Chapter 11: Sales, Leases, and E-Contracts 11–6. Case Problem with Sample Answer: Obligations of the Seller.
Flint Hills Resources, LP, a refiner of crude oil, agreed to buy “approximately 1,000 barrels per day” of Mexican natural gas condensate from JAG Energy, Inc., an oil broker. Four months into the contract, Pemex, the only authorized seller of freshly extracted Mexican condensate, warned Flint Hills that some companies might be selling stolen Mexican condensate. Fearing potential criminal liability, Flint Hills refused to accept more deliveries from JAG without proof of the title to its product. JAG promised to forward documents showing its chain of title. After several weeks, when JAG did not produce the documents, Flint Hills canceled their agreement. JAG filed a suit in a federal district court against Flint Hills, alleging breach of contract. Did Flint Hills have a right to demand assurance of JAG’s title to its product? If so, did Flint Hills act reasonably in exercising that right? Explain. [Flint Hills Resources LP v. Jag Energy, Inc., 559 F.3d 373 (5th Cir. 2009)]
Under UCC 2–609 (and 2A–401), if a contracting party has “reasonable grounds” to believe that the other party will not perform, he or she may “demand adequate assurance” of that performance. Until the assurance is received, the demanding party may suspend its own performance. If assurance is not provided within less than thirty days, this may be considered a repudiation of the contract, and the contract may be canceled. What constitutes “reasonable grounds” is determined by commercial standards. Concerned about the source of JAG’s product, Flint Hills asked for evidence of title and suspended payment until this “lack of information” was resolved. From one perspective, this demand for proof of title could be seen as an overreaction to a rumor without substantial evidence of bad title or a conflicting claim of ownership. But under the UCC the right to seek assurances and suspend payment can be based on a lack of information and does not require an adverse claim, proof of theft, or objective evidence of wrongdoing. Thus in this case, Flint Hills had the right to seek assurances from JAG, and JAG was then obligated to provide “satisfactory” evidence of title. JAG’s failure to provide the documents that it promised to forward—or any other substantiating proof of the chain of title to its product—was sufficient to support Flint Hills’s suspension of payments and, after several weeks, its cancelation of the deal.