By-Lo Oil Co., Inc. v. ParTech, Inc.
F. App'x. 538 (2001)
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Rule of Law:
Under UCC § 2-609, a party does not have reasonable grounds for insecurity to demand adequate assurance of performance when the performance deadline is nearly two years away and there is no history of non-performance. A non-committal response stating the matter is under evaluation by management may constitute adequate assurance under such circumstances.
Facts:
- By-Lo Oil Company purchased computer software from ParTech, Incorporated under an agreement that included a 'continuing support provision' for a monthly fee.
- In September 1997, By-Lo's controller, Thomas Masters, wrote to ParTech to inquire about the software's readiness for the Year 2000 (Y2K).
- After receiving no response, Masters wrote again on January 7, 1998, demanding a written commitment by January 31, 1998, that the software would function after December 31, 1999, citing the continuing support provision.
- On January 30, 1998, a ParTech director, Mary Beth Eng, responded that she could not provide a definitive answer as the decision was pending with upper-level management, and that By-Lo would be notified once a decision was made.
- Unsatisfied, Masters traveled to ParTech's headquarters but received the same non-committal response.
- In June 1998, By-Lo purchased a new computer hardware and software system from a different company for over $175,000.
- On November 20, 1998, ParTech informed By-Lo that it would supply the necessary Y2K-compliant software at no cost.
- On December 18, 1998, ParTech sent the Y2K software update to By-Lo, which By-Lo did not install because it had already replaced its system.
Procedural Posture:
- By-Lo Oil Company initially filed a lawsuit against the wrong ParTech entity in New York on May 1, 1998, and obtained a default judgment.
- After realizing its error, By-Lo filed a new complaint against the correct ParTech entity in Michigan state court in May 1999.
- ParTech removed the case to the U.S. District Court for the Eastern District of Michigan based on diversity jurisdiction.
- ParTech moved for summary judgment on By-Lo's breach of contract and warranty claims.
- The district court granted summary judgment in favor of ParTech.
- By-Lo Oil Company (appellant) appealed the district court's grant of summary judgment to the U.S. Court of Appeals for the Sixth Circuit.
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Issue:
Does a party have reasonable grounds for insecurity and a right to treat a non-committal response as inadequate assurance under UCC § 2-609 when the demand for assurance is made nearly two years before the performance deadline, and the other party has no history of unreliability?
Opinions:
Majority - Kennedy, Circuit Judge.
No. A party does not have reasonable grounds for insecurity and cannot treat a non-committal response as inadequate assurance when performance is not due for nearly two years. The court first held that By-Lo never properly invoked the contract's 'modification provision' because its letter was a demand for assurance under the 'continuing support provision,' not a request for a specific modification. Regarding the main issue under UCC § 2-609, the court found as a matter of law that By-Lo lacked reasonable grounds for insecurity in January 1998. The Y2K deadline was almost two years away, there was no indication that ParTech had been unreliable in the past, and By-Lo was not in a time crunch to find an alternative. Consequently, ParTech's assurance that it was evaluating the matter and would notify By-Lo of its decision was adequate under the circumstances. Because the grounds for insecurity were not reasonable and the assurance was adequate, By-Lo's subsequent purchase of a new system was not justified and its claim for anticipatory breach fails.
Analysis:
This decision clarifies the application of UCC § 2-609 by emphasizing the importance of timing and context in evaluating 'reasonable grounds for insecurity' and 'adequate assurance'. It establishes that these typically factual questions can be decided as a matter of law where the facts are not in dispute. The ruling prevents parties from using § 2-609 as a tool to prematurely exit a contract based on anxiety about a distant performance deadline, thereby promoting contractual stability. It provides guidance that a non-committal but professional response to an early inquiry may be legally sufficient, particularly when there is no history of poor performance.
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