## Facts

- A tugboat owner entered a three-year bareboat charter with a governmental corporate entity for total hire payable in installments, including advance installments at six-month intervals.
- The charter included an option to purchase the tug during the last 90 days for a fixed price, with the owner obligated to deliver merchantable title upon exercise.
- At contracting, the tug was subject to two mortgages; the owner later placed a third mortgage on the vessel.
- Before the final installment came due, the lessee learned the owner had defaulted on payments on a mortgage and had added the third mortgage.
- The lessee notified the owner it had reasonable grounds to require assurance that clear title would be perfected by the date the purchase option became exercisable and stated it would withhold the final charter installment until adequate assurance was provided.
- The owner provided no assurance and instead promptly sued to recover the withheld installment.
- After the option period opened, the lessee tendered the withheld installment and the option price conditioned on receiving merchantable title; the owner did not respond.
- Mortgagees later notified the lessee of impending foreclosure; the lessee purchased the first and second mortgages to protect its position.
- The lessee counterclaimed for breach of the obligation to provide merchantable title, seeking damages including the mortgage purchase cost and title to the tug.

## Issues

1. Whether the lessee had the right to withhold the final charter installment after reasonable grounds for insecurity arose regarding the owner’s ability to convey merchantable title upon option exercise.
2. Whether commercial-law principles permitting a demand for adequate assurance and suspension of performance applied to this lease-purchase maritime transaction absent a contrary agreement.

## Decision

- The Fifth Circuit reversed the district court’s judgment against the lessee.
- The court held the dispute was governed by U.C.C.-type commercial principles authorizing a party with reasonable grounds for insecurity to demand adequate assurance and suspend performance until assurance is received, absent a contrary contract term.
- The lessee’s withholding of the final installment was justified by the mortgage default and added encumbrance affecting expected title delivery.
- The owner’s failure to provide assurance and inability to assure clear title constituted the breach.
- The case was remanded with instructions to enter judgment for the lessee on its counterclaim for damages incurred in purchasing the mortgages (and related interest as appropriate).

## Legal Principles

- When reasonable grounds for insecurity arise as to the other party’s future performance, a party may demand adequate assurance of due performance and, if commercially reasonable, suspend its own performance pending receipt of assurance.
- A justified suspension of performance in response to a proper assurance demand is not repudiation.
- A contractual obligation to convey merchantable (clear) title supports an assurance demand when encumbrances and defaults create a commercially reasonable risk that title cannot be delivered as promised.
- Damages may include foreseeable expenditures reasonably incurred to protect the aggrieved party’s contractual position when the counterparty’s breach threatens performance.

## Conclusion

The court held that commercially reasonable insecurity about future delivery of merchantable title entitled the lessee-option holder to demand adequate assurance and withhold an installment pending assurance; the owner’s failure to reassure and failure to protect title was the breach, requiring judgment for the lessee’s mortgage-protection damages.


Clem Perrin Marine Towing, Inc. v. Panama Canal Co., 730 F.2d 186 (5th Cir. 1984)