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Adequate Assurance: Potential Help in Uncertain Times

March 20, 2020

By: James O'Brien & Ferran Arimon

With the constant barrage of news related to material shortages, workforce challenges and stoppages, shipping interruptions, and financial distress, purchasers of goods are faced with uncertainties related to agreements not yet performed and suppliers’ general ability to perform. Purchasers should review purchase orders and supply agreements to confirm that a supplier’s performance is not excused due to force majeure or excusable delay provisions. Unfortunately, such reviews may not provide comfort related to the future performance of suppliers.

If faced with such uncertainty, an option to consider is the generally unknown and rarely exercised right in commercial contracts to make demand for adequate assurance. Although adequate assurance rights are not typically included within most commercial contracts, it is an implied right in all contracts. For contracts involving the sale of goods between businesses, adequate assurance is a right that varies from state to state based upon the actual language of the applicable state statutory law adopting its version of Section 2-609 of the Uniform Commercial Code (in Florida, Section 672.609, Florida Statutes).

Contract for sale of goods imposes an obligation on each party that the other’s expectation of receiving performance will not be impaired. If reasonable grounds for insecurity arise about either party’s performance, the concerned party has the right by written demand to adequate assurance and may suspend performance, if commercially reasonable, until it is received. Where applicable, failure to provide adequate assurance within a reasonable period (not to exceed thirty days) constitutes a repudiation of the contract and serves as grounds for termination.

The availability of the right to demand adequate assurance in contracts involving matters other than the sale of goods varies from state to state, with some state courts applying the right of adequate assurance, others refusing to extend such a right, and many not having addressed the issue.

Since a demand for adequate assurance can be a precursor to contract termination, it should be carefully considered. However, with the proper approach and in the right circumstances, it can provide a concerned purchaser with additional comfort regarding supplier performance and serve as a platform for increased communication between contracting parties.

James O’Brien and Ferran Arimon represent clients in global and domestic distribution, manufacturing, purchasing, and supply chain agreements in a broad spectrum of industries, including hotels, restaurants, and leisure, technology and software, aviation and aerospace sectors, consumer goods, and various professional and technology services.

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This article is informational only. You should consult an attorney before acting or failing to act. The law may change rapidly and no warranty is given. LOWNDES DISCLAIMS ALL IMPLIED WARRANTIES AND WITHOUT LIMITATION, ANY WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE. ALL ARTICLES ARE PROVIDED AS IS AND WITH ALL FAULTS. Consult a Lowndes attorney if you wish to establish an attorney/client relationship.
James

James O’Brien represents clients in the areas of technology products and services, aerospace and aviation, satcom and telecom, consumer electronics and goods, restaurant services, food distribution, entrepreneurial business, healthcarereal estate development and construction as well as in professional businesses and associations. Jim also has significant experience in global and domestic purchasing and supply chain agreements in a variety of industries including consumer goods, technology, satcom/telecom and the aerospace and aviation sectors.

Jim’s practice focuses on business and contract issues, negotiation, transactional matters, mergers and acquisitions, and corporate governance. Additionally, Jim represents entrepreneurial and startup businesses, and he handles entity formation and ownership agreements, commercial exploitation of proprietary concepts and products, domestic and international contracts and business transactions, corporate finance matters, contractual issues, and employment matters including non-competition and restrictive covenants.

Prior to joining the firm, Jim founded a boutique business and real estate firm in Melbourne. Before that, he spent ten years working as a business and transactional lawyer representing private and public companies in Daytona Beach and Melbourne.

Ferran

Ferran Arimon focuses his legal practice on corporate and securities law, mergers and acquisitions and tax law.


A member of the firm’s Corporate Group, Ferran works with clients to structure financing transactions in compliance with federal and state securities laws and represents both public and private companies in mergers, acquisitions, capital raising, and corporate governance matters. Additionally, he counsels clients on a broad range of tax issues and business planning issues from entity selection and formation to dissolutions.

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