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Anticipatory Repudiation and Adequate Assurances I

Introduction Three sections of Article 2 (2-609, 2-610, and 2-611) were our focus for class today. I began by trying to put these sections into relationship with the previous topics in the course. I mentioned that I think repudiation is one of the more difficult sections of Article 2, but that learning its rules patiently can help sort out the issues. I presented a chart to describe the stages of the life of a contract:

Contract Formation: Traditional Contract Rules, Mostly the focus of the beginning Contracts Class

Contract Formed: Express Terms, Implied Terms (the 300 series of Article 2), the Parol Evidence Rule (2-202) and the Statute of Frauds (2-201), Firm Offer (2-205), Additional Terms (2-207), Modification (2-209) and Warranties.

PROCESS OF PERFORMANCE: Subject of today's class.

Tender: 2-503, 2-507

Acceptance/Rejection: the various sections of the 2-600 series, with special emphasis on 2-602, 2-606 and 2-607.

Remedies: Start with the Index sections of 2-703 (seller) and 2-711 (buyer) and build the remedies from there.

I. Anticipatory Repudiation (2-610)

Before defining the term, I thought it important to differentiate several terms that appear in Article 2 or the common law regarding the premature ending or potential premature ending of a contract. They are rescission, cancellation, termination, rejection and repudiation. Rescission is a common law term, used only once in Article 2 (2-720), which makes a contract void ab initio. It is as if the contract never took place. When the drafters of Article 2 used it in 2-720 they were only referring to its historical usage; they did not want to resurrect it for the Code. The Code terms coming closest to rescission are termination and cancellation. Those terms are defined in 2-106(3) and (4). Check out the difference between the two terms; the important distinction is to note that cancellation still gives one a 700 series remedy, while termination generally does not (except for earlier breaches in the same contract). Rejection differs from these other terms in that tender must first take place in order for it to be possible to reject. Rejection then triggers remedies, as we have seen, in the 700 series. Repudiation occurs before time for performance is due, and is defined in Comment 1 to 2-610 as "an overt communication of intention or an action which renders performance impossible or demonstrates a clear determination not to continue with performance."

I wanted to explore this definition through two problems: one being the deposition testimony of Mr. Smith (p. 551) and the other being Problem 1 on page 550. In the former Smith had a contract to deliver a quantity of soybeans to Dreyfus. Dreyfus' representative was Cox. Delivery was expected in December, but on December 8 Smith and Cox had a phone conversation in which it became clear that Smith couldn't supply all the required soybeans. The point of debate in the case is whether Smith's words of "settling up" (which would have meant that the parties would look at the agreed-delivery date for determining remedies) or "paying up" (which would have been clearer language of repudiation on December 8) were the words he actually used in the conversation. Because the price of soybeans declined rapidly between December 8 and December 12, this distinction became crucial. The appellate court affirmed the lower court judge in holding that Smith had repudiated on December 8. I gave this example to show the difficulty in sorting out when such a repudiation takes place. The problem on p. 550 explored the "impossible" prong of Comment 1. An 18 month rental of a "Duck" just a month before planned tender to another would constitute a repudiation under this prong.

One ought, however, not to be too eager to scream "repudiation" wherever contracting parties disagree. it is a more extreme remedy than Adequate Assurances, which I will cover on the next page. But, if one is to repudiate, one first has to make sure that one has received an "overt communication" or an "action" which makes performance impossible or shows that a person has no intent to continue performance.

I then looked at the text of 2-610. When either party repudiates, the options for the non-repudiating party are laid out. First, s/he may wait for a commercially reasonable time to see if the repudiating party actually performs. In this connection, 2-611 describes the Retraction of Anticipatory Repudiation, in which a repudiator can, under certain circumstances, call back that decision and have the contract reinstated. More on that in a minute. Or, second, s/he may proceed directly to the appropriate remedies under either 2-703 or 2-711. Finally, in either case, s/he may suspend performance and use the remedy of 2-704, which allows a person, when it is commerically reasonable, either to identify and complete production of the good under the contract or to sell it for scrap and then seek a remedy against the repudiator.

All four comments to 2-610 are crucial in understanding its meaning. We have already looked at the definition in Comment 1. Comment 2 adds the sentence, to the definition, that "repudiation can result from action which reasonbly indicates a rejection of the continuing obligation." Also in Comment 1 and 3 is the standard or test by which anticipatory repudiation is measured: the substantial impairment of the value of the contract. A test for substantial impairment is given in Comment 3. Two important final points should be mentioned. First, whereas a person may await performance for a "commercially reasonable time" before acting, if the party waits too long, its remedy might be small indeed. A case in point is Oloffson (p. 554), in which Oloffson waited until the date of performance before taking action. The court decided that even though market prices had risen considerably in that time, Oloffson was only entitled to damages as of the date of repudiation, six months previously. Second, the non-repudiator, according to Comment 4, is now the "master" of the remedies. S/he can exercise choice, and is only constrained by the "commercially reasonable" standard just mentioned.

The next page will consider 2-611 and 2-609.