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

• Decision Date: 01 December 1998
• Citation: 92 N.Y.2d 458,705 N.E.2d 656,682 N.Y.S.2d 664
• Parties: , 705 N.E.2d 656, 1998 N.Y. Slip Op. 10,518 NORCON POWER PARTNERS, L.P., Respondent, v. NIAGARA MOHAWK POWER CORP., Appellant.
• Court: New York Court of Appeals Court of Appeals

Page 664

682 N.Y.S.2d 664

92 N.Y.2d 458, 705 N.E.2d 656, 1998

N.Y. Slip Op. 10,518

NORCON POWER PARTNERS, L.P., Respondent, v. NIAGARA MOHAWK POWER CORP., Appellant.

Court of Appeals of New York.

Dec. 1, 1998.

Swidler & Berlin, Chartered (John R. Ferguson and Timothy A. Ngau, of the District of Columbia Bar, admitted pro hac vice, of counsel), Lankenau, Kovner & Kurtz, L.L.P., New York City (Sharon L. Schneier of counsel), Paul J. Kaleta, Syracuse, and Brian K. Billinson for appellant.

Chadbourne & Parke, L.L.P., New York City (Thomas J. Hall, Brian A. Miller and Christine P. Searl of counsel), for respondent.

Lawrence G. Malone, Albany, and Jonathan D. Feinberg for Public Service Commission of the State of New York, amicus curiae.

OPINION OF THE COURT

BELLACOSA, J.

The doctrine, known as demand for adequate assurance of future performance, is at the heart of a Federal lawsuit that stems from a 1989 contract between Norcon Power Partners, L.P., an independent power producer, and Niagara Mohawk Power Corporation, a public utility provider. Niagara Mohawk undertook to purchase electricity generated at Norcon's Pennsylvania facility. The contract was for 25 years, but the differences emerged during the early years of the arrangement.

The case arrives on this Court's docket by certification of the substantive law question from the United States Court of Appeals for the Second Circuit. Our Court is presented with an open issue that should be settled within the framework of New York's common-law development. We accepted the responsibility to address this question involving New York contract law:

"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.?" (Norcon Power Partners v. Niagara Mohawk Power Corp., 110 F.3d 6, 9 (2nd Cir.1997).)

As framed by the particular dispute, we answer the law question in the affirmative with an appreciation of this Court's traditional common-law developmental method, and as proportioned to the precedential sweep of our rulings.

I.

The Second Circuit Court of Appeals describes the three pricing periods, structure and details as follows:

"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" (Norcon Power Partners v. Niagara Mohawk Power Corp., 110 F.3d 6, 7, supra ).

In February 1994, Niagara Mohawk presented Norcon with a letter stating its belief, based on revised avoided cost estimates, that substantial credits in Niagara Mohawk's favor would accrue in the adjustment account during the second pricing period. "[A]nalysis shows that the Cumulative Avoided Cost Account * * * will reach over $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 promptly sued Niagara Mohawk in the United States District Court, Southern District of New York. It sought a declaration 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 also sought a permanent injunction to stop Niagara Mohawk from anticipatorily terminating the contract based on the reasons described in the demand letter. Niagara Mohawk counterclaimed. It sought a counter declaration that it properly invoked a right to demand adequate assurance of Norcon's future payment performance of the contract.

The District Court granted Norcon's motion for summary judgment. It reasoned that New York common law recognizes the exceptional 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. Thus, the District Court ruled in Norcon's favor because neither exception applied, in fact or by analogy to the particular dispute (decided sub nom. Encogen Four Partners v. Niagara Mohawk Power Corp., 914 F.Supp. 57 (S.D.N.Y.1996)).

The Second Circuit Court of Appeals preliminarily agrees (110 F.3d 6, supra ) with the District Court that, except in the case of insolvency, no common-law or statutory right to demand adequate assurance exists under New York law which would affect non-UCC contracts, like the instant one. Because of the uncertainty concerning this substantive law question the Second Circuit certified the question to our Court as an aid to its correct application of New York law, and with an eye toward settlement of the important precedential impact on existing and future non-UCC commercial law matters and disputes.

II.

Our analysis should reference a brief review of the evolution of the doctrine of demands for adequate assurance. Its roots spring from the doctrine of anticipatory repudiation (see, Garvin, Adequate Assurance of Performance: Of Risk, Duress, and Cognition, 69 U. Colo. L. Rev. 71, 77 [1998] ). Under that familiar precept, when a party repudiates contractual duties "prior to the time designated for performance and before" all of the consideration has been fulfilled, the "repudiation entitles the nonrepudiating party to claim damages for total breach" (Long Is. R.R. Co. v. Northville Indus. Corp., 41 N.Y.2d 455, 463, 393 N.Y.S.2d 925, 362 N.E.2d 558; see, II Farnsworth, Contracts § 8.20; Restatement [Second] of Contracts § 253; UCC 2-610). A repudiation can be either "a statement by the obligor to the obligee indicating that the obligor will commit a breach that would of itself give the obligee a claim for damages for total breach" or "a voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach" (Restatement [Second] of Contracts § 250; see, II Farnsworth, Contracts § 8.21; UCC 2-610, Comment 1).

That switch in performance expectation and burden is readily available, applied and justified when a breaching party's words or deeds are unequivocal. Such a discernible line in the sand clears the way for the nonbreaching party to broach some responsive action. When, however, the apparently breaching party's actions are equivocal or less certain, then the nonbreaching party who senses an approaching storm cloud, affecting the contractual performance, is presented with a dilemma, and must weigh hard choices and serious consequences. One commentator has described the forecast options in this way:

"If the promisee regards the apparent repudiation as an anticipatory repudiation, terminates his or her own performance and sues for breach, the promisee is placed in jeopardy of being found to have breached if the court determines that the apparent repudiation was not sufficiently clear and unequivocal to constitute an anticipatory repudiation justifying nonperformance. If, on the other hand, the promisee continues to perform after perceiving an apparent repudiation, and it is subsequently determined that an anticipatory repudiation took place, the promisee may be denied recovery for post-repudiation expenditures because of his or her failure to avoid those expenses as part of a reasonable effort to mitigate damages after the repudiation" (Crespi, The Adequate Assurances Doctrine after U.C.C. § 2-609: A Test of the Efficiency of the Common Law, 38 Vill. L. Rev. 179, 183 [1993]; see, Robertson, The Right to Demand Adequate Assurance of Due Performance: Uniform Com Code Section 2-609 and Restatement [Second] of Contracts Section 251, 38 Drake L. Rev. 305, 310 [1988-1989]; Dowling, A Right to Adequate Assurance of Performance in All Transactions: U.C.C. § 2-609 Beyond Sales of Goods, 48 S Cal. L. Rev. 1358, 1358-1360, 1386-1387 [1975]; II Farnsworth, Contracts § 8.23a).

III.

The Uniform Commercial Code settled on a mechanism for relieving some of this uncertainty. It allows a party to a contract for the sale of goods to demand assurance of future performance from the other party when reasonable grounds for insecurity exist (see, UCC 2-609; II Farnsworth, Contracts § 8.23)....