Norcon Power Partners, L.P. v. Niagara Mohawk Power Corp., 92 N.Y.2d 456 (1998)
Under New York common law, a party to a complex, long-term commercial contract has the right to demand adequate assurance of future performance when reasonable grounds arise to believe the other party will breach, even if the contract is not governed by the Uniform Commercial Code (UCC) and the other party is solvent.
Summary
Norcon Power Partners and Niagara Mohawk Power Corporation entered into a 25-year contract for the purchase of electricity. After a few years, Niagara Mohawk projected substantial credits in its favor under the contract’s pricing terms and demanded assurance from Norcon that it could meet its future repayment obligations. Norcon sued, arguing Niagara Mohawk had no right to demand such assurance under New York law outside of insolvency or UCC Article 2 scenarios. The Second Circuit certified the question to the New York Court of Appeals, which held that in complex, long-term commercial contracts, a right to demand adequate assurance exists under common law, extending principles analogous to UCC § 2-609 to contracts outside the UCC’s scope.
Facts
In 1989, Norcon Power Partners, L.P. (Norcon) and Niagara Mohawk Power Corporation (Niagara Mohawk) entered into a 25-year contract where Niagara Mohawk would purchase electricity generated by Norcon. The contract contained three pricing periods with different rate calculation methods. In February 1994, Niagara Mohawk informed Norcon that it anticipated substantial credits in its favor, reaching over $610 million by the end of the second pricing period, and demanded assurance that Norcon would fulfill its future repayment obligations. Niagara Mohawk’s letter stated its belief, based on revised avoided cost estimates, that Norcon would be unable to satisfy the escalating credits in the third period.
Procedural History
Norcon sued Niagara Mohawk in the United States District Court, Southern District of New York, seeking a declaration that Niagara Mohawk had no contractual right to demand adequate assurance and a permanent injunction against Niagara Mohawk terminating the contract. Niagara Mohawk counterclaimed, seeking a declaration that it properly invoked a right to demand adequate assurance. The District Court granted summary judgment to Norcon, holding that New York law only recognized the right to demand adequate assurance in cases of insolvency or under UCC 2-609. The Second Circuit Court of Appeals certified the question of whether such a right exists under New York law for non-UCC contracts to the New York Court of Appeals.
Issue(s)
Whether a party has the right to demand adequate assurance of future performance when reasonable grounds arise to believe that the other party will commit a breach by non-performance of a contract governed by New York law, where the other party is solvent and the contract is not governed by the U.C.C.?
Holding
Yes, because in complex, long-term commercial contracts, a right to demand adequate assurance exists under common law, extending principles analogous to UCC § 2-609 to contracts outside the UCC’s scope.
Court’s Reasoning
The Court of Appeals recognized the evolution of the doctrine of demands for adequate assurance from the doctrine of anticipatory repudiation. The court acknowledged that UCC 2-609 provides a mechanism for demanding assurance in contracts for the sale of goods, and that this has been effective in quieting doubts and allowing non-breaching parties to take timely action. While New York had previously refrained from expanding this right beyond the UCC and insolvency, the court was persuaded to extend the policy underlying UCC 2-609 to complex, long-term commercial contracts. The court reasoned that the problems addressed by UCC 2-609 are not unique to contracts for the sale of goods. It noted that the Restatement (Second) of Contracts § 251 also recognizes this development. The court emphasized its preference for incremental common-law development. The court drew an analogy between the present contract and a contract for the sale of goods, noting that if the contract were for oil instead of electricity, UCC 2-609 would apply. The court found this extension prudent because it places commercial parties at “arm’s length equilibrium.” The court limited its holding to the specific type of contract before it—a long-term commercial contract between corporate entities that is complex and not reasonably susceptible of all security features being anticipated.