For producers and manufacturers, alike supply contracts have many advantages. For manufacturers, it ensures a steady supply of raw goods for manufacturing, and for producers, it secures a steady stream of revenue. All contracts though come with the risk that one of the parties will breach them. In a recent decision, the Seventh Circuit provided guidance for interpreting the “adequate assurances” provision of Section 2-609 of the Uniform Commercial Code.
The dispute at issue is nearly a decade old. In 2009, BRC Rubber & Plastics Inc., a designer, and manufacturer of rubber and plastic products primarily for the automotive industry entered into a five-year supply contract with Continental Carbon Company for the supply of carbon black, an ingredient often used in the manufacture of rubber products. The agreement included baseline prices for three types of carbon black and provided that the prices were “to remain firm throughout the term of this agreement.”
In 2011, the supply of carbon black became generally tight and shortages were commonplace. In response, Continental sought to unilaterally increase the prices it charged BRC. BRC responded to the news of the price increase by objecting that the increases breached the contract. Continental refused to rescind the increase and its vice president of marketing and development instructed the sales representative in charge of the BRC account to withhold shipments to BRC unless it agreed to the increase.
Even after being informed of the anticipated increase price, BRC continued placing new orders at the contact prices. Continental did not respond to BRC’s objections to the increase but did continue to fulfill the orders until May of 2011. After Continental missed a shipment, BRC contacted Continental but Continental’s representative would not guarantee to supply product under existing purchase orders and claimed that it was “out of his control.” Without a confirmation that Continental would perform in conformity with the contract, BRC scrambled to find alternate suppliers and eventually received a shipment from another provider at spot rates higher than the contract rate.
BRC retained outside counsel to assist in its dispute with Continental. BRC’s outside counsel formally invoked UCC Section 2-609. UCC Section 2-609 gives a contract party the right to demand “adequate assurance of performance” when “reasonable grounds for insecurity arise.” Whether grounds for insecurity are reasonable, or assurances are adequate, are questions of fact based on commercial standards. BRC’s counsel asked Continental for “adequate assurance that Continental would continue to supply carbon black under the existing contract.” The contested issue in the lawsuit was whether Continental actually provided adequate assurance.
The District Court determined that Continental did not provide adequate assurance because although Continental’s attorney purported to provide the adequate assurance sought by BRC, Continental contradicted its counsel by claiming that it would only fulfill orders at increased prices. On appeal the Seventh Circuit affirmed the district court and in doing so provided much needed guidance on what is required to provide sufficiently adequate assurances under UCC Section 2-609.
The Seventh Circuit rejected Continental’s argument that its outside lawyer’s assurances were adequate under Section 2-609 and that if Continental’s subsequent conduct made BRC insecure again, BRC was required to start the Section 2-609 process all over again. The Court also rejected Continental’s other argument that even if the price increase constituted a breach, it “would not have substantially impaired the contract as a whole,” and thus BRC was not entitled to consider the entire contract repudiated. The Court supported its conclusion by citing case law that seeking a price increase or contract modification after a demand for adequate assurances amounts to a failure to provide adequate assurances along with the text of Section 2-609 itself which provides that a failure to provide adequate assurance under the circumstances “is a repudiation of the contract.”
The Court’s full opinion is available here.
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