Page 20: of Marine News Magazine (February 2016)

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COLUMN LEGAL

Limit Exposure with the Uniform Commercial Code

Demanding assurance pursuant to the UCC may save you from sinking on someone else’s Ship.

By Larry DeMarcay

Vessel operations require a large net- 2-609 provides you with a “Right to Adequate Assurance work of companies that come together of Performance.” Although not all states have adopted the to keep the entire business chain – in- Uniform Commercial Code, most have. For the states that cluding yours – running smoothly. have adopted this section of the Code, the requirements

Keeping the lights on and the boats for demanding assurance are included in Section 2-609. running requires agreements with The statute provides: banks, investors, shipbuilders, compo- 1. A contract for sale imposes an obligation on each nent manufacturers, designers, techni- party that the other’s expectation of receiving due cal specialists, repairmen, suppliers, performance will not be impaired. When

DeMarcay agents and countless other entities. reasonable grounds for insecurity arise with respect

Many of these agreements involve relationships that have to the performance of either party the other may in developed over time during differing market conditions. writing demand adequate assurance of due

Unfortunately, a large portion of our industry is depen- performance and until he receives such assurance dent on the exploration and production of oil and gas, and may if commercially reasonable suspend any the services related to it. As this column is written, the performance for which he has not already received price of crude oil is hovering at just above $30.00 per bar- the agreed return.

rel with a twelve month forecast (depending on who you 2. Between merchants the reasonableness of grounds believe) of $35 per barrel, down from $110.00 per barrel for insecurity and the adequacy of any assurance just over a year ago. As a result of these depressed oil prices, offered shall be determined according to oil and gas exploration has slowed down drastically and commercial standards.

producers, when they can, are restricting the production 3. Acceptance of any improper delivery or payment of their wells. There are very few businesses that operate in does not prejudice the aggrieved party’s right to this environment that have not been impacted one extent demand adequate assurance of future performance. or another. As a direct result, many of these symbiotic rela- 4. After receipt of a justi? ed demand failure to tionships are beginning to sour and many transactions are provide within a reasonable time not exceeding being cancelled or defaulted on. thirty days such assurance of due performance as is adequate under the circumstances of the particular

L L ? case is a repudiation of the contract.

EFT IN THE URCH

No one wants to be left in the lurch when an entity that you have an agreement with can no longer perform its ob- Essentially, if you become concerned that a company ligations. Although you can’t guarantee that another per- that you have an agreement with will be unable to perform son or entity will honor their commitment, you can use its obligations in the future, this provision allows you to an obscure provision in the Uniform Commercial Code to demand that they provide you with assurance that they can minimize your exposure by stopping the losses before they complete your transaction. If the company cannot provide fully accrue. adequate assurance that they can pay for your services or

If you begin to have some concern that a contracting provide the materials or services agreed to in your con- entity may have dif? culty performing, or paying you for tract, you have the right to terminate the contract before your performance, you can manage this exposure by send- the other party defaults. Using this assurance provision ing the other entity a Demand for Assurance pursuant to proactively can keep you from sustaining additional losses the Uniform Commercial Code (“UCC”). UCC Section in the event of a default.

February 2016

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