COVID-19 Insecurity: Using a Demand for Adequate Assurance Under the UCC
Suppliers and purchasers of any kind of movable, tangible property may be unaware that they have a powerful tool under the Uniform Commercial Code (UCC) for protecting themselves in this national time of uncertainty: a demand for adequate assurance.
Every state has adopted at least some portion of the UCC, though there are state-to-state variations. Article 2 of the UCC generally applies to any contract for the sale or purchase of goods (but not service or real estate contracts). When contracts cover both goods and services, some states look to whether the dispute centers on the goods, while others examine the predominant purpose of the contract.
If the UCC governs the parties’ contract, then under UCC Section 2-609, when one party to a contract is reasonably insecure that the other party won’t perform, it can send a written demand for adequate assurance. If assurance isn’t received in a reasonable time, not to exceed 30 days, the requesting party can treat the contract as terminated and seek damages.
A demand for adequate assurance is nothing more complicated than a writing asking for some form of assurance that the other party will perform. Types of assurance that courts have found reasonable include letters of credit, heightened warranties, and access to the other party’s books and records. Some courts have allowed verbal demands, but since the model statute requires that the demand be in writing, the safer course of action is to send a demand in writing.
Whether a demanding party has reasonable insecurity is a question of fact and not always clear. Though some courts have required that the insecurity spring directly from the contracting party’s actions, most courts look beyond to all relevant circumstances to determine what is objectively reasonable. A worldwide pandemic might well constitute reasonable insecurity, particularly if the other party has mentioned concerns about timely fulfilling its contract but has not given notice of a force majeure.
Of course, a demand for adequate assurance may result in the performing party declaring a force majeure under the contract’s specific terms or under the law. Nationally, there is a total absence of cases addressing the interplay between a demand for adequate assurance and a force majeure event. This is likely because there is little law, period, interpreting UCC § 2-609. As several commenters have noted, it is an infrequently used device.
Determining whether a failure to provide adequate assurance constitutes a breach (or, more precisely, a repudiation) or is excused by force majeure will depend on both the specific terms of the contract and the applicable law. Care should be taken in drafting the demand for adequate assurance to establish reasonable insecurity without admitting a force majeure event as may be defined by the parties’ contract. The model UCC does not specifically address force majeure as an excuse for performance, though it provides an excuse for a seller’s nondelivery if performance is “impracticable” and the seller gives timely notice. Mississippi’s UCC deviates from the model UCC by defining force majeure and allowing for a temporary suspension of the seller’s deliveries due to “any cause beyond the control” of the seller, but it gives the buyer no similar rights.
Ultimately, force majeure and impracticability are affirmative defenses. If the nonperforming party’s defenses fail, the party that sought adequate assurance is well-positioned to recover damages. A demand for adequate assurance can give a business some measure of control and predictability. It puts the onus on the performing party to take action to address the other party’s concerns head-on. Given the disruptions the coronavirus has caused in the marketplace, businesses should consider whether a demand for adequate assurance is an appropriate step to protect themselves before the other party has declared impracticability or force majeure.