Company Who Failed to Receive Assurance of Performance from Supplier Entitled to Purchase Goods Elsewhere Under Contract

A plastics company purchased ingredients from a producer of rubber products for many years under a series of short-term agreements. A few years after signing a long-term agreement, the rubber producer attempted to unilaterally raise the price of the products it was selling to the plastics company. When the plastics company protested that this was not allowed under the agreement, the rubber producer failed to make scheduled deliveries on time. The plastics company then sought an alternate source of rubber and sued the producer for the difference in cost it paid. The district court determined that the rubber company failed to adequately assure the plastics manufacturer of its ability to perform under the contract, and the plastics company was therefore entitled to seek supplies elsewhere and recoup damages. The appellate panel affirmed, finding that the plastic company’s actions were reasonable under the Uniform Commercial Code.

BRC Rubber & Plastics, Inc. designs and manufactures rubber and plastic products, primarily for the automotive industry. Continental Carbon Company manufactures carbon black, an ingredient in many rubber products. Before 2010, BRC bought all the carbon black it needed from Continental, though the two companies did not have a long term supply contract.

In 2009, BRC solicited bids from several suppliers of carbon black, seeking a long-term contract to ensure continuity of supply. Continental won the bidding, and in late 2009 the two companies signed a five-year contract to run to Dec. 31, 2014. Continental agreed to supply BRC with approximately 1.8 million pounds of prime furnace black annually in equal monthly quantities. The contract listed baseline prices for three types of carbon black which were to remain firm throughout the agreement. The contract also included instructions for calculating the feedstock price adjustment to account for fluctuations in the price of oil and gas.

In April 2011, supplies of carbon black were tight and Continental attempted to use the situation to impose an increase in prices on BRC’s shipments. When BRC objected to the price increase on the ground that it would violate the parties’ contract, Continental began withholding shipment from BRC. BRC demanded assurances that Continental would abide by the contract. After not receiving an adequate response for almost a month, BRC began looking for alternate suppliers. Once BRC located a new supplier, it formally invoked § 2-609 of the Uniform Commercial Code. BRC argued that Continental failed to give adequate assurance of its performance and that BRC was therefore entitled to cover by replacing Continental’s goods with those from the new supplier under § 2-712 of the U.C.C.

In response to a letter from BRC’s outside counsel requesting assurances, Continental gave contradictory answers over a two week period. BRC ultimately sued Continental in federal court. After several rounds of litigation, the district court applied § 2-609 and § 2-712 of the U.C.C., adopted by Indiana Code § 26-1-2-609, and concluded that Continental gave BRC reasonable grounds for doubting that it would perform and then repudiated the agreement by failing to provide adequate assurance that it would continue to perform once BRC demanded it. The district court then determined that BRC’s action to cover by purchasing from a new supplier was commercially reasonable. Continental then appealed.

The appellate panel began by citing AMF, Inc. v. McDonald’s Corp., stating that, under § 2-609, a party who has reasonable grounds for insecurity about the other’s performance may request adequate assurance that the other will perform. The worried party may then treat the other’s failure to provide timely and adequate assurance as a repudiation of the contract. The panel noted that whether the grounds for insecurity are reasonable and whether assurances are reasonable are matters of fact to be determined under all the circumstances.

The panel then found that the district court reasonably determined that Continental’s assurance was inadequate. The panel noted that Continental did not follow its lawyer’s assurance with consistent expressions of its readiness to perform under the contract. Rather, the panel stated, Continental’s repeated equivocations and contradictions undermined its lawyer’s assurance. In particular, the panel pointed to Continental’s repeated use of its unauthorized baseline price increase, after its lawyer supposedly assured BRC it would abide by the contract. The panel found that this was a clear indication that Continental did not intend to continue performing under the existing contract. Finally, the panel found no clear error in the district court’s decision that BRC’s actions to cover were commercially reasonable. The panel, therefore, affirmed the decision of the district court.

You can review the entire opinion here.

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