Contracts - Lecture 3: Failure to Give Adequate Assurance

Last Lecture of Class #16, Week 8

• Five more weeks to go after this.
• Two weeks of live in-person class when we come back from the online week, followed by spring break.
• No reading or assignments will be given during spring break.

BRC Rubber and Plastics v. Continental Carbon Co.

• Focus: Failure to give adequate assurance of future performance.
• Doctrine addresses shortfalls in the repudiation doctrine.
• Provides a general obligation to provide adequate assurance of performance upon request.
• Originated from the UCC, but common law courts sometimes apply it.
• UCC Section 2-609
  • 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, the other party may demand adequate assurance in writing.
  • Until assurance is received, performance may be suspended if commercially reasonable.
• Deals with insecurity on the part of one party, which must be reasonable.

BRC Rubber and Plastics v. Continental Carbon Co. (7th Circuit, 2020)

• BRC makes rubber and plastic products, requiring carbon black as an ingredient.
• Continental manufactures carbon black.
• Prior to 02/2009, they had a long-running relationship but no long-term agreement.
• In 02/2009, they entered into a five-year contract.
• Long-term agreements for commodities (something that is the same regardless of who you get it from) can result in winners and losers due to price fluctuations.
  • If the price of the goods goes up, the purchaser is usually a winner (locking in price).
  • If the price of the goods goes down, then the seller is usually the winner (locking in that higher price over the longer term).
• The carbon agrees to supply up to 1,800,000 pounds of carbon black to BRC each year.
• In 02/2011, the market tightened, and the price of carbon black increased.
• Continental's VP of marketing, Mosia, instructed employees to raise prices to BRC above the contract price.
• Employees pushed back, citing the contract, but Mosia insisted, believing BRC had no other options.
• BRC disputed the price increase and insisted on honoring the original contract.
• Mosia's instructed Continental's employees to respond that, pricing is out of their control.
• When BRC would not agree to the increased prices, Continental refused to ship in open contracts and refused to respond to requests for new shipments.
• On May 16, BRC requested adequate assurances under 2-609 because Continental stopped shipping orders.
• On May 20, Continental's lawyer confirmed in writing that Continental would comply with the contract.
  • If nothing else happened, that letter would have given BRC the adequate assurance that it needed
• On the same day, a business person from Continental told BRC they had to pay the new price.
• When BRC objected, Mochia told BRC to find another supplier.
• Continental seemed to be trying to force the price increase while claiming they would perform under the contract.
• On May 28, Continental published its June price list with prices higher than contracted for.
• On June 2, BRC terminated the agreement and sought to hold Continental liable for increased costs.
• BRC bought carbon black from a third party at a higher price and sought to recover the difference from Continental.
• Seller tried to take advantage of a tight market to force a price increase.
• When the buyer refused, the seller threatened to stop supplying the buyer at all.
• The buyer then asked for adequate assurances under section two dash six zero nine, did not receive it, and so chose to treat the contract as repudiated.
• If BRC had agreed to the price change (which it didn't), it would have been a good modification under the UCC without additional consideration.

Issues Before the Court:

• Whether the seller repudiated the contract by failing to give adequate assurance under 2-609.
  • Was the failure to provide adequate assurances an anticipatory repudiation?
  • Anticipatory repudiation is a material breach, permitting termination and immediate suit for damages.
• Whether the buyer acted reasonably in covering to replace the breaching seller's goods (edited out of the case).

Arguments:

• Plaintiff (BRC):
  • Had reasonable grounds to seek adequate assurance because Continental stopped shipping.
  • Continental failed to provide adequate assurance, thus repudiating the agreement.
  • Defendant's failure to give adequate assurances constitutes an anticipatory repudiation of the contract and thus is breach.
• Defendant (Continental):
  • Provided adequate assurance with the lawyer's letter on May 20.
  • The price dispute was not substantial and was a pretext.
  • The price increase would not have substantially impaired the contract as a whole, therefore it wasn't a repudiation.
  • Plaintiffs should have been required to prove clear, absolute, and unconditional repudiation under UCC section 2-610, which deals with anticipatory repudiation.

Court's Analysis and Rules:

• Under 2-609, a party with reasonable grounds for insecurity may request adequate assurance.
• Failure to provide timely and adequate assurance can be treated as repudiation.
• Reasonableness is a factual matter determined under the circumstances.
• Between merchants, reasonableness is based on commercial standards.
• Failure to give adequate assurance may be treated as a repudiation.
• Section 2-609 addresses concerns about a party's ability or intent to fulfill promises before performance is due (similar to anticipatory repudiation).
• This section was a pragmatic innovation to protect the essential purpose of the bargain.

Defendant's Arguments:

1. March 20 Letter Was Adequate Assurance:
   • Continental argued the letter should be considered in isolation, and subsequent events should trigger a new request.
   • The court rejects this, stating UCC embraces commercial reasonableness.
   • BRC was not required to take the lawyer's assurance at face value when the client contradicted it.
   • Repeated delinquencies (actions after the letter) are cumulative.
2. Price Change Was Not Substantial:
   • The court rejects, precedents show continuing to push for price increases after a demand for assurance is a failure to provide it.
   • Continuing to insist on the price increase after they've received a request for adequate assurance, right, is basically telling BRC, no, we are not going to give you assurance that we're going to perform.
   • The fact that Continental delivered £1,300,000 in the first four months does not negate the failure to provide reasonable assurance of remaining obligations.
3. Price Increase Did Not Substantially Impair the Contract:
   • After a seller repudiates under two dash six zero nine subsection four by failing to give adequate assurances, Section two dash seven eleven one provides that the buyer may cancel and seek damages under section two dash seven twelve if the breach goes to the whole of the contract.
   • Court tells us on the bottom of 08/21. Determining whether the breach goes to the whole of the contract involves analysis under section two dash six twelve, which is a UCC provision on installment contracts. Under section two dash six twelve subsection three, a breach of the whole occurs, quote, whenever nonconformity or defaults with respect to one or more installments substantially impairs the value of the whole contract.
   • Section two dash six twelve, a party may demonstrate substantial impairment from one or more nonconforming installments, though evidence that with respect to its own needs, the value of the goods was substantially impaired by the breach.
   • Continental had shown BRC that it was not a trustworthy business partner, a party and supplier for a commodity essential for BRC's business. Continental's actions qualify as a sort of repudiation contemplated by the Anderson treatise, a repudiation that impairs the value of the entire contract.
4. Repudiation Was Not Clear, Absolute and Unconditional:
   • The court says Continental seems to argue that assurances given under two dash six zero nine must be deemed adequate unless the response is a clear, absolute, and unconditional repudiation of the contract. And on this point, we disagree.
   • Court first notes that, yeah, you are right, Continental, under section two dash six ten. A repudiation must be positive, must be absolute, must be unconditional.
   • Court tells us on page eight twenty three, addresses the problem of insecurity about whether the other party to the contract is willing and able to perform as promised. Section two dash six ten deals with a distinct problem when a party communicates that it does not intend to perform as promised.
   • Should not extend section 2-610 to section 2-609 because it emphasizes the broad standard of commercial reasonableness.

Conclusion:

• Continental's created a lack of trust.
• Continental failed to provide adequate assurances, as a repudiation of the agreement, and, allowed BRC to terminate and sue for breach.

Question 2.1:

• Yes, the court holds that there are different standards for repudiation under Sections two-six zero nine and two-six 10.
• Section, two dash six ten requires something akin to the common law requirement of unequivocal repudiation. Well, section two dash six zero nine deems failure to provide adequate assurance even if it's debatable as a repudiation.
• The difference likely arises from the pressures placed on the parties by the UCC to honor their contracts, by imposition of vague standards upon breaching or recalcitrant parties, thus incentivizing compliance.
• Under two dash six zero nine, one party is already starting from a place where it has a reasonable basis to believe that the other party may not perform in the future.
• The mechanics of 2 Dash 6 0 9, requires that they send this written request for adequate assurance (formality to make this agreement work).