Norcon Power Partners LP v. Niagara Mohawk Power Corp.
92 N.Y.2d 458, 705 N.E.2d 656, 682 N.Y.S.2d 664 (1998)
Facts
Federal lawsuit that stemmed from a 1989 K between Norcon Power Partners (independent power producer) and Niagara Mohawk Power (public utility provider). Niagara was to purchase electricity generated at Norcon’s Penn. facility. The K was for 25 years.
Niagara pays Norcon six cents per Kilowatt-hour for electricity in the first period. In the second and third periods, the price paid by Niagara Mohawk is based on its avoided cost. (The avoided cost reflects the cost that Niagara Mohawk would incur to generate electricity itself or purchase it from other sources.) If the avoided cost falls below a certain price, Niagara is obligated to pay the floor price. If the avoided cost rises above a certain amount, Niagara only has to pay a ceiling price. In the third period, the price paid by Niagara is based on its avoided cost without any ceiling or floor price. Payments made by Niagara are then adjusted to account for any balance existing in the adjustment account from the second period. If the adjustment contains a balance in favor of Niagara, then the rate paid by Niagara would be reduced to reflect the credit; and, if the adjustment account contains a balance in favor of Norcon, Niagara must make increased payments to Norcon. The balance must be paid in full within 30 days of termination of the third period.
In 2/94, Niagara presented Norcon with a letter stating that substantial credits in Niagara’s favor would accrue in the adjustment account during the second pricing period. (Over 610 million). Anticipating that Norcon would not be able to satisfy the daily credits in the third period, Niagara demanded that Norcon provide adequate assurance to Niagara that Norcon will duly perform all of its future repayment obligations.
Norcon sued Niagara, seeking declaration that Niagara had no contractual right under NY state law to demand adequate assurance beyond security provisions negotiated and expressed in the agreement. Norcon also sought a permanent injunction to stop Niagara from anticipatorily terminating the K. Niagara counterclaimed that it properly invoked a right to demand adequate assurance of Norcon’s future payment performance of the K. The Dist Court granted Norcon’s motion for SJ, stating that the NY common law recognized the doctrine of demand for adequate assurance only when a promisor becomes insolvent, and also when the statutory sale of goods provision under UCC 2-609 is involved. DC ruled in favor of Norcon because neither exception applied.
Issue
Does a party have 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 K?
Holding/Rule
Yes. Where reasonable grounds arise to believe that the obligor will commit a breach by non-performance that would of itself give the obligee a claim for damages for total breach, the obligee may demand adequate assurance of due performance and may, if reasonable, suspend any performance for which he has not already received the agreed exchange until he receives such assurance.
Analysis
The doctrine of good faith and fair dealing apply.
UCC § 2-609 states the principle that the parties to a contract look to actual performance and that a continuing sense of reliance and security that the promised performance will be forthcoming when due, is an important feature of the bargain. It allows a party to a K for the sale of goods to demand assurance of future performance from the other party when reasonable grounds for insecurity exist. Rest. 2d of K §251 is modeled after the UCC in this regard.
The Court analogizes the facts to a sale of goods and uses the UCC basis. The reason is to put disputes at arms length without having to use the court for intervention.
The doctrine of demands for anticipatory repudiation is treated as anticipatory repudiation if the party does not give a satisfactory answer.
2 things can happen when someone doesn’t perform:
1) You can stop performance (equitable measure)
2) Sue for damages (remedy at law)
Under the facts of Norcon, if there was a change in the law that repeals the tax benefits (as an example) of Norcon as an independent provider of power, and both parties or even one know that Norcon will not be able to perform because of the change in the law (unanticipated), then adequate assurance can become anticipatory repudiation.
The court says that in long term corporate contracts, the doctrine applies, but not necessarily small K’s with a short time frame. Short term service contracts may not apply.
“Norcon’s performance, in terms of reimbursing Niagara Mohawk for credits, is still years away. In the meantime, potential quantifiable damages are accumulating and Niagara Mohawk must weigh the hard choices and serious consequences that the doctrine of demand for adequate assurance is designed to mitigate.”
Conclusion
Affirmed