Builders and Contractors Exchange
Weekly Bulletin: 22 Mar 2006
Right To Demand "Adequate Assurances" Of Contract Performance
By: Pat Genzler
Construction contractors frequently must depend on timely performance and delivery by subcontractors and suppliers to complete their own work within the contract’s allowed time. This can lead to problems when a subcontractor or supplier has fallen behind schedule, but is not yet “in default” or has not yet missed a required completion date. If it appears impossible or unlikely that the subcontractor or supplier will complete its work on time or correctly, does the contractor have any remedy, or must he wait until default actually occurs? Fortunately, the answer is usually “no,” but it’s a “qualified “no.”
Contract law recognizes that one party to a contract, who has “reasonable grounds” to believe that the other party to the contract will not perform its contract duties as required, has a right to demand “adequate assurances” of timely and correct performance. If the failure of performance would constitute a “material breach” of the contract, then the party requesting assurances can (1) suspend his performance (usually the obligation to the pay the subcontractor or supplier) until adequate assurances are received, and (2) treat a failure to provide adequate assurances as a “repudiation” of the contract and a material breach of the contract in itself.
This principle is recognized in general contract law, and is often incorporated into standard construction contract documents. It is also specifically incorporated into the “Uniform Commercial Code” applicable to sales of goods, for example construction materials. Virginia Code sec. 8.2-609 provides:
§ 8.2-609. Right to adequate assurance of performance
(1) A contract for sale imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired. When 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.
…
(4) After receipt of a justified demand failure to provide within a reasonable time not exceeding thirty days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract.
Caveats
As indicated in this section, the right to demand such assurances exists when there is “reasonable grounds for insecurity,” which depends on the facts of each situation. Secondly, once a demand for assurances has been made, the other party must provide assurances that are adequate “under the circumstances of the particular case.” In general, something more than a mere promise or statement of intent to perform is required. Usually, there must be some explanation or demonstration of reasonable capability to perform, such as a plan, schedule or timetable. If financial circumstances are the reason for requesting assurances, some demonstration of adequate financial resources could be required.
The right to demand adequate assurances can be an important risk management technique available to contractors, but must be exercised carefully and only when it is clear that performance is impossible or highly unlikely. It is recommended that you seek legal advice before terminating a subcontract or purchase order on this basis.
Questions?
If you have any questions about this article or any other related matters, please contact:
This article is meant to bring awareness to this topic and is not intended to be used as legal advice.