, that they had not paid for certain instalments and had fraudulently induced the respondent to purchase an ownership interest in them.

The dispute was decided by an arbitral tribunal of the Zurich Chamber of Commerce, composed of three Swiss lawyers. The ‘main thrust’ of the contracts was held to be the supply of the raw materials, but an ‘ancillary aspect’ was the sale of interests in the claimants to the respondent. The tribunal applied the Swiss Private International Law statute (as required by the Zurich Chamber of Commerce Rules), which provides that, if the parties do not make a choice of law, the law of the seller's domicile governs. The seller's domicile was Russia, so the tribunal applied Russian law. Since Russia had ratified the CISG and the parties all came from countries party to the CISG, the CISG applied to the sale of goods aspects of the contracts and Russian domestic law to the remainder of the contractual relationship (in particular, the sale of shares in the claimants).

The tribunal's approach to the choice of law is similar to one a court would have taken. It began by applying the Swiss choice of law rules. These called for the seller's law, which the tribunal then assessed to determine which Russian law would apply to which aspects of the relationship. Even if a court could not apply the CISG directly, then the CISG's application would still be warranted because of its incorporation into Russian law. Finally, the tribunal applied the CISG strictly to the sales aspects of the contract, which is the narrow approach that a national court would likely take.

The respondent asserted that the claimants' missed payments amounted to fundamental breach. Finding that the CISG creates no general right of suspension, the tribunal analysed the respondent's actions under the CISG's termination provisions. In particular, CISG article 73 permits termination of an entire instalment contract only if a breach as to one instalment gives the creditor ‘good grounds to believe’ that a fundamental breach will also occur with respect to future instalments. The tribunal found that no such grounds existed. In sum, the tribunal found that the CISG—an international instrument—governed, and interpreted it without reference to general principles or exogenous terminology.

4. ICC Case no 9448 of 1999Footnote ¹⁰⁶

The claimant, a Swiss manufacturer of roller bearings, and the respondent, an American distributor, entered into an exclusive distribution contract. The contract contained a choice of law clause applying Swiss law. Switzerland had ratified the CISG and the tribunal characterised the contract as “successive sales and deliveries of bearings [from] Claimant … to Respondent, while granting Respondent exclusive representation in the USA”. Therefore, the contract was within the CISG's scope of application. The tribunal did not state that it considered the sales aspects of the contract to predominate, but did assert that ‘all preconditions for the application of the CISG … are fulfilled’. A national court is likely to have made the same determination.

After two years, the respondent refused payment for future instalments on the grounds that some prior instalments had arrived late and that there were shortfalls in the number of bearings in other shipments. The claimant initiated arbitration to recover the missing payments. The respondent claimed the right to suspend performance based on the claimant's alleged breaches, citing CISG article 71.

The tribunal stated that it need not determine whether the breaches alleged by the respondent had actually occurred. The respondent's allegations, even if true, could not justify suspension of performance under article 71, since that provision gives a party the right only ‘to withhold its performance corresponding to a future anticipated breach’. Since the respondent had already received the deliveries, it had to pay for the amount received and could assert separate claims for lateness and incompleteness of the deliveries. Moreover, if the late or incomplete deliveries had constituted fundamental breach, the Respondent could have terminated the contract with respect to those deliveries under article 73(1) of the CISG. However, the respondent did not allege fundamental breach or attempt to terminate the contract.

The tribunal's analysis of the CISG stays close to the text. For interpretive guidance, the tribunal cited two well-known treatises on the CISG.Footnote ¹⁰⁷ As to the interest rate (which is not governed by the CISG), the tribunal cited a Swiss Federal Court decision. A national court would likely have followed the same approach and reached the same conclusions.

5. ICC Case no 11849 of 2003Footnote ¹⁰⁸

This case involved an exclusive distributorship agreement between the respondent, an Italian fashion house, and the claimant, an American retailer. The agreement provided that the goods were to be delivered in seasonal instalments; payment was by draw-downs after each delivery from a letter of credit opened in favor of the respondent.

The agreement contained a choice of law clause directing the sole arbitrator to ‘apply the [CISG] for what is not expressly or implicitly provided for under the contract. Letters of credit shall be governed by the [ICC] Uniform Customs and Practices for Documentary Credits.’ However, the claimant took the position that the CISG cannot apply to long-term relationships like distributorships and that therefore it should apply only to each of the individual sales between the parties, not the general framework of their relationship.

The sole arbitrator rejected this argument and applied the CISG to the entirety of the contractual relationship. He appears not to have considered the CISG's own rules for its application. Instead, he applied the CISG because ‘the parties have clearly indicated their intention to avoid their respective internal law rules, and to resort to neutral solutions’. A court is unlikely to have cited as decisive an apparent preference of the parties for non-national rules. Instead, a court would likely have cited the text of CISG and commentary or case law interpreting CISG article 3's requirement that, for the CISG to apply to mixed contracts, sales aspects of a contract must predominate.

After a few deliveries, the respondent demanded higher prices for future instalments. The claimant refused to open a new letter of credit reflecting the increases. After unsuccessful negotiations, the respondent set a deadline for the claimant to open a letter of credit, after which the respondent would consider the agreement terminated. When this deadline passed, the respondent terminated the contract.

The claimant initiated arbitration, claiming that the respondent's attempt to terminate the contract was unjustified. The respondent defended on the grounds that the claimant's failure to open the letter of credit before the deadline it set justified termination. In turn, the claimant asserted that the respondent's attempt unilaterally to increase the price justified the claimant's having suspended payment. It is this action—the claimant's refusal to open the letter of credit at the higher price—that the claimant characterized as suspension.

The claimant invoked the exceptio. The arbitrator found that under the CISG, the exceptio is expressed in article 71, but held that article 71 permits only prospective suspension of performance. However, the arbitrator did not rule against the claimant on the grounds that the CISG does not permit suspension for prior nonperformance. Instead, he ruled that the claimant's suspension of performance was improper because it was ‘excessive and disproportionate’. Under CISG article 54, a refusal to open a letter of credit is tantamount to a total refusal to pay the purchase price, while the disagreement related to ‘10 or 15 per cent only of the prices’. Except for the reference to article 54, there was no analysis of the claimant's actions under the CISG, nor did the arbitrator cite any source for the ‘excessive and disproportionate’ standard. The tribunal thus applied the CISG according to a theory of party intent that international instruments would prevail, then applied under the CISG principles not found anywhere in its text.

6. ICC Case no 8547 of 1999Footnote ¹⁰⁹

The claimant, a Bulgarian seller of goods, and the respondent, a Greek importer, concluded a contract through a series of telexes for delivery of goods in instalments. One telex sent by the claimant stated that the contract was to be ‘governed by, constructed and interpreted in accordance with the [ULIS]’. The tribunal held the entire contract to be governed by the ULIS.

Leaving aside whether the exchange of telexes formed a contract encompassing all of the deliveries, a court is likely to have reached the same conclusion. ULIS article 4 provides that it applies where the parties have chosen it as the governing law of a contract, regardless of whether the states in which they are domiciled have ratified it. The tribunal found this rule to be ‘in accordance with the principle of party autonomy’. Party autonomy is a cornerstone of arbitration, but emphatically not an important principle in litigation. Indeed, courts have divided on the question of whether the ULIS can apply simply because the parties have chosen it. For example, the German Bundesgerichtshof (federal supreme court) applied the ULIS in such a situationFootnote ¹¹⁰ but a US Federal District Court in New York refused to do so.Footnote ¹¹¹

After delivery commenced, the respondent alleged that the goods were of poor quality. The claimant admitted this but took no action to cure the nonconformity. In response, the respondent suspended payment for subsequent deliveries, specifically citing the exceptio in its communications with the claimant. Asserting that the respondent's suspension breached the contract, the claimant initiated arbitration.

The tribunal stated unequivocally that the respondent had the right ‘to stop payment because of the nonconformity of the goods’. It noted that the order of performance under the contract was such that the payment was to occur after delivery, then asserted that ‘It would amount to a curtailment of the rights of the buyer if he had to continue payment … without knowing what will happen in regard to the nonconformity.’ Finally, ‘the degree of nonconformity is … irrelevant in regard to [the] right to suspend payment’, so the respondent was justified in suspending performance.

The tribunal so decided although it acknowledged that a right to suspend performance ‘is not expressly stated in ULIS’. The tribunal found that the exceptio is a general principle of international law, made applicable to the ULIS by its article 17, which states that gaps may be filled by reference to general principles. The tribunal cited UNIDROIT Principles article 7.1.3, the relevance of which was reinforced by ‘the internationality of the relations between the parties’. The tribunal thus displayed a clear preference for general principles of international law, even when these conflict with the law chosen by the parties.

If a court had decided this case, it would not likely have found a right to suspension of performance since such a right is not granted by the ULIS. In particular, the mere fact that the parties came from different countries would be insufficient to apply the UNIDROIT Principles.

7. ICC Case no 3540 of 3 October 1980Footnote ¹¹²

The claimant, a French construction company, contracted with a Yugoslav subcontractor (the respondent) to build a project in the USSR. The contract contained no choice of law clause and empowered the tribunal to act as amiable compositeur. The tribunal, composed of Swiss, Yugoslav and French arbitrators, was constituted in Switzerland under the ICC rules.

The parties disagreed on the substantive law, the respondent pleading for French law, the claimant for Swiss. The tribunal determined that arbitral tribunals in general, especially when acting as amiables compositeurs, choose whichever law (or no law) they consider appropriate; it then decided to apply lex mercatoria.

Under the contract, payment was to be in monthly instalments. A dispute arose and the Claimant refused to pay for some of the instalments. The respondent raised a counter-claim seeking an interim award for the monthly payments that the claimant had withheld. In its defense, the claimant invoked the exceptio and, subsidiarily, a set-off to the extent of the damages that it claimed from the respondent.

The tribunal held that the exceptio ‘must be considered as belonging to the general principles of law forming the lex mercatoria applicable here’. It gave no authority or justification for this conclusion but did note that both Swiss and French law—the laws pleaded by the parties—recognise the exceptio. The tribunal went on to state a familiar description of the remedy as ‘by nature dilatory … it momentarily paralyses the action for execution of the creditor's obligations’.

The tribunal decided that it was ‘more expedient’ to resolve the dispute on the basis of the claimant's alternative argument for a set-off, so it declined to determine whether the claimant's invocation of the exceptio was proper. A common lawyer might say that the tribunal's characterisation of suspension of performance as a general principle of international private law was dictum.

8 ICC Case no 3267 of 1979Footnote ¹¹³

In this case, too, the contract called for amiable composition. The respondent, a Belgian building contractor, subcontracted part of a building project to the claimant. The tribunal found that, since it was appointed as amiable compositeur, it need not ‘decide which specific law governs the contractual relationship between the parties’. Instead, it applied ‘general principles of international commercial law … with no specific reference to a particular system of law’.

The contract called for a fixed price, subject only to limited circumstances that could justify modification. The respondent was to pay in instalments, after the claimant reached specified contractual milestones. The respondent deducted from the sixth and seventh payments, alleging failures by the claimant to reach certain milestones. In response, the claimant terminated the contract.

The tribunal characterized the respondent's deductions as suspensions of performance. Since the contract mandated a particular procedure for withholding payments ‘specifically devised for this kind of contingency’, and the respondent did not follow this procedure, the payment deductions were not justified. Importantly, the tribunal held that the existence of a particular contractual term on-point means that ‘The argument that such … deduction was made in “accordance with … international trade usages”, does not carry any weight.’ In other words, the tribunal declined to state whether suspension of performance constituted a general principle of law consonant with ‘international trade usages’ because the agreement of the parties supersedes any such principles.