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The scope and significanceof the Year 2000 problem is still largely unknown. The Securities and ExchangeCommission has stated in its interpretive guidance release that “[o]nlyone thing is certain about the impact of the Year 2000 — it is difficultto predict with certainty what truly will happen after Dec. 31, 1999.” [FOOTNOTE 1] If some of the more direpredictions are true, companies in the United States and abroad may facethe possibility of disruptions to their businesses because of the Year2000 problem and litigation is likely to result. Many articles have been writtenabout a company’s potential exposure to litigation due to its failure toremediate its own computer systems. However, companies can also sufferdue to their business partners’, suppliers’ and customers’ failures toadequately address the Year 2000 problem. Because of this risk of litigation,an important aspect of many companies’ Year 2000 remediation efforts has been an examination of the compliance efforts of third parties upon whichthe companies’ business relies. [FOOTNOTE 2]Tothat end, companies have sought. and will continue to seek, assurancesfrom these third parties regarding their Year 2000 compliance efforts. It is undoubtedly the casethat most companies that send or receive these inquiries view them as nuisances.In response, companies typically send back boilerplate Year 2000 readinessdisclosure statements, which frequently are neither tailored to the specificinquiry — or inquiring party — nor particularly enlightening. There maycome a time, however, when a Year 2000 inquiry seeks something more. Thatinquiry — coming as it may from an important contractual partner undera substantial, long-term contractual relationship — could well demand morethan a boilerplate statement of the counterparty’s ability to continueto perform under that long-term contract in view of the Year 2000 problem.Rather, the inquiry may demand specific assurances that the counterpartywill be able to perform under the contract despite any Year 2000 problemsit may face. How the counterparty responds to that inquiry may affect thefuture relationship under the contract. ADEQUATE ASSURANCES The doctrine of adequateassurances generally provides that a party to a contract may demand assuranceof future performance from the other party where there is reason to believethe other party will be unable to perform. [FOOTNOTE 3]If this adequate assurance is not forthcoming, the party demanding theassurance may take actions as though an anticipatory repudiation of thecontract has occurred. [FOOTNOTE 4]The purposeof the doctrine is to resolve the dilemma of a party to a contract whobelieves that the other party will be unable to perform, but is uncertainwhether it should continue its own performance or suspend performance basedupon this perceived inability to perform. In the absence of the adequateassurances doctrine, that party would place itself in jeopardy of beingfound by a court to have breached the contract if it were to terminateits own performance due to the perception that the other party has repudiatedthe contract. [FOOTNOTE 5] This doctrine has been codifiedin the Uniform Commercial Code (UCC) �2-609, which provides, in thecontext of a contract for the sale of goods, the following: � Subsection 1 of �2-609states that: A contract for sale imposes an obligation on each party thatthe other’s expectation of receiving due performance will not be impaired.When reasonable grounds for insecurity arise with respect to the performanceof either party the other may in writing demand adequate assurance of dueperformance and until he receives such assurance may if commercially reasonablesuspend any performance for which he has not already received the agreedreturn. � Subsection 4 of �2-609states: After receipt of a justified demand failure to provide within areasonable time not exceeding 30 days such assurance of due performanceas is adequate under the circumstances of the particular case is a repudiationof the contract. In addition, the Restatement(Second) of Contracts also recognizes the doctrine of adequate assurances.Pursuant to Restatement (Second) of Contracts Section 251: (1) Where reasonable groundsarise to believe that the obligor will commit a breach by nonperformancethat would of itself give the obligee a claim for damages for total breachunder �243, the obligee may demand adequate assurance of due performanceand may, if reasonable, suspend any performance for which he has not alreadyreceived the agreed exchange until he receives such assurance. (2) The obligee may treatas a repudiation the obligor’s failure to provide within a reasonable timesuch assurance of due performance as is adequate in the circumstances ofthe particular case. [FOOTNOTE 6] New York Law Until recently, New Yorkrecognized the doctrine of adequate assurances in only two circumstances.First, where a contract is for the sale of goods, New York adopts the principleset forth in UCC �2-609. Second, where it appears that the promisoris or may become insolvent, the promisee may request adequate assuranceof future performance from the promisor. [FOOTNOTE 7]In a recent decision, however, the New York Court of Appeals broadenedthe application of the doctrine of adequate assurances. In Norcon Power PartnersLP v. Niagara Mohawk Power Corp., [FOOTNOTE 8]the question arose whether a contracting party can avail itself of thedoctrine of adequate assurances under New York law in circumstances notfalling within the UCC context or the insolvency context. The Norconcase involved an action brought by Norcon, an independent power producer,which had entered a long-term contract obligating Niagara Mohawk to purchaseelectricity produced at Norcon’s power plant. Niagara apparently believedthat Norcon would be unable to perform its reimbursement obligations [FOOTNOTE 9]under the contract and sent a letter to Norcon requesting that “Norconprovide adequate assurance to Niagara Mohawk that Norcon will duly performall of its future repayment obligations.” In response, Norcon commencedsuit in the U.S. District Court for the Southern District of New York seekinga declaratory judgment that Niagara Mohawk had no right to demand suchan adequate assurance and a preliminary injunction enjoining Niagara Mohawkfrom terminating the contract. Niagara Mohawk counterclaimed seeking adeclaratory judgment that it had properly exercised its right to demandadequate assurance. The district court foundthat there was no basis under New York law for Niagara Mohawk to demandadequate assurance from Norcon. [FOOTNOTE 10]Thecourt canvassed New York law and concluded that: (1) No right to demand adequateassurances exists under New York common law; (2) Under New York law, thesale of electricity does not constitute a sale of goods under the UCC,and; (3) Restatement (Second)of Contracts �251 is not the law of New York. [FOOTNOTE 11] On appeal, observing thatthere was no “New York authority accepting the right to demand adequateassurance where a party is solvent and the contract is not governed bythe UCC,” [FOOTNOTE 12]the Court of Appeals forthe Second Circuit certified the following question to the New York Courtof Appeals:
Does a party havethe right to demand adequate assurance of future performance when reasonablegrounds arise to believe that the other party will commit a breach by nonperformanceof a contract governed by New York law, where the other party is solventand the contract is not governed by the UCC? [FOOTNOTE 13]

The Court of Appeals acceptedthe certification. After reviewing the doctrineof adequate assurances, the Court of Appeals answered this question inthe affirmative, stating “[t]his Court is persuaded that the policies underlyingthe UCC counterpart should apply with similar cogency for the resolutionof this kind of controversy.” [FOOTNOTE 14]TheCourt of Appeals noted that commentators have argued that “the problemsredressed by UCC [�]2-609 are not unique to contracts for sale ofgoods, regulated under a purely statutory regime.” [FOOTNOTE 15]In addition, the Court of Appeals relied upon the Restatement (Second)of Contracts �251, through which the American Law Institute “has alsorecognized and collected the authorities supporting” the application ofUCC �2-609 outside of the sale of goods context. [FOOTNOTE 16]Furthermore, the Court of Appeals identified several states that have adoptedRestatement (Second) of Contracts �251. [FOOTNOTE 17] However, the Court of Appealsdeclined at this time to approve a blanket extension of this doctrine;rather, the court stated “[i]t should apply to the type of long-term commercialcontract between corporate entities entered into by Norcon and NiagaraMohawk here, which is complex and not reasonably susceptible of all securityfeatures being anticipated, bargained for and incorporated in the originalcontract.” [FOOTNOTE 18]This caveat was basedupon the fact that the Court of Appeals’ “jurisprudence usually evolvesby deciding cases and settling the law more modestly” than taking a wholesaleapproach, such as extending the doctrine of adequate assurances to allnon-UCC contracts. [FOOTNOTE 19]Ultimately, inthe context of the factual circumstances surrounding this case, the Courtof Appeals concluded that this limited response “suffices to declare adispositive and proportioned answer to the certified question.” [FOOTNOTE 20] The Doctrine and Y2K In addressing the Year 2000issue, commentators recommend that companies, in addition to remediatingtheir own systems, evaluate the business risks associated with the Year2000 readiness of third parties with whom they have contractual or otherbusiness relations. [FOOTNOTE 21]This need toevaluate the readiness of third parties arises because “[o]utside partiesmight affect the company’s own operations if outsiders fail in their ownefforts to achieve Year 2000 readiness.” [FOOTNOTE 22]When evaluating the business risks potentially created by third parties,a company should first identify key business partners, such as suppliers,upon whom the company relies for the success and continuation of its business.A company should also consider the potential impact of a Year 2000 failureof such a significant third party. The doctrine of adequateassurances could provide an additional avenue of protection for those companieswhose business relies upon third parties whose ability to perform underexisting contractual arrangements may be affected by the Year 2000 problem.For example, a company may have a long-term supply contract with a companywhose key suppliers are located outside of the United States and whichmay be more susceptible to Year 2000 risks. While commentators have longbeen recommending that companies send inquiries to third parties requestinginformation regarding Year 2000 readiness, [FOOTNOTE 23]those inquiries might well take on a more serious tenor. Should the inquirybe construed as one seeking “adequate assurances,” the failure of a thirdparty to provide an adequate response to a Year 2000 inquiry could constitutea failure to provide adequate assurance. The inquiring company may thensuspend performance of a contract with that third party pursuant to theadequate assurances doctrine. The inquiring company might then regard thelong-term contract as breached, suspend its own performance, and contractwith another third party that is Year 2000 compliant — or represents itselfas such — to provide the same services. Of course, all the elements ofthe adequate assurances doctrine will have to be met in order for a partyto treat the contract as breached. For example, the belief that the counterpartymight not be able to perform must be reasonable. Y2K Case Law The doctrine of adequateassurances has been relied upon in at least one of the more than fiftyYear 2000 related lawsuits that have already been filed. Issokson etal. v. Intuit Inc., is a class action lawsuit filed in April 1998 againstIntuit Inc., a company that “develops, markets and supports consumer financesoftware products (such as Quicken software), financial supplies (suchas computer checks, invoices and envelopes) and internet-based productsand services.” [FOOTNOTE 24]Plaintiffs allegedthat certain versions of Quicken contained a Year 2000 defect for whichIntuit was not providing a free “fix.” Plaintiffs’ sixth and seventhcauses of action alleged anticipatory breach and failure to provide adequateassurances. Intuit demurred on numerous grounds, seeking to have the complaintdismissed. In an order dated Jan. 27, 1999, Superior Court Judge RobertA. Baines granted Intuit’s demurrer to the sixth and seventh causes ofaction, stating “Intuit’s offer of a free fix by the end of the 2nd Quarter1999 negates the anticipatory breach claim and is an adequate assuranceof performance. Plaintiffs also fail to adequately allege a contractualbasis for Intuit’s allegedly due performance.” [FOOTNOTE 25]Furthermore, the judge granted this demurrer on the grounds that the contractwas unilateral, thus “the doctrine of anticipatory breach does not apply.” [FOOTNOTE 26] CONCLUSION The Year 2000 problem isan unprecedented situation that has created the potential for a great dealof litigation due to systems failures. Companies are in the process ofremediating or have already remediated their own systems to ensure Year2000 compliance. In addition to remediating their own systems, many companieshave appreciated the need to address the potential for business interruptionscaused by third parties upon which they rely. Without addressing such third-partyrisks, even a company that has fully remediated its own systems could potentiallyface major Year 2000 business interruptions due to Year 2000 failures. The doctrine of adequateassurances, which has been extended outside of the UCC context in numerousjurisdictions, including New York following the decision in Norcon,provides a potential mechanism companies may rely on to protect themselvesfrom third parties that cannot provide an assurance that they will be Year2000 compliant. Although Norconextended the doctrine only to casesinvolving long-term, complex commercial contracts, it appears that thecurrent trend in other jurisdictions is to extend the doctrine even further. [FOOTNOTE 27]It is possible that New York courts similarly will extend the doctrinewhen an appropriate factual scenario arises, and the Year 2000 problemmay present just such a scenario. As the Year 2000 draws closer,companies addressing Year 2000 readiness issues should be aware of thepossibility that some Year 2000 inquiries from business partners may demandmore than a boilerplate response, and that any response could have an impacton their contractual relationships. For this reason, it is important thatcompanies have a system in place to track and respond to all Year 2000inquiries that come in. These inquiries should, in turn, be carefully reviewedby persons within the organization who are knowledgeable about the specificbusiness relationships in question and any contractual agreements thatmay be affected. Under certain circumstances, in-house legal counsel �or, where appropriate, outside counsel — should be consulted in connectionwith Year 2000 inquiries and the company’s response to them. Richard Mancino is a partner at Willkie Farr & Gallagher. Scott S. Rose is an associate at the firm. FOOTNOTES: FN1Disclosure of Year 2000Issues and Consequences by Public Companies, Investment Advisers, InvestmentCompanies, and Municipal Securities Issuers, Release No. 33-7558, reprintedin James Hamilton, Year 2000: SEC Disclosureat 36 (CCH 1998). FN2One leading commentatorhas urged that a Year 2000 remediation plan “should not only be limitedto technical and legal evaluation of computer systems, but should includeinquiries into the compliance efforts of critical third parties.” LeonardNuara, et al., “Is it 638 Days or 638 Legal Issues to the Year 2000?” LitigationStrategy for Year 2000at 9. FN3See Larry T. Garvin,”Adequate Assurance of Performance: Of Risk, Duress, and Cognition,” 69 U. Colo. L. Rev.71, 71-72 (1998); Gregory S. Crespi, “The AdequateAssurance Doctrine After U.C.C. �2-609: A Test of the Efficiency ofthe Common Law,” 38 Vill. L. Rev.179, 184 (1993). FN4See Garvin, supra note3, at 72; Crespi, supra note 3, at 184. FN5See Crespi, supra note3, at 183. FN6Several jurisdictionshave accepted Restatement (Second) of Contracts �251. See UnitedCorp. v. Reed, Wible and Brown Inc., 626 FSupp. 1255, 1258 (D.Vi. 1986); Drinkwater v. Patten Realty Corp., 563 A2d 772, 776 (Me. 1989); Julian v. Montana State Univ., 229 Mont. 362, 367-68, 747 P2d 196,199-200 (Mont. 1987); Conference Center Ltd. v. TRC — The Research Corp.of New England, 189 Conn. 212, 226, 455 A2d 857, 864 (Conn. 1983); L.E. Spitzer Co. v. Barron, 581 P2d 213, 216-17 (Alaska 1978); MagnetResources Inc. v. Summit MRI Inc., 318 N.J. Super. 275, 288, 723 A2d976, 982 (N.J. Super. Ct. App. Div. 1998) (“Section 251 of the Restatement(Second) of Contracts has been accepted as part of New Jersey law.”); Juarezv. Hamner, 674 SW2d 856, 861 (Tex. App. 1984); Carfield & SonsInc. v. Cowling, 616 P2d 1008, 1010 (Colo. Ct. App. 1980). See also C.L. Maddox Inc. v. Coalfield Servs. Inc., 51 F3d 76, 81 (7th Cir.1995) (“The Restatement of course is not law, and we cannot find any Illinoiscases discussing section 251. But the principle strikes us as a sound one,and we have no reason to doubt that it would be so regarded by the courtsof Illinois.”). FN7See Hanna v. FlorenceIron Co. of Wis., 222 NY 290, 300, 118 NE 629 (1918); Pardee v.Kanady, 100 NY 121, 126-27, 2 NE 885 (1885); Updike v. Oakland MotorCar Co., 229 AD 632, 635, 242 NYS 329 (1st Dept. 1930). FN8110 F3d 6 (2d Cir. 1997). FN9Under the contract, Norconowed Niagara Mohawk money if the payments by Niagara Mohawk to Norcon exceededNiagara Mohawk’s “avoided cost,” defined in the contract as the cost NiagaraMohawk would incur to generate electricity itself or purchase it from othersources. Niagara Mohawk believed the amount owed by Norcon would exceed$600 million. FN10See Encogen FourPartners v. Niagara Mohawk Power Corp., 914 FSupp. 57, 63 (SDNY 1996). FN111See id. at 60-62. FN12 Norcon, 110 F3dat 9. FN13Id. FN14 Norcon Power PartnersL.P. v. Niagara Mohawk Power Corp., 92 NY2d 458, 468 (1998). FN15Id., 92 NY2d at 465. FN16Id. FN17Id., 92 NY2d at 466. FN18Id., 92 NY2d at 468. FN19Id., 92 NY2d at 467. FN20Id., 92 NY2d at 468. FN21See Nuara, supra note2, at 9. FN22Richard D. Williamsand Bruce T. Smith, Law of the Year 2000 Problem: Strategies, Claimsand Defenses2:12-2:13 (Aspen Law and Business 1999). FN23See id. FN24Complaint in Issoksonv. Intuit Inc., CV773646 (California Superior Court, County of SantaClara April 28, 1998) at 6. FN25 Issokson v. IntuitInc., CV773646 (California Superior Court, County of Santa Clara Jan.27, 1999). See California Judge Sustains Intuit’s Second Demurrer, Mealey’sYear 2000 Report(February 1999). FN26 Issokson v. Intuit,Inc., CV773646 (California Superior Court, County of Santa Clara Jan.27, 1999). See California Judge Sustains Intuit’s Second Demurrer, Mealey’sYear 2000 Report(February 1999). Under California law, a party toa unilateral contract may not repudiate the contract because there is nomore performance required from the party claiming anticipatory repudiation.See Xebec Dev. Partners Ltd. v. National Union Fire Ins. Co. of Pittsburgh,Pa., 15 Cal. Rptr. 2d 726, 740 (Cal. Ct. App. 1993); Harris v. Time,Inc., 237 Cal. Rptr. 584, 588 (Cal. Ct. App. 1987). FN27See cases cited at note6.

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