## Facts

- Norcon Power Partners, L.P., an independent power producer, and Niagara Mohawk Power Corp., a regulated utility, entered a 25-year power purchase agreement in 1989.
- The contract set an initial fixed price, then shifted to pricing tied to Niagara’s “avoided cost,” with over/underpayments tracked in an “Adjustment Account.”
- Any remaining Adjustment Account balance at the end of the final period would be payable in full within 30 days by the party owing it.
- By the early 1990s, the pricing structure led Niagara to pay above prevailing avoided cost, creating large projected credits in Niagara’s favor.
- In 1994, Niagara asserted the credits could exceed $610 million and demanded adequate assurance that Norcon would be able to repay the balance when due.
- Norcon sued in federal court for a declaration that Niagara had no right to demand assurance under New York law and to prevent anticipatory termination; Niagara counterclaimed for a declaration supporting its demand.
- The federal district court granted summary judgment to Norcon, concluding adequate assurance was available only under the U.C.C. or, at common law, in insolvency settings.
- The Second Circuit certified to the New York Court of Appeals whether New York common law permits adequate assurance demands in non-U.C.C. contracts when the allegedly insecure party has reasonable grounds and the counterparty is solvent.

## Issues

1. Whether New York common law permits a party to a non-U.C.C. contract to demand adequate assurance of future performance upon reasonable grounds for insecurity when the counterparty is solvent.
2. If so, whether the doctrine should be confined to a limited class of contracts or recognized as a general rule for non-U.C.C. agreements.

## Decision

- The Court of Appeals answered the certified question “yes,” but limited the doctrine’s extension.
- New York common law permits demands for adequate assurance, by analogy to U.C.C. § 2-609, in certain complex, long-term commercial contracts not governed by the U.C.C.
- The Court emphasized the rule’s narrow scope, targeting sophisticated parties in long-term arrangements with performance risks and deferred obligations that cannot reasonably be fully secured at contract formation.
- The Court did not decide whether Niagara’s demand was justified on the record; it returned the matter for application of the stated rule.

## Legal Principles

- In New York, a party with reasonable grounds for insecurity may demand adequate assurance of future performance in certain non-U.C.C. contracts.
- The common-law adequate assurance doctrine is recognized as an incremental extension of contract law, informed by the policy of U.C.C. § 2-609.
- The doctrine’s extension is limited to complex, long-term commercial contracts between sophisticated entities where future performance risks and consequences cannot reasonably be fully anticipated or collateralized at inception.
- In appropriate cases, failure to provide adequate assurance after a justified demand may be treated as a repudiation.

## Conclusion

New York common law allows a party to demand adequate assurance of future performance outside the U.C.C. when reasonable grounds for insecurity arise, but the right is confined to complex, long-term commercial contracts between sophisticated parties; application to the parties’ specific conduct was left to the federal courts.


Norcon Power Partners, L.P. v. Niagara Mohawk Power Corp., 92 N.Y.2d 458 (N.Y. 1998)