How Do Adequate Assurances Work?
A party to a contract who has reasonable grounds to be concerned that the other party might not perform can request adequate assurances of damages from the other party. If this occurs the party being asked to provide an adequate assurance must do so within a reasonable amount of time (generally within 30 days). A failure to do so will result in a repudiation, which may result in a termination of the contract.
Example: I enter into a contract to sell my Blockbuster Video Franchise to an antiques collector. I hear from a credible source that the antiques collector is in very serious financial trouble, and I have legitimate concerns that he will not be able to come up with the money at the time it’s due. I can make a request for adequate assurances from the antiques collector, and if he fails to provide such assurances I can treat this as a repudiation and terminate the contract if I wish.
Two issues to watch out for an an MBE question:
A) If a request for adequate assurances is satisfied by the other party, the party who who made the request must perform the contract.
Example: The antiques collector in the above example satisfies my request for adequate assurances by providing me financial statements that show he is in excellent financial shape and will have no problem performing his end of the contract. Now I have to perform the contract, and if I don’t I will be the one who will be held in breach of contract.
B) Remember that a demand for adequate assurances must be reasonable and justified. If the party making the demand does not have reasonable grounds for believing that the other party might not be able to perform, the party being asked to provide adequate assurances is under no obligation to provide them. The party demanding adequate assurances cannot refuse to perform on the grounds that the other party did not provide them (because he had no reasonable grounds to demand them in the first place) without being in breach of contract.
Example: I demand assurances from the antiques collector despite the fact that I don’t actually have any credible evidence at all that he won’t be able to perform his end of the contract. The antiques collector refuses to provide any such assurances. If I refuse to perform the contract on the grounds that the antiques collector did not provide me adequate assurances, I will be the one in breach of contract (because I did not have reasonable grounds to demand them in the first place).
Summary
On an MBE question about adequate assurances, make sure to understand that:
- The party seeking adequate assurances must perform if such assurances are provided by the other party.
- The party demanding adequate assurances must have reasonable grounds to do so. If the party demanding adequate assurances does not have reasonable grounds for doing so, the other party does not have to provide them. If, under these circumstances the party who was demanding adequate assurances refuses to perform because the other party didn’t provide them, the party seeking adequate assurances will be in breach of contract.