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Editor's Note: In the example below, a customer demands assurances from its supplier under a purchase and sale agreement because of disruption in supply chain due to the Covid-19 pandemic and related actions suggesting that the supplier may be at risk of non-performance.
Customer Demand for Adequate Assurances
[Supplier Contact Name]
Dear [Supplier Contact]:
We refer to our agreement for the purchase and sale of [Describe Goods] dated [Date]. It has come to our attention [from public sources] that [Describe grounds for customer's insecurity regarding due performance by supplier, such as the following:] your company has suffered the loss of one more of your major suppliers of raw materials and component parts due to disruptions in your supply chain stemming from the Covid-19 pandemic and various governmental actions to contain that disease. In our opinion, unless you have access to other sources of supply, such a loss is likely to result in a suspension or material reduction in your manufacturing capability, including the production of [Describe Goods] that you are obligated to supply under the aforementioned purchase and sale agreement.
Comment: Under the Uniform Commercial Code (UCC), when a party to an agreement for the purchase or sale of goods has reasonable grounds to believe its counterparty will not perform as promised, the party may make a written demand for assurance of due performance from the counterparty. Until the counterparty provides sufficient assurance of performance, the party may suspend its own performance under the contract if it is commercially reasonable to do so. UCC § 2-609. As between merchants, the UCC provides that commercial standards determine whether a party's insecurity or uncertainty about the other's performance is reasonable. Commercial standards likewise apply in determining the adequacy of any offered assurance. UCC § 2-609(2) and com. 3.
We hereby demand assurances that you duly perform your obligations under the purchase and sale agreement notwithstanding [Describe Grounds – e.g., “the loss of any supply source or other disruption in your supply chain.”] Please indicate in your written response to this demand the facts upon which your assurances of due performance are based. Your response should be directed to [Name or Title] and received by us no later than [10 days] from the date of this letter.
Comment: A failure to provide adequate assurances within a reasonable time not exceeding 30 days after the written demand is a repudiation of the contract. UCC § 2-609(4). Under UCC §2-610, com.1, “when . . . a repudiation substantially impairs the value of the contract, the aggrieved party may at any time resort to his remedies for breach, or he may suspend his own performance while he negotiates with, or awaits performance by, the other party.” Under the circumstances of the pandemic, and depending on the type of materials and supply chain needs, a shorter time, such as 10 days, may be necessary in order to assess the adequacy of supply.
Until we receive adequate assurances from you, we are suspending further performance under the aforementioned agreement and may cover our requirements for [Describe Goods] from other sellers.