## Facts

- AMF manufactured a computerized cash register (model 72C) intended for use in an automated restaurant system.
- In April 1968, McDonald’s purchased a prototype 72C register for $20,385.28 and installed it at a McDonald’s restaurant in Elk Grove, Illinois.
- McDonald’s later placed orders totaling 23 additional registers: 16 for company-owned restaurants and 7 for McDonald’s licensees, with delivery expected by mid-1969.
- The prototype performed poorly, required frequent service, and was removed around April 1969.
- In March 1969, McDonald’s representatives inspected AMF’s plant and observed that registers were not ready for assembly and that there were concerns about design problems.
- McDonald’s sought agreed performance and reliability standards and requested that AMF halt production pending agreement; AMF agreed to stop production while standards were discussed.
- AMF proposed standards McDonald’s found unacceptable and stated it did not have a working machine and could not produce one within a reasonable time; AMF also asked McDonald’s to reduce the order from 23 units to 5, which McDonald’s refused.
- On July 29, 1969, McDonald’s sent a formal notice repudiating the 23-unit contract.
- After a bench trial, the district court dismissed AMF’s claims against McDonald’s and the seven licensees; AMF appealed only those dismissals.

## Issues

1. Whether McDonald’s had reasonable grounds for insecurity under U.C.C. § 2-609 to demand adequate assurance of AMF’s performance.
2. Whether AMF failed to provide adequate assurance, thereby excusing McDonald’s July 29, 1969 repudiation and defeating AMF’s breach-of-contract damages claim.
3. Whether AMF’s claims against McDonald’s licensees could survive if AMF could not establish wrongful repudiation related to the underlying transaction.

## Decision

- The Seventh Circuit affirmed the judgments dismissing AMF’s complaints against McDonald’s and the seven licensees.
- The court held that McDonald’s had reasonable grounds for insecurity based on the prototype’s failures and AMF’s production and design problems.
- The court concluded that AMF did not provide adequate assurance of performance, including by admitting it lacked a working machine and could not timely produce one, and by proposing a drastic reduction of the order.
- Because adequate assurance was not provided, McDonald’s repudiation was justified rather than wrongful, and AMF was not entitled to damages.
- The dismissals as to the licensees were affirmed because AMF’s inability to prove wrongful repudiation on the core transaction required dismissal of the related claims.

## Legal Principles

- Under U.C.C. § 2-609, a party with reasonable grounds for insecurity regarding the other party’s performance may demand adequate assurance and may treat failure to provide adequate assurance within a reasonable time as a repudiation.
- Objective facts such as repeated product failures, observed production deficiencies, and admissions of inability to perform can establish reasonable grounds for insecurity.
- A response that concedes inability to provide a working product within a reasonable time, or proposes materially reducing the contracted quantity, may be insufficient as “adequate assurance” of performance.
- When a buyer’s demand for assurance is justified and adequate assurance is not provided, the buyer’s termination or repudiation is excused and does not support the seller’s claim for breach damages.

## Conclusion

The court held that McDonald’s was entitled under U.C.C. § 2-609 to demand adequate assurance of AMF’s ability to deliver functioning registers and, because AMF failed to provide adequate assurance, McDonald’s repudiation was justified and AMF’s claims against McDonald’s and the licensees were properly dismissed.


AMF, Inc. v. McDonald’s Corp., 536 F.2d 1167 (7th Cir. 1976)