In 1989, Niagara Mohawk Power Corporation ("Niagara"), a public utility, contracted with Norcon Power Partners ("Norcon"), an independent power producer, to purchase the electricity Norcon produced at its Pennsylvania facility. The way the contract was structured during this time period, Niagara had to pay more than the market price for this electricity, accumulating a positive balance with Norcon. In the final period of the contract, Niagara's payments were to be adjusted to account for balances that accrued in the previous period. If, at the end of the final period, a balance existed, "the party owing the balance must pay the balance in full within thirty days." The anticipated credit in their favor was so large that Niagara demanded adequate assurance from Norcon that it would perform all of its future repayment obligations. Norcon brought suit in the Federal District Court for the Southern District of New York to seek a declaration that Niagara had no contractual right under New York law to demand such adequate assurance, and sought an injunction to stop Niagara from anticipatorily terminating the contract for lack of adequate assurance. Niagara counterclaimed, seeking a declaration that it properly invoked the right to adequate assurance. The district court granted Norcon's motion for summary judgment. On appeal, the Second Circuit Court of Appeals certified the question to the Court of Appeals for a determination regarding the correct application of New York State law.
Whether, under New York law, a party to a contract not governed by the UCC has the right to demand adequate assurance of future performance when reasonable grounds arise to believe that the other party, although solvent, will commit a breach by non-performance of a contract.
Yes. The doctrine of demand for adequate assurance is extended to apply to complex, long-term commercial contracts between two corporate entities where all potential consequences cannot be foreseen, bargained for, or incorporated into the contract.
The doctrine of demands for adequate assurance evolved from the doctrine of anticipatory repudiation. See Larry T. Garvin, Adequate Assurance of Performance: Of Risk, Duress, and Cognition, 69 U. Colo. L. Rev. 71, 77 (1998). Under the doctrine of anticipatory repudiation, the obligee (here, Niagara) may repudiate the contract where the obligor (here, Norcon), through statement or action, indicates that the obligor will breach the contract. See Restatement (2d) of Contracts § 250 (1979). This repudiation allows the obligee to claim damages for total breach prior to the time designated for performance. See Long Is. R.R. v. Northville Indus. Corp., 41 N.Y.2d 455, 463 (N.Y. App. Div. 1976). Unfortunately, the words and actions of the obligor are not always clear enough to allow the obligee to safely choose to not perform, resulting in the obligee's liability for nonperformance. In order to relieve some of this uncertainty, the Uniform Commercial Code and the Second Restatement of Contracts established the right of a party to a contract for the sale of goods to demand adequate assurance when reasonable grounds for insecurity exist. See U.C.C. § 2-609 (1997); Restatement (2d) of Contracts § 251 (1979). Some states, realizing the importance of providing the doctrine of demands for adequate assurance, extended the doctrine to apply to all contracts, and not just those for the sale of goods. See, e.g., Carfield & Sons v. Cowling, 616 P.2d 1008 (Colo. App. 1980); L.E. Spitzer Co. v. Barron, 581 P.2d 213 (Alaska 1978); Drinkwater v. Patten Realty Corp., 563 A.2d 772 (Me. 1989); Jonnet Dev. Corp. v. Dietrich Indus., 463 A.2d 1026 (Pa. Super. 1983). Before this case, New York only recognized the right to demand adequate assurance of performance when the contract was for the sale of goods or when the party was insolvent. See Sterling Power Partners v. Niagara Mohawk Power Corp., 657 N.Y.S.2d 407 (N.Y. App. Div. 1997); Hanna v. Florence Iron Co. of Wisconsin, 222 N.Y. 290 (N.Y. 1918).
Effect of Norcon Power on Current Law
The Norcon Power Court refused to expand the doctrine of demand for adequate assurance beyond the specific case at hand to a universal application of the doctrine, referring to its tradition of cautious, incremental common law development. See Norcon Power, section IV. However, the court did extend the doctrine beyond the prior understanding under New York law that the doctrine applied only to insolvent parties or to contracts governed by the U.C.C. The Court of Appeals recognized that there are contracts that are not governed by the U.C.C. but that are so complex that unforeseen consequences may arise. The doctrine of adequate assurance was thus extended to these contracts to allow mitigation of potential damages. The Court chose to apply this doctrine in the instant case because all of the necessary security features of the contract could not be anticipated, bargained for, and incorporated into the original contract.
How will this decision be applied to other contracts governed by New York Law and not governed by the U.C.C.? The Court of Appeals fails to indicate whether the characteristics of the Norcon contract discussed, the fact that it was a complex long-term contract, were dispositive. In other words, are there other complex contracts that would be covered by this holding even if they are of shorter duration, or other long-term contracts that would fall into this category even if less complex in nature. The Court also fails to articulate whether the consequences requiring assurance must be unforeseen or unforeseeable at the time of the negotiation of the original contract. Finally, the Court suggests but does not definitively state that the expansion of the doctrine of demand for adequate assurance articulated in this case may only apply to contracts entered into by corporate entities. It is unclear whether the Court would consider extending the doctrine further to contracts between non-corporate entities or between a corporate entity and a non-corporate entity or person.
In Lo Re v. Tel-Air Communications, 490 A.2d 344, 350-51 (N.J. Super. Ct. App. Div. 1985) the Appellate Division of the Superior Court of New Jersey found that a party to a non-sales contract could be in breach of that contract for failure to fulfill a request for assurance of performance. Although a 30-day statutory requirement existed for sales contracts, the court found that in non-sales contracts, a party need only respond to a request for assurance within a reasonable time.
The Connecticut Supreme Court has held that any party with reasonable grounds for insecurity may demand adequate assurance of performance and failure to respond to this request within a reasonable time will to be treated as repudiation of the contract. The Court found that the principals outlined in § 2-609 of the U.C.C. and § 251 of the Restatement (2d) of Contracts were not just limited to contracts for the sale of goods. See Conference Ctr Ltd. v. TRC-The Research Corp. of New England, 455 A.2d 857, 864 (Conn. 1983).
The Colorado Court of Appeals has required that a party demand adequate assurance of performance before treating a contract as terminated. Even if a reasonable belief exists that the contract had been breached, a party cannot treat it as repudiated until the other party has refused to provide assurance. See Carfield & Sons, Inc. v. Cowling, 616 P.2d 1008, 1010 (Colo. Ct. App., 1980).