Long-term supply contracts have many advantages for both buyers and sellers. Over the life of the contract, the buyer ensures its supply of goods for production, the seller secures a steady stream of revenue, and both parties achieve predictability in pricing. On the other hand, both buyer and seller take the risk that future market trends will make them regret their decision. If the price for goods goes down after contract execution, the buyer will miss out on lower prices it could have obtained from other sellers. Conversely, if the price goes up, the seller may be tempted to raise prices above those agreed to in the contract.
Section 2-609 of the Uniform Commercial Code is a useful tool for a business that suspects its counterpart may be rethinking its commitment to a supply agreement. Section 2-609 provides that "[w]hen reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return." The failure to provide assurance of due performance "within a reasonable time not exceeding thirty days" represents "a repudiation of the contract." Under this provision, a party does not have to wait until its contractual partner commits a breach of the agreement before seeking alternative performance to ensure its business needs are met. However, contractual parties must be careful when exercising their rights under section 2-609. If a party suspends its performance in reliance on section 2-609 but a court later determines the assurances it received were adequate, that party may be held liable for its own breach of the contract.
The recent Seventh Circuit Court of Appeals opinion in BRC Rubber & Plastics, Inc. v. Continental Carbon Company, 981 F.3d 618 (7th Cir. 2020) provides helpful guidance to commercial parties who feel insecure about their counterpart's future performance under a supply contract. In that case, BRC, a rubber products manufacturer, entered into a five-year supply contract for the purchase of carbon black from Continental. Pursuant to the contract, Continental agreed to supply BRC with approximately 1.8 million pounds of carbon black annually. The contract provided baseline pricing for three different grades of carbon black and stated that the pricing was to "remain firm" throughout the term of the agreement.
BRC bought substantial quantities of carbon black over the first 15 months of the contract. However, when the supply of carbon black tightened and market prices went up, Continental attempted to impose a price increase on BRC. BRC protested that the new pricing would violate the parties' supply agreement, but Continental refused to budge. Over the next few weeks, BRC placed new orders with Continental, relying on the contract pricing. Continental's sales representatives failed to provide BRC with assurance that it would honor the contract pricing, and Continental missed a shipment to BRC.
Concerned about a potential interruption to its supply of carbon black, BRC's outside counsel sent a letter to Continental asking for adequate assurance of performance pursuant to section 2-609. In response, Continental's outside attorney sent a letter confirming that Continental would comply with the supply contract. However, on the same day, a Continental employee told BRC that it would only fulfill BRC's order at the increased price. When BRC again objected, Continental's vice president of marketing told BRC to find another supplier. Continental hedged when asked by BRC to confirm its outside counsel's response to the 2-609 demand and then sent BRC future pricing that included the disputed price increase.
At this point, BRC had received a confirmation from Continental's lawyer that it would comply with the supply contract, but then received contradictory messages from Continental's sales team as to whether it would actually abide by the agreed pricing. Still feeling insecure, BRC notified Continental that it was terminating the parties' contract and had filed a lawsuit. BRC then "covered" by purchasing carbon black from another supplier at higher pricing than the supply contract pricing.
After a bench trial, the district court determined that Continental's conduct did not represent "adequate" assurances in response to BRC's 2-609 demand and the contract had been repudiated by Continental. Accordingly, the court ordered Continental to pay BRC damages.
On appeal, Continental argued that its outside lawyer's assurances were adequate under 2-609 and that if Continental's subsequent conduct made BRC insecure again, BRC was required to start the 2-609 process all over again. The Seventh Circuit disagreed, finding that "a buyer in BRC's position could not reasonably be required to take the lawyer's assurance at face value when the client was contradicting that assurance at every turn."
Continental also insisted that BRC was not actually concerned about the new pricing and was using the price increase as a pretext to repudiate the contract for other reasons. While noting that this theory was a "reasonable view of conflicting evidence," the Seventh Circuit held that BRC's (and the district court's) view of the evidence was also reasonable, as Continental continued to push for a price increase even after its lawyer gave assurances. The court cited case law supporting the proposition that continuing to seek a price increase or contract modification after a demand for adequate assurances amounts to a failure to provide adequate assurances.
Finally, Continental argued that even if its price increase represented a breach, the breach did not "go to the whole contract," and thus BRC was not entitled to treat the contract as repudiated. The Seventh Circuit agreed with the district court that the price increase, which would remain in effect for the remainder of the contractual period, would have a "substantial negative financial impact to BRC." In addition, the court noted that "Continental had shown BRC that it was not a trustworthy business partner and supplier for a commodity essential for BRC's business."
The BRC Rubber opinion demonstrates the importance of consistent messaging. Contradictory messages can negate otherwise unambiguous assurances and allow the other party to declare the contract repudiated. The adequacy of assurances under 2-609 are evaluated "under the circumstances of the particular case," and the trier of fact must "consider the commercial practicalities in light of all the circumstances." The court may consider the totality of the circumstances, including a party's reliance on the contract terms to plan its business. So long as the threatened breach will "substantially impair the value of the contract" to the insecure party, even seemingly small contract modifications can result in repudiation. Parties who are considering invoking section 2-609 or who are having trouble interpreting their partner's vague assurances should be familiar with the court's analysis in BRC Rubber.
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