Norcon Power Partners, L.P. v. Niagara Mohawk Power Corp.

• Decision Date: 26 March 1997
• Docket Number: No. 367,D,367
• Citation: 110 F.3d 6
• Parties: 32 UCC Rep.Serv.2d 833 NORCON POWER PARTNERS, L.P., Plaintiff-Counter-Defendant-Appellee, v. NIAGARA MOHAWK POWER CORP., Defendant-Counter-Claimant-Appellant. ocket 96-7283.
• Court: U.S. Court of Appeals — Second Circuit

Page 6

110 F.3d 6

32 UCC Rep.Serv.2d 833

NORCON POWER PARTNERS, L.P., Plaintiff-Counter-Defendant-Appellee, v. NIAGARA MOHAWK POWER CORP., Defendant-Counter-Claimant-Appellant.

No. 367, Docket 96-7283.

United States Court of Appeals,Second Circuit.

March 26, 1997.

Present: FEINBERG, WALKER, and JACOBS, Circuit Judges.

ORDER

This is an appeal from a judgment of the United States District Court for the Southern District of New York, John E. Sprizzo, District Judge, declaring, inter alia, that appellant has no right to demand additional security or other adequate assurances of the performance of appellee's contractual obligations. On consideration of the briefs, appendix, record, and the oral argument in this appeal, it is hereby ORDERED that the Clerk of this court transmit to the Clerk of the New York Court of Appeals a certificate in the form attached, together with a complete copy of the briefs, appendix and record filed by the parties with this court. This panel retains jurisdiction so that, after we receive a response from the New York Court of Appeals, we may dispose of the appeal.

Certificate to the New York Court of Appeals pursuant to Second Circuit Local Rule § 0.27 and New York Court of Appeals Rule § 500.17.

In March 1994, Norcon Power Partners, L.P. ("Norcon"), brought an action against Niagara Mohawk Power Corporation ("Niagara Mohawk") seeking declaratory and injunctive relief to prevent Niagara Mohawk from terminating a contract for the sale of power from Norcon to Niagara Mohawk. Norcon, a Delaware limited partnership, is an independent power producer that owns and operates a power plant located in Erie, Pennsylvania. In 1989, Niagara Mohawk and Norcon entered into a long term contract obligating Niagara Mohawk to purchase electricity produced at Norcon's power plant. The contract, as amended in 1991, is divided into three pricing periods.

In the first period, Niagara Mohawk pays Norcon six cents per kilowatt-hour for electricity. 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. In the second period, if the avoided cost falls below a certain floor price (calculated according to a formula), Niagara Mohawk is obligated to pay the floor price. By the same token, if the avoided cost rises above a certain amount (calculated according to a formula), Niagara Mohawk's payments are capped by a ceiling price. An "adjustment account" tracks the difference between payments actually made by Niagara Mohawk in the second period and what those payments would have been if based solely on Niagara Mohawk's avoided cost.

In the third period, the price paid by Niagara Mohawk is based on its avoided cost without any ceiling or floor price. Payments made by Niagara Mohawk in the third period are adjusted to account for any balance existing in the adjustment account that operated in the second period. If the adjustment account contains a balance in favor of Niagara Mohawk--that is, the payments actually made by Niagara Mohawk in the second period exceeded what those payments would have been if based solely on Niagara Mohawk's avoided cost--then the rate paid by Niagara Mohawk will be reduced to reflect the credit. If the adjustment account contains a balance in favor of Norcon, Niagara Mohawk must make increased payments to Norcon. If a balance exists in the adjustment account at the end of the third period, the party owing the balance must pay the balance in full within thirty days of the termination of the third period.

In February 1994, Niagara Mohawk sent Norcon a letter ("Demand Letter") expressing Niagara Mohawk's belief that "due to changes in economic conditions" since the contract was signed, "Norcon cannot and will not perform its repayment obligations in the later years of the [contract]." According to the Demand Letter, Niagara Mohawk believed that studies based on new avoided cost estimates demonstrated that the adjustment account will accumulate substantial credits in the second pricing period in favor of Niagara Mohawk. Niagara Mohawk claimed that Norcon will be unable to repay the credits due Niagara Mohawk in the third period. In order to prevent this possible loss to Niagara Mohawk, the Demand Letter requested that "Norcon provide adequate assurance to Niagara Mohawk that Norcon will duly perform all of its future repayment obligations."

Norcon initiated this suit to obtain a declaratory judgment that Niagara Mohawk has no right to demand any adequate assurance beyond what is provided for in the contract. Norcon also requested a permanent injunction to enjoin Niagara Mohawk from terminating the contract for the reasons set forth in the Demand Letter. Niagara Mohawk counterclaimed, seeking a declaratory judgment that it properly exercised its rights to demand adequate assurance of Norcon's future performance.

The district court rejected Niagara Mohawk's argument that, under New York common law, a party to a contract may demand adequate assurance of future performance, and then treat the failure to provide the assurance as the repudiation of the contract. See Encogen Four Partners v. Niagara Mohawk Power Corp., 914 F.Supp. 57, 60, 63 (S.D.N.Y.1996). The district court found that "no such right exists under New York common law." Id. at 60-61. Niagara Mohawk also relied on § 2-609 of the Uniform Commercial Code ("U.C.C."), which allows a party to demand adequate assurance of future performance, to argue that New York courts apply the principle underlying § 2-609 to contracts not governed by the U.C.C. The district court found no basis in New York statutory or common law supporting Niagara Mohawk's position and held, inter alia, that Niagara Mohawk had no right to demand adequate assurance from Norcon. See Encogen, 914 F.Supp. at 63.

On appeal, Niagara Mohawk argues that the New York Court of Appeals would recognize the right to demand adequate assurance of future performance in contracts similar to the one at issue in this case.

The traditional common law rule in New York is that a party has no right to demand adequate assurance of performance. See Schenectady Steel Co. v. Bruno Trimpoli Gen. Constr. Co., 43 A.D.2d 234, 236, 350 N.Y.S.2d 920 (3d Dep't) ("at common law no such duty to provide adequate assurances existed"), aff'd on other grounds, 34 N.Y.2d 939, 941, 359 N.Y.S.2d 560, 316 N.E.2d 875 (1974); O'Shanter Resources, Inc. v. Niagara Mohawk Power Corp., 915 F.Supp. 560, 566 (W.D.N.Y.1996); Elliott Assocs. v. Bio-Response, Inc., Civ.A.No. 10624, 1989 WL 55070, at * 3, reargument denied, 1989 WL 72028, at * 1 (Del.Ch.1989); E. Allan Farnsworth, Contracts § 8.23 (2d ed.1990). There is an exception to this rule. If a promisor becomes insolvent, the promisee may request adequate assurance of future performance from the promisor. See Pardee...