Material breach and substantial performance

Failures of performance that discharge duties of counter-performance

The parties to a bilateral contract exchange promises. If one party to a bilateral contract breaches a promise, the aggrieved party is entitled to damages (or in some cases specific performance). We explore the damages remedy elsewhere in the materials. Early in the history of the common law, the aggrieved party was nonetheless required to perform its own promise at pain of itself being liable for damages for its own breach. Courts in effect construed the promises of each as independent of the other. Each party had to perform its promise irrespective of breach by the other. The only remedy for breach was damages. Even today, courts may construe some promises in some contracts as "independent promises" such that breach does not discharge the remaining duties (i.e. the duties of counter-performance) of the aggrieved party.

Over time courts came to construe some promises made by one party to a bilateral contract as dependent upon performance of promises made by the other. Performance of promises by one party (e.g. Party A) that is due earlier than performance of promises by the other (e.g. Party B) are therefore said to be constructive conditions to the performance of a promise or promises by the other (Party B). However, for fear that trivial breaches by one party (Party A), especially if unintentional and curable, might provide too convenient a discharge of the duty of counter-performance (by Party B), courts have required an "uncured material failure of performance" (by Party A) for discharge of the aggrieved party's (Party B) yet unperformed promises under the contract. Where the failure of performance (by Party A) is not material, or when a material failure of performance has been timely cured (by Party A), the party aggrieved (Party B) remains obligated to perform its own promises and its refusal to do so will itself be a breach entitling the other party (Party A) to damages. Obviously, in a unilateral contract, there are no duties of counter-performance because only one party has made promises. Accordingly, for such contracts, we needn't confront the issue of independence or dependence of promises or the materiality of a failure to perform.

Note that notwithstanding an uncured material failure to perform, an aggrieved party may still choose to perform its remaining obligations. One reason for making such a choice is that the aggrieved party may not be certain at the time of the consequences of its own refusal to perform. It may be uncertain that the other has failed to perform (because, for example, a term of the contract is ambiguous in its description of the performance required), or it may be uncertain whether the failure to perform was material, or that the failure to perform will remain uncured. With hindsight, a court to whom a dispute may be presented could conclude that there was no failure to perform, or that the failure to perform was not material, or that the failure to perform was timely cured. In that case, the aggrieved party's refusal to perform its own obligations would be a breach of contract exposing it to liability.

For the failures of builders to perform some duties required by construction contracts, courts chose a different vocabulary - "substantial performance" - to resolve the same issues. Where there is incomplete or defective construction, the aggrieved party is entitled to damages. In addition, the aggrieved party is discharged from paying the balance of the contract price (its promise under the contract) unless the builder has substantially performed, but is not discharged from paying the contract price if the builder has substantially performed. Jacob & Youngs v. Kent, involving a contractor who failed to install the correct pipe in plumbing a new country residence, is the classic case on substantial performance.

R.2d Contracts 237, 241, and 242 articulate these common law rules on uncured material failure of performance. Van Oort Construction Company, Inc. v. Nuckoll's Concrete Service, Inc., involving breach of a promise not to compete in the ready-mix concrete business, illustrates application of the rules. These restatement rules abandon the language of substantial performance (assimilating the concept to material failure of performance, see Comment d to R.2d Contracts 237) but much of the case law continues to use the distinct language of substantial performance in construction cases and in some other cases and you must be prepared to recognize and use the correct vocabulary in a given context.

There are several related issues and rules:

1. One has to decide initially whether performance by one party is due earlier than performance by the other or whether performance by both is due simultaneously. The contract may expressly answer this question. In construction contracts, for example, the agreement will frequently call for periodic progress payments by owner to builder subsequent to the completion of stages of construction (e.g. foundation, framing, finish work). In the absence of an express term governing the sequence of performance, and in the absence of circumstances that imply a sequence of performance, default rules supply the answer. See R.2nd Contracts 234. In some contracts performances of each party are due simultaneously. The closing of a deal for the purchase and sale of real estate is a good example: typically, the price is to be paid (or a promissory note for the balance given) by the buyer and the deed tendered by the seller simultaneously (often through use of an escrow). In cases where performances of each party are due simultaneously, tender of performance by each party (i.e. an offer of performance coupled with present ability to perform), or performance itself, is a constructive condition of exchange. See R.2nd Contracts 238. In contracts for the sale of goods, tender of delivery of the goods by the seller and tender of payment by the buyer are due simultaneously unless the parties agree to the contrary. See UCC 2-507(1) and UCC 2-511(1).

2. Even uncured material failures of performance will not discharge all duties of counter-performance of an aggrieved party if a court finds the contract to be "divisible." R.2d Contracts 240. For example, a commission salesperson with a one year employment contract will not be denied contractually stated commissions earned but not yet paid, even where the employer may be justified in terminating the employment and getting damages for the employee's breach (e.g. because the employee consistently shows up for work drunk), because each sale and its corresponding commission may be properly regarded as agreed equivalents. We explore this concept further in Problem.Dispute.Bar examination tutor.

3. An uncured material failure of performance may not be a breach of a promise yet will still discharge duties of counter-performance where the contract is not divisible. Thus, for example, a party's whose obligations are discharged by impossibility (e.g. the owners of the Surrey Gardens and Music Hall in Taylor v. Caldwell), impracticability, or frustration of purpose will have failed to perform (and the failure will be uncured and may be material), but it is not liable for breach of contract because its duties have been discharged. However, even though not a breach, its uncured material failure of performance will discharge the other party (e.g. the performers who were renting the Surrey Gardens and Music Hall in Taylor v. Caldwell) from its obligation to perform such that it, too, is not liable for breach of contract. See Comment a to R.2d Contracts 237.

4. The doctrines of material failure of performance or substantial performance do not apply if one party's performance under a contract is dependent upon a condition rather than upon a promise and there is a failure, even a minor failure, of the condition. For failure of the condition in any respect, the promised duty does not arise. See, e.g. Brown-Marx Associates, Ltd. v. Emigrant Savings Bank, 703 F.2d 1361 (11th Cir. 1983) (lender did not breach loan commitment conditioned upon borrower obtaining signed leases for minimum annual rentals even if borrower obtained leases that came close to satisfying the condition). On the other hand, a court may be willing to dispense with a condition that is not a material part of the agreed exchange if to enforce the condition would cause disproportionate forfeiture to the party expecting performance. R.2d Contracts 229. Typical of such cases are those in which one party's duty is conditioned upon timely and proper notice by another and the notice actually given is either slightly late or its form somewhat imperfect (as in notice by an insured to an insurance company of the occurence of an accident, or notice by a long term commercial tenant of exercise of an option to renew the lease, as in J. N. A. Realty Corp. v Cross Bay Chelsea).

5. If a party aggrieved by a material failure of performance has derived benefit from partial performance of the contract by the breaching party, the aggrieved party may still have to pay something to the breaching party as restitution to avoid unjust enrichment, less any damages to which the aggrieved party is entitled because of the breach. R.2d Contracts 374. We explore this application of restitution in Problem.Dispute.Bar examination instructor, Fish v. Correll (the case of the Scotch granite tombstone), and Ducolon Mechanical, Inc. v. Shinstine/Forness, Inc. (a subcontractor breaches its contract to perform HVAC work on a church facility). Note that the availability of restitution may diminish the forfeiture that the party failing to perform might otherwise suffer and, to that extent, bolster the argument that a failure of performance is material. See Comment d to R.2d 241.

Article 2 of the Commercial Code takes a different approach and uses different vocabulary for comparable issues posed by a seller's non-conforming tender of delivery of goods (e.g. a late delivery or a delivery of insufficient quantity) or a seller's delivery of non-conforming goods (e.g. goods failing to conform to an express warranty). As at common law, a buyer aggrieved by a seller's breach is entitled to damages. The buyer may withhold those damages from any payment of purchase price remaining due (UCC 2-717), but will be denied damages absent timely notice of breach to the seller (UCC 2-607(3)(a)). But Article 2 treats discharge of the buyer's duty of counter-performance differently than the common law. UCC 2-601, 2-606, and 2-608 introduce the concepts of "rejection," "acceptance", and "revocation of acceptance." Prior to accepting a seller's tender of goods (not to be confused with accepting an offer), a buyer may reject and be discharged from paying for a tender that is non-conforming in any respect (not non-conforming in a material respect). This "perfect tender" rule is subject to a number of exceptions that we explore and, in some cases, is also subject to the seller's right to cure under UCC 2-508. In contrast, after acceptance of a tender, a buyer must pay the contract price for the goods (UCC 2-607(1)), less any damages to which it is entitled by virtue of the breach, unless it revokes its acceptance. The buyer may revoke its acceptance only if the seller's tender substantially impairs the value of the goods to the buyer (UCC 2-608), a rule comparable to the common law rule excusing counter-performance only if a breach is material. UCC 2-608 also imposes other conditions to revocation of acceptance. We explore the operation of Article 2 on the duties of performance in Problem.Dispute.Professor's plaques and Problem.Dispute.Hotel scale models.

Supplementary reading: Farnsworth, 8.8 - 8.19; White & Summers, Chapter 8.