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Magnet Resources, Inc. v. Summit MRI, Inc.

Superior Court of New Jersey, Appellate Division
723 A.2d 976 (1998)
ELI5:

Rule of Law:

When a contracting party has reasonable grounds to believe the other party will commit a material breach, it may demand adequate assurance of due performance and suspend its own performance until such assurance is received. A reasonable suspension under these circumstances does not constitute a material breach.


Facts:

  • Magnet Resources, Inc. contracted to provide preventive maintenance, emergency repair services, and cryogens for MRI installations operated by Summit MRI, Inc.
  • The contracts required Summit to make monthly payments in advance for the services.
  • Summit was habitually late with its payments and had multiple checks dishonored over the course of the relationship.
  • By late December 1994, Summit owed Magnet Resources over $40,000 for past-due services and an emergency repair performed on a promise of payment that Summit failed to keep.
  • On December 24, 1994, Summit requested immediate emergency service for its Paterson installation.
  • Magnet Resources declined to provide the service and on December 27, formally suspended all services to Summit's sites due to the outstanding overdue payments.
  • Shortly thereafter, Summit informed Magnet Resources that it had hired another company to service its MRIs and changed the locks on its facilities to prevent access by Magnet's personnel.

Procedural Posture:

  • Magnet Resources, Inc. filed a breach of contract action against Summit MRI, Inc. in the Superior Court of New Jersey, Law Division. Summit filed a counterclaim for breach of contract.
  • On pre-trial motions, the trial court granted summary judgment dismissing Magnet's fraud claims against Summit's individual officers.
  • The breach of contract claims were tried before a jury.
  • The jury returned a verdict finding that both parties had breached the contract.
  • The jury awarded $492,320 in damages to Magnet Resources and $18,470 in damages to Summit.
  • Summit, as appellant, appealed the judgment against it, and Magnet, as cross-appellant, appealed the dismissal of its fraud claims and the damage award to the Superior Court of New Jersey, Appellate Division.

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Issue:

Does a service provider's suspension of performance due to the other party's chronic failure to pay constitute a material breach of contract, or is it a legally justified action taken in response to reasonable grounds for insecurity?


Opinions:

Majority - Brochin, J.A.D.

No. A service provider's suspension of performance is not a material breach when it is based on reasonable grounds for insecurity, such as the other party's chronic non-payment. The court adopted the principle from the Restatement (Second) of Contracts § 251, which permits a party who reasonably believes the other will breach to demand adequate assurance of performance and suspend its own obligations. Summit's history of late payments, dishonored checks, and an outstanding debt of over $40,000 provided Magnet Resources with reasonable grounds for insecurity. Therefore, Magnet's decision to suspend service was a legally justified act to avoid extending further un-bargained-for credit, not a material breach. Consequently, Summit's subsequent actions of hiring another service provider and barring Magnet's access constituted a repudiation and the first material breach of the contract, making Summit liable for damages.



Analysis:

This case formally incorporates the Restatement (Second) of Contracts § 251 into New Jersey law, providing a clear legal framework for parties who feel insecure about a contract partner's ability or willingness to perform. It empowers a non-breaching party to suspend performance and demand assurances rather than continuing to perform and accumulate greater losses. The decision also clarifies the calculation of lost profits in service contracts, affirming that fixed overhead costs not avoided by a breach are recoverable. This precedent is significant for service-based businesses, as it protects them from clients' non-payment and ensures their damage calculations can realistically reflect ongoing operational costs.

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