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Norcon Power Partners, L.P. v. Niagara Mohawk Power Corp. - 92 N.Y.2d 458, 682 N.Y.S.2d 664, 705 N.E.2d 656 (1998)

Rule:

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. The obligee may treat as a repudiation the obligor's failure to provide within a reasonable time such assurance of due performance as is adequate in the circumstances.

Facts:

Appellant Niagara Mohawk Power Corporation (“Niagara Mohawk”), a public utility provider, entered into a contract with respondent Norcon Power Partners, L.P. (“Norcon”), an independent power producer for a 25-year period. In February 1994, Niagara Mohawk presented Norcon with a letter stating its belief that the latter would owe it approximately $610 million by the end of the second period. Anticipating that Norcon would not be able to satisfy the daily escalating credits in the third period, Niagara Mohawk demanded that Norcon provide adequate assurance to Niagara Mohawk that Norcon will duly perform all of its future repayment obligations. Norcon then sued Niagara Mohawk in the United States District Court, Southern District of New York, arguing that Niagara Mohawk had no contractual right under New York State law to demand adequate assurance, beyond security provisions negotiated and expressed in the agreement. Norcon sought a permanent injunction to stop Niagara Mohawk from anticipatorily terminating the contract based on the reasons described in the demand letter. The District Court granted Norcon’s motion for summary judgment, holding that the New York common law recognized the exceptional doctrine of demand for adequate assurance only when a promisor became insolvent, and also when the statutory sale of goods provision under UCC 2-609, was involved. The Second Circuit preliminarily agreed with the District Court. Niagara Mohawk sought review.

Issue:

May a party demand adequate assurance of future performance when reasonable grounds exist to believe that the obligor will commit a breach by non-performance, notwithstanding the fact that the obligor was solvent and the contract was not governed by the U.C.C.?

 

Answer:

Yes.

Conclusion:

The Court of Appeals answered this question, which involved New York contract law, in the affirmative: "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 contract governed by New York law, where the other party is solvent and the contract is not governed by the U.C.C.?"

With respect to a long-term commercial contract between corporate entities, which was governed by New York law, and was complex and not reasonably susceptible of all security features being anticipated, bargained for and incorporated in the original contract, the Court held that it was useful to recognize the extension of demand for adequate assurance, as a common-law analogue. As such, the Court averred that 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 the contract, even where the other party was solvent and the contract was not governed by the Uniform Commercial Code. The Court concluded that Niagara Mohawk was entitled to assurances when it demanded them because it was reasonable under the circumstances for it to demand assurances; as such, it was error for the lower courts to grant summary judgment to Norcon.

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