CHAPTER 4 Remedies Available to the Nondefaulting Party
| Jurisdiction | United States |
CHAPTER 4 Remedies Available to the Nondefaulting Party
A. Request for Adequate Assurance under UCC § 2-609
Often, certain factors will lead a seller to believe that a buyer is experiencing financial difficulties that may result in the buyer's inability to provide payment for goods or otherwise render it unable to perform its obligations under an agreement. Similarly, a buyer may fear that its seller is unable to perform. Perhaps the situation most susceptible to such concerns is that between the seller and customer, wherein the seller believes that the customer is in financial crisis and it is industry knowledge that the customer is considering a major restructuring or even filing for bankruptcy. In such a situation, the seller is likely to experience subjective, although not necessarily objective and reasonable, insecurity with respect to the customer's ability to perform under the existing purchase orders and requirements contracts that it has with the customer.
The UCC authorizes a party (either buyer or seller), upon reasonable grounds for insecurity, to demand adequate assurances of due performance and until it receives such performance...if commercially reasonable, to sus-pend any performance for which he has not already received the agreed re-turn.133 The UCC does not require a party to request assurances as a condition of recovery.134 The purpose of a demand for adequate assurance is to permit a party likely to be injured by the other party's nonperformance to take steps to protect itself without worrying that its own nonperformance will later be construed as a repudiation.135
Whether a seller has reasonable grounds for insecurity is generally a question of fact.136 Because the reasonableness of a seller's insecurity is determined by commercial standards, an objective factual basis must exist for the seller's insecurity, as opposed to a purely subjective fear that the customer will not perform.137 The UCC provides a broad definition of the circumstances that could cause a seller's insecurity, including the insolvency of a customer.138 However, the seller's dissatisfaction with the customer's financial standing cannot be false or arbitrary.139
Along those lines, a seller will not have reasonable grounds for insecurity based solely on the fact that its customer filed for bankruptcy unless there is evidence that the debtor will be unable to perform its obligations.140 Reasonable security may arise, however, solely from the customer falling behind on its account with supplier.141 So long as the customer continues to satisfy its contractual obligations and does not indicate that it does not intend to honor future obligations, the supplier has no reasonable grounds for insecurity.142
The UCC requires a clear demand so that all parties are aware that, absent assurances, the demanding party will withhold performance.143 Any demand for adequate assurance typically needs to be answered within 30 days, unless the express terms of the demand reduce or extend such period.144
Where a customer fails to timely respond to the seller's demand, the seller should take immediate action to terminate the agreement or the seller will risk waiving the right to terminate.145 As an alternative, a seller who wishes to continue performance may do so without waiving any of its rights to seek remedies by expressly and explicitly reserving its rights.146
Whether a customer will be deemed to have offered adequate assurance is determined by factual conditions, including an exercise of good faith and observance of commercial standards.147 An absolute definition of adequate assurance does not exist, though. In some cases, the assurance offered by the customer may be less than a supplier demands and still be considered adequate.148 Prior to demanding adequate assurance, the seller should assess whether the requested assurances are reasonable. If the assurances demanded are more than adequate and the customer refuses to accede to the excessive demands, a court may find that the demanding supplier is in breach or has repudiated itself.149 As such, a supplier's request for adequate assurance must be reasonable under the circumstances and not be tantamount to overreaching.
Where a customer has filed for bankruptcy protection, however, bankruptcy courts have authorized adequate assurances to protect sellers by requiring cash in advance.150 In the event the customer has filed a bankruptcy petition, the demand for adequate assurance should be in the form of a motion filed with the bankruptcy court.
B. Anticipatory Repudiation under UCC § 2-610
The UCC provides that when a party "repudiates the contract with respect to performance not yet due, the loss of which will substantially impair the value of contract, the aggrieved party may...resort to any remedy for breach...even though he has notified the repudiating party that he would await the latter's performance and has urged retraction...."151
As discussed above, in a typical relationship between seller and customer, certain factors, including statements or actions, may lead the seller to believe that the customer will be unable to continue to perform its obligations pursuant to applicable agreements. In such a situation, a seller may be tempted to infer that such statements or actions constitute a repudiation of the applicable agreement by the customer. However, a seller must cautiously proceed with respect to anticipatory repudiation, which is deemed to have occurred where the statements or actions are unequivocal, definite and final or where an action reasonably indicates a rejection of the customer's continuing obligations.152
If a seller regards an apparent repudiation as an anticipatory repudiation, terminates its own performance and sues for breach, the seller places itself in jeopardy of being found to have itself breached if the court determines that the apparent repudiation was not sufficiently clear and unequivocal to constitute an anticipatory repudiation justifying nonperformance.153 Conversely, if a seller continues to perform after an apparent repudiation that, unbeknownst to the seller, is actually an anticipatory repudiation, the seller may be denied recovery for post-repudiation expenditures because of its failure to avoid those expenses as part of an effort to mitigate damages after the repudiation.154 Thus, where the seller is unclear as to whether an anticipatory repudiation has occurred, it is advisable for the seller to utilize § 2-609 of the UCC by demanding adequate assurance of future performance.
On its face, § 2-610 of the UCC appears to allow suit for breach upon a demand by the other party for more than the contract requires.155 The UCC cautions, though, that a demand for more than what the contract requires in the way of counter-performance is not repudiation. Rather, only when such demand amounts to an intention not to perform except on conditions that go beyond the contract does the demand constitute repudiation.156 Similarly, a request for modification of a contract does not amount to a repudiation.157
In order to qualify as an anticipatory repudiation, the performance repudiated must substantially impair the value of the contract to the other party.158 While such a requirement is seemingly easily satisfied in cases of nonpayment under nonrequirements contracts, it becomes somewhat more complicated under requirements contracts. Where a supplier and customer enter into requirements contracts over several years, and the contract contains a minimum overall requirement, the customer may not be considered to have repudiated due to its failure to order its yearly requirements.159 Instead, because the overall requirements would be satisfied, the reduction in orders for the contract's final year would arguably not amount to a substantial impairment of the contract's value.160
Generally, the material breach of one contract does not justify an aggrieved party in refusing to perform another separate and distinct contract.161 Therefore, the aggrieved seller should refrain from attempting to exercise its rights under § 2-610 with respect to agreements that the customer has not breached. Instead, it is advisable for the seller to rely on the provisions of § 2-609 and demand adequate assurance of performance based, in part, on the customer's inability to perform the repudiated contract.
With respect to a seller's actions for anticipatory repudiation, § 2-610(b) provides that an aggrieved party may "resort to any remedy for breach" of the contract "even though he has notified the repudiating party that he would await the latter's performance."162 Therefore, despite a supplier's representations to the contrary, the seller could exercise one or more of its rights under §§ 2-701 et seq. of the UCC, as discussed below.
C. Sellers' Remedies under UCC Article 2
1. In General
Part 7 of Article 2 of the Uniform Commercial Code creates remedies for breach of contract for the benefit of nondefaulting sellers and buyers of goods on credit terms. Within a multi-tiered industry, such as the automotive industry, sellers entitled to assert these remedies include vendors to higher-tiered suppliers or to OEM customers. These remedies are summarized in § 2-703 of the UCC and are discussed below.
2. Termination of Credit Terms
In circumstances where a seller determines that its buyer that is purchasing goods on credit terms is "insolvent," the seller may refuse to ship goods on credit terms to the buyer.163 The term "insolvent" is defined in UCC § 1-201(23) as a person "who either has ceased to pay his debts in the ordinary course of his business or cannot pay his debts, as they come due or is insolvent within the meaning of the federal bankruptcy law."164 In these circumstances, a seller may insist upon cash payment for further shipments of goods on a cash-in-advance or cash-on-delivery basis.165
3. Reclamation
Reclamation is a remedy provided to unpaid sellers of goods under § 2-702 of the...
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