By letter dated February 4, 1994, Niagara Mohawk communicated its refusal to perform its obligations under the Encogen Agreement unless it receives adequate assurances of Encogen's ability to perform its repayment obligations under the Encogen Agreement. First Am. Comp., Exh. B. Id., P 37-38. Niagara Mohawk also asserts that the electricity delivered by Encogen was in excess of that which it had agreed to purchase under the Encogen Agreement. Ans. P 43. Therefore, Niagara claims it is not contractually obligated to purchase the electricity at the contract rate. Id.
By letter dated March 4, 1994, Encogen responded that it intended to continue to perform its obligations pursuant to the terms of the Encogen Agreement. Ans. P 55; First Am. Comp. P 45. Encogen filed the instant action for breach of contract seeking damages in an amount in excess of $ 1.075 million plus interest and punitive damages. Encogen also seeks a declaratory judgment that 1) Niagara has no grounds for reasonable insecurity as to Encogen's ability to perform its obligations under the Encogen Agreement, First Am. Comp. P 53, 2) Niagara has no right to demand adequate assurances of its future performances from Encogen, id., 3) the assurances sought are unreasonable, id., and 4) Niagara does not have the right to terminate the Encogen Agreement. Id.
On April 4, 1994, Niagara Mohawk filed an answer and counterclaim seeking a declaratory judgment that 1) Niagara Mohawk is reasonably insecure with respect to Encogen's future performance of its obligations under the Encogen Agreement, Ans. P 67, 2) Niagara Mohawk properly exercised its right to demand such adequate assurances in the February 1994 letter to Encogen, id., 3) Encogen's March 1994 letter fails to provide adequate assurances of its future performance, id., 4) Encogen's failure to provide adequate assurances of its future performance constitutes a repudiation of the Encogen Agreement, id., and 5) by reason of Encogen's repudiation, Niagara Mohawk is entitled to cease its performance under the Encogen Agreement.
Pursuant to Fed. R. Civ. P. 12(c), Encogen moves for judgment on the pleadings dismissing Niagara Mohawk's counterclaim, which seeks declaratory judgment that Niagara Mohawk has the right to demand adequate assurances of Encogen's ability to perform the contract. Pursuant to Fed. R. Civ. P. 56, NorCon moves for summary judgment on the ground, inter alia, that Niagara Mohawk has no right to demand, and Encogen has no obligation to provide, additional assurances of performance.
In its principal argument, Niagara Mohawk claims that New York common law provides it the right to demand adequate assurances of Encogen's ability to perform its contractual obligations.
However, no such right exists under New York common law. 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), aff'd, 34 N.Y.2d 939, 359 N.Y.S.2d 560, 316 N.E.2d 875 (1974) ("at common law no such duty to provide adequate assurances existed") (citing 2 Anderson U.C.C. [2d ed.] § 2-609:3), aff'd on other grounds, 34 N.Y.2d 939, 359 N.Y.S.2d 560, 316 N.E.2d 875 (1974); Elliott Assoc. v. Bio-Response, Inc., 1989 Del. Ch. LEXIS 63, *7-9 (May 23, 1989), aff'd, C.A. No. 10,624, 1989 Del. Ch. LEXIS 73, at *2-3, (June 21, 1989)(same)(applying New York law); CALAMARI & PERILLO, THE LAW 0F CONTRACTS, § 12-2 at 518 (3d ed. 1987) ("U.C.C. § 2-609 introduced into the law the notion that where a party to a contract is guilty of serious prospective inability or unwillingness to perform, the other may make a demand for 'adequate assurances of due performance.' There was no such common law procedure."). Indeed, New York courts have strictly adhered to the common law rule, absent one narrowly defined circumstance, not applicable to this case.
Niagara Mohawk also argues that section 2-609 of the Uniform Commercial Code ("U.C.C.") provides the right to demand adequate assurances of future performance.
Under New York law, however, the sale of electricity does not constitute a sale of goods, but a service. See United States v. Consol. Ed., Inc., 590 F. Supp. 266, 269 (S.D.N.Y. 1984); Bowen v. Niagara Mohawk Power Corp., 183 A.D.2d 293, 590 N.Y.S.2d 628, 631 (4th Dep't 1992) ("the provision of electricity is a service, not the sale of a product"); Farina v. Niagara Mohawk Power Corp., 81 A.D.2d 700, 701, 438 N.Y.S.2d 645 (3d Dep't. 1981) (same). Thus, the U.C.C. does not govern contracts, such as the Encogen Agreement, involving the sale of electricity. See Consol. Ed., 590 F. Supp. at 269 ("in New York, electricity is not considered 'goods' and the U.C.C. therefore is not directly applicable to contracts involving the provision of electricity"); Farina, 81 A.D.2d at 701 (same).
Niagara Mohawk's reliance on case authority in which New York Courts have applied U.C.C. § 2-609 outside the code context is misplaced. In those cases, the courts employed other provisions of the U.C.C. to illuminate a comparable common law rule already in existence.
See, e.g., Teachers Ins. & Annuity Ass'n of America v. Coaxial Communications, Inc., 807 F. Supp. 1155, 1159 (S.D.N.Y. 1992) (discussing right, under New York common law and U.C.C. § 2-610, to suspend performance upon repudiation by other party to contract); CBS v. Ziff-Davis Publishing Co., 75 N.Y.2d 496, 506, 554 N.Y.S.2d 449, 553 N.E.2d 997 (Ct. App. 1990) ("analogy to [U.C.C. 2-607] is 'instructive'" in determining breach of express warranty under New York common law in non-goods context). However, there is no comparable existing common law right to demand adequate assurances which can be illuminated by any analogy set forth in U.C.C. § 2-609.
It follows that the U.C.C. does not provide Niagara Mohawk the right to demand from Encogen adequate assurances of its ability to perform under the Encogen Agreement. Indeed, Niagara Mohawk has, on more than one occasion, successfully urged New York courts to hold that the U.C.C. does not apply to contracts involving the sale of electricity. See Farina, 81 A.D.2d at 701; Zoller v. Niagara Mohawk, 137 A.D.2d 947, 525 N.Y.S.2d 364, 367 (A.D. 3 Dep't 1988); c.f. Bowen, 590 N.Y.S.2d at 631 (Niagara Mohawk successfully argued electricity is service and not product subject to strict products liability).
Niagara Mohawk further argues that § 251 of the Restatement (Second) of Contracts creates the right to demand adequate assurances under New York law,
However, here too, the contention is unsupported by the cases relied on, in which New York Courts used various sections of the Restatement to clarify or illuminate contract principles already recognized under New York common law. See, e.g., Marvel Entertainment Group, Inc. v. ARP Films, Inc., 684 F. Supp. 818, 820-21 (S.D.N.Y. 1988) (refusing, in dictum, to adopt § 251 as law of New York); Fourth Ocean Putnam Corp. v. Interstate Wrecking Co., 66 N.Y.2d 38, 44, 495 N.Y.S.2d 1, 5, 485 N.E.2d 208 (1985) (Restatement § 313(2) "state[s] the essence of the prior holdings of this court" relating to third party beneficiaries to a contract); Teachers Ins. & Annuity Ass'n, 807 F. Supp. at 1159 (Restatement §§ 237, 240-42 employed to illuminate existing common law rules of repudiation and anticipatory breach). The Restatement, however, is not the substantive law of New York and creates no rights not already incorporated by New York statutory and common law.
Niagara Mohawk further contends that the right to demand adequate assurances is a corollary to the prohibition under New York regulatory law against electricity rates set by the PSC that "would result in a substantial overcharge to [the utility's] rate payers." Long Island Lighting Co. v. Pub. Serv. Comm'n, 199 A.D.2d 831, 833, 606 N.Y.S.2d 406 (3d Dep't 1993), because to refuse to require such security would allow cogeneration facilities such as Encogen to overcharge state rate payers in contravention of the requirement of "just and reasonable rates." PSL § 66-c. However, in enacting PURPA, Congress provided a comprehensive statutory structure covering administrative rule-making, the setting of utility rates, commission enforcement and judicial review and enforcement. PURPA § 824a-3. Likewise, the New York legislature enacted a detailed scheme promoting conservation of energy and the development of alternate energy sources by, inter alia, specifying rate-making and financing mechanisms. PSL § 66-c. Notwithstanding that comprehensive regulatory scheme, neither Congress nor the New York legislature created a right to demand adequate assurances where an otherwise approved rate might, in the distant future, prove economically disadvantageous to the utility purchaser.
Moreover, although the parties foresaw the risk of accumulation in the adjustment account, the Encogen Agreement provides that "Niagara's exclusive remedy for [Encogen's] failure to pay the balance of the adjustment Account is to foreclose its lien upon the [Encogen] plant." Encogen Agreement P 9 (emphasis added). In light of the legislative decision not to provide the right to demand adequate assurances, Niagara Mohawk's failure to cite any relevant legal authority thereof and the parties' failure to contractually provide for such a right, the Court sees no reason to depart from established New York common law.
For the reasons stated above, Encogen's motion pursuant to Fed. R. Civ. P. 12(c) for judgment on the pleadings dismissing Niagara Mohawk's counterclaim shall be and hereby is granted. NorCon's motion for summary judgment pursuant to Fed. R. Civ. P. 56 shall be and hereby is granted on the issue of Niagara Mohawk's right to demand adequate assurances and denied without prejudice as to the remaining issues. The parties are directed to appear before this Court for a Pre-Trial Conference on February 22, 1996 at 1:30 p.m. in Courtroom 705.
It is SO ORDERED.
DATED: New York, New York
February 6, 1996
John E. Sprizzo
United States District Judge