/REE-zuh-nuh-bul GROWNDZ for in-SEH-kyuh-ree-tee/·phrase
Also known as:reasonable ground for insecurity · adequate assurance of performance
Written by attorneys — see sources below.
Circumstances that give a party to a contract for the sale of goods objective reason to doubt that the other party will render due performance. The presence of such grounds permits the insecure party to demand in writing adequate assurance of due performance and, if commercially reasonable, to suspend performance until assurance is received. Failure to provide adequate assurance within a reasonable time constitutes a repudiation.
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How its tested
Common Examples
2
Financial Distress Triggers Demand
Regina Robinson contracted to buy a fleet of delivery vans from Rocky Mountain Mining on a fixed schedule with progress payments. Rocky Mountain Mining defaulted on several loans and lost key equipment to its lender. Regina Robinson sent a written demand for proof of continued production capacity and financing. Rocky Mountain Mining gave only a vague reply that operations would continue. Regina Robinson suspended further payments because the financial collapse created reasonable grounds for insecurity about future deliveries.
Assignment Creates Insecurity
Ralph Richardson agreed to purchase specialized drilling equipment from Lightning Oil Co. Lightning Oil Co. assigned its delivery obligations to a new entity without notifying Ralph Richardson of the assignee's financial stability. Ralph Richardson demanded written confirmation of the assignee's ability to perform on schedule. The assignment itself supplied reasonable grounds for insecurity, allowing Ralph Richardson to withhold payment until adequate assurance arrived.
What facts typically create reasonable grounds for insecurity?
Financial distress such as loan defaults and seizure of assets, loss of key subcontractors through bankruptcy, repeated inspection failures, or an assignment of performance duties can each supply objective commercial reason to doubt future performance. Courts apply commercial rather than legal standards and treat the question as one of fact based on all circumstances.
Supporting sources
Must a party wait for an actual breach before demanding assurance?
No. The doctrine permits a party with reasonable grounds for insecurity to demand adequate assurance without first waiting for total breach. Suspension of performance is allowed if commercially reasonable while awaiting the assurance.
Supporting sources
What happens if adequate assurance is not provided?
Failure to furnish adequate assurance within a reasonable time, not exceeding thirty days, constitutes a repudiation. The insecure party may then cancel the contract, cover, and pursue damages for anticipatory breach.
Supporting sources
Does prior acceptance of defective goods bar a later demand for assurance?
No. Acceptance of any improper delivery or payment does not prejudice the right to demand adequate assurance of future performance when new grounds for insecurity arise.
Supporting sources
741 F. Supp. 2d 651 (D. N.J. 2010)
…additional term regarding attorneys’ fees governs: the flat 25% rate purportedly included with the Order Acknowledgment, or the “reasonable attorney’s fees” term appearing on the subsequent invoice. Rather, according to the comment, the statute is intended to deal with two typical situations. The one is the written…
ContractsPerformance, breach, and discharge · Breach (including material and partial breach, and anticipatory repudiation)UBEFoundational