What is a Demand for Adequate Assurance Letter?

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What is a Demand for Adequate Assurance Letter?

Contracts that deal with the sale of goods are governed by the Uniform Commercial Code (UCC).  Under Section 2-609, one party has the right to demand an adequate assurance of performance from the other party if there is a concern that the other party will be unable to fulfill its contractual obligations due to trouble or distress—e.g., a strike, insolvency, etc.  This demand is typically met through an adequate assurance letter.

Sellers concerned about a buyer’s ability to perform to the terms of a contract are likely to want to avoid any additional losses by suspending their own performance; an adequate assurance letter from the buyer allows the seller to do this without being in breach of contract.  If a buyer refuses or otherwise fails to provide adequate assurance, the seller can then treat the contract as repudiated.

However, there are certain requirements for demanding adequate assurance.  If executed improperly, the seller is exposed to liability for breach of contract:

Grounds for insecurity.  When demanding adequate assurance, the seller must explain the basis for insecurity about the buyer—e.g., the seller has learned that the buyer is insolvent, has a collection action filed against him, or has even learned that the buyer is in breach of other purchase contracts.  The basis must be reasonable and based on a good faith belief that the buyer will not be able to meet its contractual obligations.

Scope of assurance.  Being over-demanding in requesting assurance could lead a court to conclude it is an anticipatory repudiation of contract by the seller.  Assurance requests should stick to the terms of the original contract and not demand more than is required.

In writing.  While some courts have found that oral demands for assurance are acceptable in certain cases, it is always better to put a demand for assurance in writing as required by the UCC.

Reasonable timeframe.  A deadline for providing the requested assurance should be reasonable and stated clearly.  Under the UCC, if no deadline is provided, the buyer will have up to 30 days to provide assurance.  However, the seller does have the right to request a shorter timeframe.  If no assurance is provided within the 30-day limitation, it can be considered a repudiation of the contract by the buyer and the seller can then treat the contract as breached.

Business litigation is complex. Skilled representation is necessary. Williams Mestaz, L.L.P., is a law firm with decades of experience in commercial litigation, including IP infringement, employee lawsuits, business divorce, aviation, and high stakes litigation. Contact us at (602) 256-9400 and schedule a time to meet with us today.

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