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N.J. Appellate Court Defines Standards on Use of Summary Judgment in "Adequate Assurance" Cases

April 3, 2008

On March 27, 2008, the Appellate Division of the Superior Court of New Jersey decided and approved for publication, Spring Creek Holding Company, Inc. v. Shinnihon U.S.A. Co., Ltd., Docket No. A-4606-05T2. The Appellate Division's opinion provides significant interpretation of Section 251 of the Restatement (Second) of Contracts, particularly in the context of a summary judgment motion. Under Section 251 of the Restatement: (1) where reasonable grounds arise to believe that the obligor will commit a breach by non-performance, the obligee may demand adequate assurance of performance; and (2) the obligee may terminate the contract based on the obligor's failure to provide such assurance within a reasonable time. In pertinent part, the Court's decision establishes that a party to a contract need not breach it to justify a request by another contracting party for adequate assurance, that the question as to whether a party was "adequately assured" can be answered by the Court as a matter of law and that events subsequent to the termination of a contract, based on the failure to receive adequate assurance of performance, will not be considered in evaluating the reasonableness of the request and response for adequate assurance.

Fully half of the Appellate Division's opinion sets forth the involved and voluminous facts. In brief, Shinnihon owned a golf course and a contiguous and intertwined parcel of land known as the "Remainder Land." Shinnihon had obtained title to the Remainder Land in a previous quiet title action; an appeal of that action was settled, resulting in a "Settlement Agreement" pursuant to which Shinnihon would convey the Remainder Land to Spring Creek, assuming certain terms and conditions were met. Following execution of the Settlement Agreement, Spring Creek's three shareholders broke into two factions, each contesting the authority of the other as to ownership and authority to deal with Shinnihon and a pending application to the municipal Zoning Board. Shinnihon itself was sued as part of this internal struggle, and following receipt of yet another threat of litigation from a third party that was affiliated with one of the factions, Shinnihon sought assurance from Spring Creek regarding the conflicting claims of ownership and authority. When Shinnihon determined that responses to those inquiries did not adequately assure it of Spring Creek's ability to perform as required by the Settlement Agreement, it declared breach and terminated the agreement. Spring Creek sued, and following an extended procedural history of motion practice and discovery, both parties cross-moved for summary judgment. Shinnihon sought a declaration of its right to terminate, and Spring Creek sought specific performance conveying the property.

The Appellate Division affirmed the trial court's granting summary judgment in favor of Shinnihon on the ground that, under Section 251, Shinnihon's termination of the Settlement Agreement was proper. The Appellate Division initially noted the absence of New Jersey precedent on the use of summary judgment to decide an adequate assurance case in the context of commercial real estate litigation where the request for assurance was not based on payment. However, the Court ruled that summary judgment was an appropriate procedure to evaluate such claims and that the Court could determine as a matter of law whether the undisputed facts-here, conflicting claims of ownership among the obligor's shareholders-could give rise initially to grounds for demanding adequate assurance. The holding that the reasonableness of Shinnihon's "insecurity" may be determined as a matter of law is significant in light of authority which provides that subjective issues are not proper for summary judgment.

The Court also evaluated whether the assurances themselves were adequate as a matter of law to allow termination of the contract by the obligee. The Court found that the "traditional law of anticipatory breach" did not provide clear guidance in situations that did not involve an obligor who expressly repudiates a contract. Instead, the Court cited the "modern view" that looks to the reasonableness of the obligee's belief that the obligor will breach the contract. The significance of this analysis is its recognition that the jurisprudence of anticipatory breach in contract matters does not require the non-repudiating party to choose immediately whether to continue to perform in the face of a repudiating party's acts or omissions or to cease performance and exposure to damages. The reasonableness of such a determination may be made, appropriately in a case as this, on summary judgment.

Finally, the Court addressed an issue that had not clearly been resolved in New Jersey and elsewhere-the relevance of events that post-date the request for adequate assurance in the evaluation of the reasonableness of the request at the time it was made. The Court found that the focus of Section 251 is the insecurity of the party seeking adequate assurance, and the level of comfort provided by a response to the request, at the time they are both provided. Thus, the Court refused to consider events subsequent to the decision to terminate and held that they were not relevant to the analysis of the adequacy of the assurance, even where such events arguably removed the cause for concern that prompted the request for assurance.

The Appellate Division's decision clarifies the circumstances in which contracting parties may seek assurance of performance in the face of impending breach and emphasizes the need for caution and careful documentation of the facts (namely, the grounds giving rise to the request for adequate assurance and reasons as to why such a request is required) as parties proceed to act or not act in connection with their contractual relationship. Importantly, issues normally considered not appropriate for summary judgment relating to subjective "belief" now may be dealt with at that procedural stage, given an undisputed record.

Steven M. Richman of Duane Morris LLP's Princeton office and Jonathan L. Swichar of the firm's Philadelphia office represented Shinnihon at both the trial and appellate levels. Both are members of the firm's commercial litigation and appellate practice groups.

For Further Information

If you have any questions about this Alert or would like more information, please contact Steven M. Richman, Jonathan L. Swichar, any other member of the Commercial Litigation Practice Group or the attorney in the firm with whom you are regularly in contact.

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