## Facts

- Magnet Resources, Inc. provided preventive maintenance and emergency repair services for magnetic resonance imaging equipment.
- Magnet Resources entered into a multi-year service contract with Summit MRI, Inc. at \$120,000 for the first year and \$150,000 for each year thereafter.
- The contract required Summit to pay monthly in advance (after an initial period), but Summit’s payments were often late and multiple checks were dishonored.
- By December 20, 1994, Summit was in arrears by approximately \$35,000.
- On December 20, 1994, Summit requested service work that was not covered by the contract.
- Magnet Resources initially refused to perform the non-covered work, but then performed it after Summit promised to pay the outstanding balance by the end of that week.
- By December 27, 1994, Summit still had not paid the past-due amounts, and Magnet Resources refused Summit’s further service request that day.
- Magnet Resources declared that it was suspending service until Summit paid the arrears or made satisfactory arrangements for payment.
- Summit then cancelled the contract, taking the position that Magnet Resources’ suspension of service was a breach.
- Magnet Resources sued Summit for breach of contract and asserted additional claims against individual defendants and an affiliated entity; Summit counterclaimed for breach of contract.
- Before trial, the court dismissed claims against the individual defendants (and related entity) on summary judgment and entered partial summary judgment for Magnet Resources for \$6,800.
- After trial, the jury found both parties breached, awarding Magnet Resources \$492,320 and Summit \$18,470.
- Both parties appealed.

## Issues

1. Whether, in a non-UCC service contract, a party that reasonably deems itself insecure because the other party may materially breach may demand adequate assurances and suspend its own performance pending receipt of those assurances.
2. Whether a plaintiff seeking lost profits for breach of a service contract may include fixed overhead and other fixed costs in the lost-profit measure, and what proof is required.
3. Whether alleged trial errors (including the jury instructions on breach/damages, mitigation, and rulings related to proof of overhead) required reversal of either party’s award.

## Decision

- The Appellate Division held that general contract law permits a party that reasonably feels insecure about the other side’s performance to demand adequate assurances and to suspend performance while awaiting them.
- The court concluded that Magnet Resources’ suspension of service, if based on reasonable insecurity stemming from Summit’s payment history and unpaid arrears, was not itself a breach merely because performance was withheld pending assurances.
- The court held that lost-profit damages may include fixed overhead and similar fixed costs when the evidence supports that the costs are truly fixed and the allocation to the lost contract is reasonable.
- The court upheld the trial court’s management of the damages proof, including permitting additional testimony to address whether overhead was fixed, and rejected challenges that would have required judgment notwithstanding the verdict on Magnet Resources’ damages.
- The court affirmed the judgment in favor of Magnet Resources.
- The court set aside Summit’s award on its counterclaim and remanded for further proceedings consistent with the appellate ruling.
- The summary-judgment dismissal of Magnet Resources’ claims against the individual defendants and the affiliated entity remained in place.

## Legal Principles

- Outside Article 2 of the UCC, a party may invoke an adequate-assurances concept as a matter of common-law contract doctrine when the party has reasonable grounds to believe the other side may commit a material breach.
- A party with reasonable grounds for insecurity may suspend its own performance while awaiting adequate assurances, and that suspension is not automatically treated as anticipatory repudiation.
- Lost profits may be recovered as expectation damages when proven with reasonable certainty.
- Fixed overhead and other fixed costs may be included in lost-profit calculations if the claimant shows the costs would have been incurred regardless of the breached contract and provides a reasonable basis to allocate them.
- Trial-court rulings on the order and scope of proof (including allowing a party to reopen to supply additional damages evidence) are generally reviewed for abuse of discretion.
- Challenges to jury instructions not raised at trial are reviewed under a plain-error standard, focusing on whether the instructions as a whole were capable of producing an unjust result.

## Conclusion

Magnet Resources v. Summit MRI holds that, even in a service-contract setting, a contractor faced with a customer’s serious payment problems may demand adequate assurances and suspend performance while awaiting them, and that lost-profit damages may include properly proven fixed overhead; applying those rules, the Appellate Division upheld Magnet Resources’ recovery while setting aside Summit’s counterclaim award and remanding for further proceedings.


Magnet Resources, Inc. v. Summit MRI, Inc., 723 A.2d 976 (1998)