Risk of Loss
Anticipatory Repudiation and Adequate Assurances II
The cleares indication in Article 2 that a repudiation is not to be equated with a breach of contract is the existence of the section on retraction of anticipatory repudiation (2-611). This section describes when a repudiation of a contract might not be the final action on the contract. The section is not difficult, but one needs to read its language carefully.
It provides that a repudiating party may retract its repudiation under the following circumstances:
1. Retraction must take place before the next due date for the repudiator's performance. If, for example, the contract called for periodic payments or other services to be performed by the buyer on April 30, May 31 and June 30, and if repudiation took place on May 15, the opportunity to retract would only be available before May 31, unless of course the repudiator performed the service due on May 31.
2. If this requirement is met, repudiation may be retracted unless the seller has cancelled or materially changed position in the interim. 2-610 does not use the word "cancel," but Comment 1 does. Thus, if the hurdle in 1. above has been surmounted, these are the only impediments to a retraction. But, note that the non-repudiating party is still the "master of the deal." S/he may pick either remedy and proceed as s/he desires. Note that 2-703, the seller's index, provides for "cancellation" as a remedy (f). Thus, the non-repudiating party may contract to sell the goods to someone else and have the remedies of 2-706; may seek the remedy of 2-708 or, in some cases, even seek an action for the price under 2-709.
II. Adequate Assurances of Performance. 2-609 . I treated this issue last because it is the means one would use if the "harder" or "stricter" action of repudation is not appropriate. It is primarily a device wherein a seller or a buyer, between the time of contract formation and tender of goods, can remove uncertainty or insecurity regarding whether performance will actually take place. The important question, and one very difficult to answer clearly, is what constitutes sufficient insecurity that enables a party to demand adequate assurances of performance from its contract partner?
Now is the time, of course, to look directly at the language of the Code. 2-609 is a long section, with even longer comments (You need to study Comments 1-5), the first section of which provides that when "reasonable grounds for insecurity" arise with respect to either party's ability to perform the contract, the other party may demand an adequate assurance of due performance. Comment 4, second paragraph, and Comment 3 list three conditions which might trigger a demand for adequate assurances. These conditions are: a) report from apparently trustworthy source regarding seller's goods [I will comment on this more in class]; b) the facts of the Corn Products case in Comment 4 and c) the fact that it need not relate to the specific contract in question (Comment 3). Thus, if a report comes to a party that indicates either financial instability or potential for nonperformance, the other party may ask for adequate assurances.
Second, the assurances must be in writing. Even though a few courts have held that a clearly expressed oral demand for assurances sometimes will suffice, there seems to be no reason to depart from the express langauge of the Code: the demand must be in writing.
Third, the nature of what constitutes an adequate assurance. First to note is whether the transaction is between merchants. If it is, then 2-609(2) controls, which provides that the adequate assuranceds must be determined according to "commercial standards." This may be in some tension with Comment 4, where the Code mentions that for a company with a "good repute," it may be a sufficient assurance to say that "he is giving the matter his attention" and that "the defect will not be repeated." This may be confined, however, to situations of defective goods and may not go to the financial stability of the company, in which the Code seems to contemplate a more serious response. Or, to put it differntly, the assurance must "be based on reason and must not be arbitrary or capricious." The Code rejects the purely personal "good faith" test of Corn Products. See Comment 4, third paragraph. The Code envisions an objective test for determining whether an assurance is adequate.
The case I assigned discussing the issue of adequate assurance was Clem Perrin (p. 541). There was a contract between PCC and CP to charter a tug, and PCC was required to make installment payments to CP every six months for three years. PCC had an option to purchase the tug during the last 180 days of the contract (Dec 1976-Mar 1977). The final payment was due in Sept 1976. In Aug 1976 PCC heard that CP was defaulting on the mortgage to the tug and suspended its final payment. PCC asked for assurances that it could deliver clear title to the tug if PCC was to exercise its option. Immediately CP filed suit for payment. CP never responded to PCC's demand for adequate assurances. PCC paid the last payment and tendered the option money in December.
The question on appeal is whether the trial court had used the proper standard in determining what constituted a reasonable ground for insecurity that would enable PCC to request adequate assurances. The trial court had used a "due diligence" standard: that is, unless PCC had performed diligent research into determining the financial health of CP, it was not entitled to ask for adequate assurances. The appellate court rejected that approach. Page 543-44 is especially important in understanding the court's reasoning and the application of this doctrine.