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Also known as:UCC § 2-609 · UCC § 2-717 · 2-609 · 2-717 · adequate assurance · deduction of damages
Written by attorneys — see sources below.
A statutory rule permitting a party to a contract for the sale of goods who has reasonable grounds for insecurity about the other party's performance to demand in writing adequate assurance of due performance. Until receipt of that assurance the insecure party may if commercially reasonable suspend any performance for which the agreed return has not been received. Failure to provide adequate assurance within a reasonable time constitutes a repudiation of the contract.
See Our Sources· 8 primary sources
Uniform Acts
Restatements
How its tested
Common Examples
3
Demand After Regulatory Reports
Stone Resource contracted with Stone Clean for phased delivery of compactors over eighteen months. Media reports of pending enforcement actions against Stone Clean prompted Stone Resource to send a written demand for adequate assurance of future deliveries. Stone Clean replied only that production remained on track without contingency plans. More than thirty days later Stone Resource treated the failure to assure as repudiation and suspended its own payments while arranging cover.
Retraction With Required Assurance
BlueWave Oceanographic contracted with HarborWorks Shipyard to build a research vessel by a fixed date. BlueWave demanded detailed written assurance after seeing little progress and unpaid subcontractors. HarborWorks replied only that it would accelerate work. BlueWave treated the vague response as inadequate and hired a replacement yard after HarborWorks failed to retract with the demanded assurance.
Assignment Creating Insecurity
Nexxus Products contracted with Best Beauty for exclusive distribution of hair-care products in Texas. Best was acquired by Sally Beauty a competitor of Nexxus. Nexxus treated the assignment as creating reasonable grounds for insecurity and demanded assurance from the assignee. When Sally Beauty provided no assurance Nexxus repudiated the contract and arranged alternative distribution.
Sally Beauty Co. v. Nexxus Products Co.801 F.2d 1001 (1986)
In 1979 Nexxus Products Company, a California corporation that formulates and markets hair care products, negotiated with Best Barber & Beauty Supply Company, Inc., a Texas corporation in the business of distributing beauty and hair care products to retail stores, barber shops and beauty salons throughout Texas.
Between March and July 1979 Mark Reichek, Best’s president, negotiated with Stephen Redding, Nexxus’ vice-president, over a possible distribution agreement between Best and Nexxus. This resulted in an August 2, 1979 distributorship agreement executed in the form of a July 24, 1979 letter from Reichek to Redding under which Best would serve as the exclusive distributor of Nexxus hair care products to barbers and hair stylists throughout most of Texas except El Paso.
The July 24, 1979 letter set forth pricing terms, Nexxus’s agreement to underwrite training and seminars, payment by letter of credit, and termination provisions allowing cancellation only on the anniversary date with 120 days’ prior notice and requiring Nexxus to buy back inventory at cost if it terminated the relationship.
In July 1981 Sally Beauty Company, Inc., a Delaware corporation with its principal place of business in Texas and a wholly-owned subsidiary of Alberto-Culver Company, acquired Best in a stock purchase transaction and merged Best into Sally Beauty, which succeeded to Best’s rights and interests in all contracts; Alberto-Culver is a major manufacturer of hair care products and a direct competitor of Nexxus.
Shortly after the merger Stephen Redding met with Michael Renzulli, president of Sally Beauty, and wrote a letter stating that Nexxus would not allow Sally Beauty to distribute its products because Sally Beauty was wholly owned by a direct competitor.
In August 1983 Sally Beauty commenced this action by filing a complaint in the Northern District of Illinois, claiming that Nexxus had violated the federal antitrust laws and breached the distribution agreement. Nexxus moved for summary judgment on the breach claim. The district court granted the motion on January 31, 1985. The remaining claims were dismissed by stipulation in May 1985, and final judgment was entered on the breach of contract claim.
5 common questions
Students Frequently Ask...
What constitutes reasonable grounds for insecurity under the adequate-assurance rule?
Reasonable grounds arise from objective facts such as media reports of enforcement actions that could close a plant, visible lack of progress on a project, unpaid subcontractors, or an assignment to a competitor. These facts must support a belief that the other party will commit a breach giving rise to a claim for total damages.
How long does a party have to respond to a demand for adequate assurance?
The response must come within a reasonable time not exceeding thirty days. Failure to provide assurance adequate under the circumstances within that period constitutes repudiation.
What makes an assurance adequate under commercial standards?
Adequacy is judged by commercial standards between merchants. A vague statement that production remains on track or that the party is confident it can work something out is ordinarily inadequate when prior defects or operational disruptions have been reported.
May a party suspend its own performance while awaiting assurance?
Yes. If commercially reasonable the insecure party may suspend performance for which it has not received the agreed return until adequate assurance is received.
Does prior acceptance of nonconforming goods waive the right to demand assurance later?
No. Acceptance of any nonconforming delivery or payment does not prejudice the right to demand adequate assurance of future performance.
under this Article.” Section 2-306 is consistent with prior New York case law (Buerger and O’Connor, Practice Commentaries, McKinney’s Cons Laws of NY, Book 62½, Uniform Commercial Code, §…
for nonconformities, see
UCC § 2-717
, then they could withhold sums for nonconformities that occurred during prior years' deliveries. While that may be true, Defendants did not plead a recoupment defense, and, as the Court…
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