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.
1. Reasonable expectation of fundamental non-performance
This Article protects the interest 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 invoke Article 7.3.3 since there is still a possibility that the other party will or can perform. In the absence of the rule laid down in this Article the former party 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.
2. Right to withhold performance pending adequate assurance of performance
Consequently this Article 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. What constitutes an adequate assurance will depend upon the circumstances. In some cases the other party’s declaration that it will perform will suffice, while in others a request for security or for a guarantee from a third person may be justified.
A, a boatbuilder with only one berth, promises to build a yacht for B to be delivered on 1 May, and no later. Soon afterwards, B learns from C that A has promised to build a yacht for C during the same period. B is entitled to ask A for an adequate assurance that the yacht will be delivered on time and A will then have to give B a satisfactory explanation of how it intends to perform its contract with B.
3. Termination of the contract
If adequate assurance of due performance is not given the other party may terminate the contract.