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California Business Contracts: The Right to Adequate Assurance of Performance

Every San Diego business has had it happen: A contracting partner fails to perform or fails to deliver on time, and there is worry about why and whether the other party can meet its obligations. These situations can be daunting and worrisome because someone else’s failure may cause the performance of your business obligations to be delayed or otherwise suffer.

Then, of course, there is the question of what to do? Under general laws of contract, contracting parties have a right to adequate assurance of performance from the other party. This is a contractual right that is rarely written into a contract but still exists even if not made explicit. The right of adequate assurance is one of those “implicit” provisions in any contract. The most famous and well-known statutory codification of the right to adequate assurance is contained in the Uniform Commercial Code (“UCC”) adopted in all fifty States (for the most part). For California’s version, see here.

The right to adequate assurance is specifically codified in UCC Section 2-609. For commercial transactions involving the sale of goods, this section allows a party to send a demand letter asking for assurance that the other party still intends and will be able to perform. The demand for adequate assurance is the first step in the process of anticipatory breach. Under some circumstances, one party to a contract can suspend their own performance if the other party has stated their intention to breach or it has become clear that the other party will not or cannot perform. If the other party fails to respond to the letter or provides inadequate assurances of future performance, then California courts will consider that sufficient grounds for repudiating the contract.

What is the Process?

In general, the process is not too complicated. Basically, a letter should be drafted by an experienced San Diego corporate attorney who can also offer advice and counsel on when the letter should be sent. It is best to make the demand in writing since it is possible the dispute will end up in court. A written demand is easier to present in court and avoids time-consuming testimony about what was said, by whom, and when. That being said, some conversations should be had, too. Talking with your contracting partners is often the best way to resolve problems and avoid litigation. Note that the right to have adequate assurance is a reasonable right and the assurance that is required is also reasonable. In practical terms, you cannot send a demand letter every week and you cannot insist upon extraordinary proof that the other side will perform.

What Should be in the Demand Letter?

First, the demand letter should state, in clear terms that the letter is a demand for adequate assurance. Second, in a straight-forward, non-argumentative or accusatory manner, the letter should state the facts that have given rise to your concern about the other party’s future performance. Third, the letter should provide some time-table, reasonable under the circumstances of your particular contract. Fourth, the letter should clearly state that your own performance is suspended until assurance is received.

What is the Timing?

A demand for adequate assurance should go out when you have information that genuinely and reasonably puts future performance at risk. For example, if the contract involves regular supply of some raw material or product, failure to deliver, even once, is usually a good basis for asking for reasonable assurance. An unusual delay in payment is another example.

What is the Effect of Sending an Adequate Assurance Letter?

In general, as noted above, sending a demand letter gives you legal grounds for suspending your own performance for a little while until reasonable assurance is provided. As an example, if you are providing services that require purchasing various materials to be installed, for example, it is reasonable to delay purchasing the materials until assurance is received. A corollary here is that your business obtains legal protection for a delay in your performance, a short and reasonable delay, that is caused by your request adequate assurance.

Contact San Diego Corporate Law Today

For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard can assist with contract drafting and review, with the formation of your business entity — corporations, LLCs, and other forms — can help with business mergers and acquisitions, can review and negotiate commercial leases, and help with the registration and licensing of trademarks and copyrights.