Right to Adequate Assurance of Performance: Be Clear!

Section 2-609 contemplates a situation where either party to a sales contract has ‘reasonable grounds for insecurity’ regarding the other party’s performance, and the insecure party wants some evidence that the other party is willing and able to perform. Subsection (1) to Section 2-609 states as follows:  

The cases are clear that the determination of whether or not a party’s stated grounds for insecurity are reasonable is a question of fact. In this regard, I want to emphasize a point made repeatedly throughout these posts, and particularly in connection with the discussion of Section 1-302(b) which allows parties to an agreement to set standards for what is or is not ‘reasonable’, provided the standards set are not ‘manifestly unreasonable’.  If standards for ‘reasonableness’ are in fact stated, the inquiry will be limited to: were the called for standards met, and if so, were the standards ‘manifestly unreasonable’? If the standards are not manifestly unreasonable, and proven, inquiry ends. Parties to a contract, can if they choose, create provisions for what ‘reasonably constitutes’ insecurity which would frame the inquiry as stated.

A contract for sale imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return.

Although there are some cases which state that an oral demand for ‘adequate assurance of due performance’ is sufficient, the majority of cases follow the clear language of the statute which requires that the request for adequate assurances be in writing. Further, the cases are clear that the writing which purportedly seeks adequate assurances actually make it clear in the writing that such a demand is being made.  Mere objections as to performance do not meet the standard of a demand for proper performance which is required to gain the benefit of the provisions of the section. As discussed in the last post regarding Section 2-607(5)(a), the best way to insure that the requirements of a particular provision are complied with is to track the language of the statute.

In Alaska Pacific Trading Company v Eagon Forest Products 85 Wn App 354, 93 P 2d 41 (1997) one of the issues considered by the court was whether the purported demand for assurances was properly stated.  The case involved a sales contract by which ALPAC was to sell 15,000 cubic meters of logs to Eagon.  The lumber was to be shipped from Argentina to Korea.  Between the time of the execution of the contract in April of 1993 and time stated time for shipment, the market price for the lumber dropped significantly. Eagon became tentative about performing under the contract and ultimately, ALPAC came to the conclusion that Eagan was not going to accept the logs, and decided not to ship. In discussing whether or not a proper demand for adequate assurance of performance had been made by ALPAC, the court stated:          

Here, while Ahn [Eagon] had some idea that Kimura and ALPAC were concerned about the status of the contract, he did not understand that ALPAC would withhold performance as a result….If we were to hold that, in every case where a contract becomes less favorable for one party, general discussions between the parties can be considered requests for assurances, we would defeat the purpose of 2-609. That section requires a clear demand so that all parties are aware that, absent assurances, the demanding party will withhold performance. An ambiguous communication is not sufficient.   Eagon at 357

When merchants are involved, the determination of whether or not a particular performance was such as to properly give rise to insecurity will be determined by commercial standards:

          (2) Between merchants the reasonableness of grounds for insecurity and the adequacy of any                 assurance offered shall be determined according to commercial standards.

This is consistent with Article 2 in general and the drafters’ consistent direction to focus on what is going on in the commercial world, not simply the legalese involved.  As stated in comment 2 to Section 2-202:

[This section definitely rejects] the premise that the language used has the meaning attributable to such language by rules of construction existing in law rather than the meaning which arises out of the commercial context in which it was used;

This policy applies throughout Article 2 and, through the expanded definition of good faith, arguably throughout the Code.

         Once a proper demand for adequate assurance of performance has been made, the failure to provide that assurance is a repudiation of the contract:

 After receipt of a justified demand failure to provide within a reasonable time not exceeding thirty days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract.  Section 2-609(4)

Section 2-609 provides parties with a remedial type course of action which is short of litigation, but clearly creates a situation where insecurities about performance are either effectively dealt with through adequate assurances of performance or repudiation occurs as a result of not providing those assurances.  Firms dealing in sales and leases of goods would be well advised to create a template for properly activating and utilizing Section 2-609.  This is in addition to drafting a contract provision which sets standards for ‘reasonable grounds for insecurity.'