AMF, Inc. v. McDonald's Corp.
536 F.2d 1167 (1976)
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Rule of Law:
Under UCC § 2-609, a buyer's demand for adequate assurance of performance does not need to be in writing if the seller has a clear understanding that the buyer is suspending performance until it receives such assurance. Failure to provide adequate assurance after such a demand constitutes a repudiation of the contract.
Facts:
- In 1967, McDonald’s Corporation agreed to evaluate a prototype of AMF, Incorporated's model 72C computerized cash register.
- In April 1968, AMF installed the prototype 72C unit in McDonald's busiest restaurant in Elk Grove, Illinois.
- The prototype performed poorly, resulting in numerous problems and requiring frequent service calls by AMF.
- In December 1968 and January 1969, while the prototype was still malfunctioning, McDonald's and its licensees placed orders for twenty-three additional 72C units.
- At a meeting on March 18, 1969, due to the prototype's poor performance and production delays, McDonald's personnel asked AMF to halt production until they could mutually agree upon performance and reliability standards, to which AMF agreed.
- In late April 1969, due to its continued poor performance, McDonald's had AMF remove the prototype unit from the Elk Grove restaurant.
- At a subsequent meeting on May 1, 1969, AMF presented performance standards that McDonald's found unacceptable, and the parties never reached an agreement.
- On July 29, 1969, representatives from both companies met with the mutual understanding that all orders for the 72C units were cancelled.
Procedural Posture:
- AMF, Incorporated filed suit against McDonald’s Corporation for wrongful cancellation of orders in the U.S. District Court for the Southern District of New York.
- The case was subsequently transferred to the U.S. District Court for the Northern District of Illinois.
- In a separate action, McDonald’s of Elk Grove, Inc. sued AMF in the same court to recover the purchase price for the prototype cash register.
- The two cases were consolidated and tried together in a bench trial.
- The district court (trial court) entered judgment in favor of McDonald's and its licensees, dismissing all of AMF's complaints.
- AMF (appellant) appealed the judgment dismissing its complaints to the U.S. Court of Appeals for the Seventh Circuit, with McDonald's and its licensees as appellees.
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Issue:
Under UCC § 2-609, is a buyer's oral request to halt production until performance standards are established a sufficient demand for adequate assurance of performance, allowing the buyer to repudiate the contract if such assurance is not provided?
Opinions:
Majority - Cummings, Circuit Judge.
Yes. A buyer's request to halt production pending the establishment of performance standards constitutes a valid demand for adequate assurance of performance under UCC § 2-609, and the seller's subsequent failure to provide such assurance is a repudiation of the contract. The court determined that McDonald's had 'reasonable grounds for insecurity' regarding AMF's ability to perform, based on the persistent failure of the prototype unit and significant production delays. Although UCC § 2-609 states that a demand for assurance should be 'in writing,' the court rejected a 'formalistic approach,' holding that the written requirement is excused when the seller has a 'clear understanding' that the buyer has suspended performance until receiving adequate assurance. Here, AMF's own testimony and internal memoranda showed it clearly understood McDonald's position after the March 18 meeting. AMF's failure to provide acceptable performance standards or a workable machine by the May 1 meeting was a failure to give adequate assurance, which under § 2-609(4) amounted to a repudiation of the contract. This repudiation gave McDonald's the right under §§ 2-610 and 2-711 to cancel the orders.
Analysis:
This decision significantly clarifies the application of UCC § 2-609 by establishing that the 'in writing' requirement for a demand for assurance is not absolute. The court prioritizes the substance of the communication and the parties' understanding over procedural formalities. This creates a more flexible, commercially reasonable standard, preventing a party from using a technicality to escape liability when they were clearly aware of the other party's insecurity and demand for assurance. The case serves as a precedent for excusing the written demand requirement where there is clear evidence that the seller understood the buyer's suspension of performance was conditional upon receiving adequate assurance.
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