What is the entitlement of a party who has substantially performed his obligations?

Abstract

Although there is an increasing body of opinion that awards of damages for breach of contract should take account of the claimant's performance interest, there has been little in the way of analysis of what the performance interest is. Commonly the concept is put forward as simply a reformulation or reconceptualization of the expectation interest, itself hitherto regarded as the one true contractual interest. Such thinking is flawed. A closer analysis of contract doctrine shows there to be two distinct contractual interests; in receiving performance, and in being compensated for losses caused by non-performance. Receiving compensatory damages for non-performance is not the same as receiving performance. At present, this important difference is not fully appreciated, resulting in a failure to develop a principled approach to the claims that can be made following a breach of contract. Recognition of this distinction forces us to confront the fundamental question of how committed we are to the notion that contracts entail a right to performance. This article examines the distinction between these two interests, how the performance interest may be given effect by a damages award, and what the consequences of this analysis are for our understanding of the nature of contractual obligation.

Journal Information

The Oxford Journal of Legal Studies is published on behalf of the Faculty of Law in the University of Oxford. It is designed to encourage interest in all matters relating to law, with an emphasis on matters of theory and on broad issues arising from the relationship of law to other disciplines. No topic of legal interest is excluded from consideration. In addition to traditional questions of legal interest, the following are all within the purview of the journal: comparative and international law, the law of the European Community, legal history and philosophy, and interdisciplinary material in areas of relevance.

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Order of Performance I

Some obligations are pre-conditional on the other party first performing his obligation under the contract. They or some of them, in turn, may depend on the first performance of some element of his obligations.

The order of performance may be a critical issue. Where one party must perform first, then upon his refusal, the other party may be entitled to treat his obligations under the contract as terminated and /or he may sue for damages (depending on the nature of the breach).

Where, the other party’s obligation is not prior, but is concurrent, or is to follow performance by the other, the position is significantly different. In the case of concurrent obligations, the party must tender his payment or performance (if refused).

Where his performance falls due first, he must perform or tender performance (if refused). If he does not do so the other party may be entitled to terminate his obligations and sue for breach of contract (depending on the nature of the breach).

Order of Performance II

The order of performance may be determined by the express or implied terms of the contract. If there is no express contract, circumstances and custom may determine whether the parties’ respective obligations are conditions precedent, concurrent or are independent.

It will be a question of interpretation as to whether one part of the contract can be performed by one party, thereby entitling him to part payment or part performance by the other party, without the performance of the balance of his obligations.

In many cases, common sense will readily suggest the necessary or appropriate sequence of performance obligations. It could be an express or implied term of the contract that a party is entitled to no payment unless he fully performs his obligations under the contract in full.

Consequences of Non-Performance

The failure to perform by one party, who is obliged to perform first, entitles the other party to terminate the contract, where the failure is a fundamental breach of contract.

The right to terminate in this context means that the innocent party may treat himself as released from his further obligations under it and sue for the breach. Alternatively, he may affirm the contract, with or without suing for damages for the breach

Where the breach is not fundamental the innocent party has a right to damages or a reduction in price only. In most cases, the innocent party may withhold performance until the party who has obliged first to perform, has done so. If the delay continues, time may become or be made “of the essence”, giving the innocent party a right to terminate the contract at a later date.

One Party’s Obligation a Pre-Condition

One party’s obligation to perform may be subject to a condition precedent. His obligation to perform may not arise until the condition precedent has been satisfied. A condition precedent to the contract in this sense may be a pre-condition to the existence of the contract, in the sense of either party having any obligations under it.

A condition precedent in this sense may suspend the contract entirely and may never be fulfilled. The contract is entirely contingent. If the condition precedent does not occur, then the contract is discharged and is no longer capable of taking effect.

In another sense, a condition precedent may refer to a condition which is a precondition to the obligations of the one party. The condition precedent may be promissory, in that one or other party, or both may have obligations, to achieve or endeavour to achieve the fulfilment of the condition precedent.  The other party may have no obligations or limited obligations until the condition precedent is achieved, pursuant to the other party’s obligations.

Concurrent and Independent Obligations to Perform

Obligations are concurrent when each party is to perform them simultaneously. For example, under the Sale of Goods Act, the delivery of goods and payment are presumed to be concurrent. Each party must at least tender performance or payment, if the other party does not accept it, in order to fulfil his obligation and avoid default.

In broad terms, where simultaneously concurrent performance is possible, it is presumed to be required. Where simultaneous performance is not possible, custom and practice are likely to determine the position.  Payment for concerts and performances almost invariably require prepayment by the attendees. Many personal services, such as for a haircut, are typically paid for after the service has been provided

Contractual obligations may be independent. Each party may be entitled to enforce the other’s obligations, even though he has not performed his own obligations. Obligations are more likely to be independent if they are of relatively minor importance. In this case, each party is limited to a right to sue for breach. He must allow a set off in respect of his own breach.

Strict and Substantial Performance

The general principle is that a contract must be performed exactly in accordance with its terms. The presumption is that the contractual obligations must be performed in their entirety.

Many contractual obligations are “entire”, in that the obligations must be carried out completely by the relevant party before that party is entitled to the price or other consideration.

The doctrine of substantial performance seeks to mitigate the harshness of the above position. It allows for minor deviations If the contract is substantially performed, the other party’s remedy may be limited to damages. Otherwise, the other party may gain a windfall by reason of a relatively minor breach. The principle may apply only where the performance is almost or very nearly complete.

Criteria for Substantial Performance

The principle of substantial performance is applicable in many cases. In these cases, the courts hold that if a party’s obligations are substantially performed, then he is entitled to payment, with a deduction for the unperformed part.

The most important consideration is the extent of the uncompleted works, the nature of the defects and the cost of remedy, relative to the contract price. Under this principle, a builder who has substantially performed the contract may be entitled to the price subject to reduction for omissions and defects.

The cost of the defects must be minor compared with the contract price. It is not possible to quantify the shortfall, but it would seem that is should be no more than ten percent and perhaps significantly less many cases. The principle does not apply where the builder abandons the job and refuses to complete.

Limits to Substantial Performance

In many cases, where the contract has been substantially performed, the party who has so performed may recover the price or other consideration, subject to a reduction in respect of the uncompleted performance or defects.

However, there are limits to the principle of substantial performance. It is subject to the terms of any written contract. Where the position is not expressly and clearly provided, the position is a matter of interpretation. In some cases, the circumstances will imply that there is no scope for the principle to apply.

Where partial or even substantial performance does not give rise to a right to a proportionate payment, the party may be entitled to some payment by way of restitution. However, the courts will not readily allow an obligation of substantial or complete performance, to be circumvented by a claim in restitution.

Severable Obligations I

A contract is whole or entire when it must be performed in full before the other party is obliged to perform his obligations. Where a contract is whole, partial performance is not sufficient.

If obligations are severable, each obligation is distinct. The failure to perform one allows the other party, only to withhold his performance in respect of that part.

It is a matter of interpretation as to whether a contract is entire or severable. This depends on the circumstances.

Severable contracts commonly arise in the case of ongoing periodic contracts, such as an employment contract. If for example, an employee does not perform for a certain period falling short of fundamental breach, he has no entitlement to wages or salary in respect of that period.

It is the obligations under the contract that is severable, rather than the contract itself. If there are severable separate contracts, then each stands or falls alone. In this context, there is a single contract with several severable distinct obligations under it.

Severable Obligations II

Whether or not obligations are entire or severable, is a matter of interpretation of the contract in the circumstances. It is, therefore, a question of interpretation, whether a breach of the obligation to provide or perform part, repudiates the whole contract or whether is a severable, giving a right to damages or right to withhold payment of that instalment only. Custom or commercial practice may inform the position.

Where the contract is severable, a party who was fully performed in part can recover the payment in respect of that part, notwithstanding that he has not performed the whole. Where the contract is for delivery of goods in instalments, with severable or obligations, then the party is entitled to part payment for instalments delivered.

Lump sum building contracts are generally interpreted as entire in nature. However, there are usually provisions for instalments.  Accordingly, there is an obligation to make payment under the contract when the requisite part of the works has been certified to have been completed.

Sale of Goods Context

The Sale of Goods Act provides rules in relation to performance. Where fewer goods than the quantity agreed are delivered, the buyer may reject them. The obligation to provide the quantity of goods contracted for is presumed to be “whole”.

The buyer is not obliged to accept anything other than the quantity ordered. The buyer may elect to accept them and pay for them at the contract rate. Where a greater quantity is delivered, the buyer may reject the excess or the whole. If the buyer accepts greater than the amount contracted for, he must pay at the contract rate.

Where goods are delivered, which include goods in compliance with the description and non-compliant goods, the buyer may accept those which are in accordance with the contract and reject the rest or reject the whole. A buyer of goods is not bound to accept delivery in instalments unless otherwise agreed.

An instalment contract for the sale of goods may be severable.  Where a contract is in substance a series of separate obligations, it may be severable. If this is the case, then the failure to deliver certain instalments may entitle the buyer to withhold payment in respect of that instalment, but does not entitle him to treat the entire contract as discharged. He must pay for the instalments received.

Effect of Breach I

The failure by one person to perform his obligations is generally a breach of contract.  The innocent party may seek to have the contract specifically enforced or may claim damages for its breach. Where the party in default commits a fundamental breach, the innocent party may opt to discharge himself from further obligations and claim damages for breach.

In the case of a non-fundamental breach by the other party, there is usually no right to terminate. Exceptionally, an express contract may allow termination, where the breach is not in fact fundamental.

There may be a right to withhold payment, for as long as the other party does not perform. If the failure to perform becomes prolonged, then at some point it may become fundamental and give the innocent party the right to terminate the contract in the above sense.

A party with the prior obligation may be nonetheless discharged if the other party repudiates the contract by wrongfully refusing to accept his performance or by indicating that he will do so (an anticipatory breach).

Where one party has repudiated the contract, the other may be entitled to damages even though he cannot show that he would have been able to perform his obligations, but for the other’s repudiation.

Effect of Breach II

A party is discharged from his obligations by the other party’s fundamental, repudiatory or anticipatory breach. Conversely, where one party has committed an earlier breach which is not fundamental, it does not justify the other party in failing to perform.

Where the innocent party does not accept the repudiation, his obligations continue. Accordingly, he may later fall into breach of contract by the failure to perform his obligations. He may have a right of set-off in this case, in respect of loss which he has incurred.

Difficult questions of fact and law can arise in this context. Disputes may turn on whether one party or the other has the prior obligation. Each may claim an entitlement to repudiate and sue the other on the basis of the other’s non-performance.

A repudiation or failure to perform a fundamental obligation by the first may be accepted by the second (innocent) party’s repudiation of his obligations. The first  party may claim in turn that the second party was not entitle to repudiate his obligations and that this is itself   a repudiatory breach by the second party, which allows him not to perform.

References and Sources

Irish Textbooks and Casebooks

Clark, R. Contract Law in Ireland 8th Ed. (2016) Ch 18

Friel, R. The Law of Contract 2nd Ed, (2000)

McDermott, P.  Contract Law (2001) 2nd Ed (2017) Ch 21

Enright, M. Principles of Irish Contract Law (2007)

Clark and Clarke Contract Cases and Materials 4th Ed (2008)

English Textbooks and Casebooks

Poole, J. Casebook on contract law. (2014) 12th edition

Stone and Devenney, The Modern Law of Contract 10th Ed (2015)

McKendrick, Contract Law 10th Ed (2013)

Chen-Wishart, Contract Law 5th Ed (2015)

Anson, Reynell, Beatson, J., Burrows, Cartwright, Anson’s law of contract. 29th Ed (2010)

Atiyah and Smith, Atiyah’s introduction to the law of contract. 6th Ed.

Chen-Wishart, M. (2015) Contract law. 5th Ed.

Cheshire, Fifoot and Furmstons, Furmstons and Fifoot Cheshire, Fifoot and Furmston’s law of contract. OUP.

Duxbury, Robert (2011) Contract law. 2nd Ed.

Halson, Roger (2012) Contract law. 2nd Ed.

Koffman & Macdonald’s Law of Contract. 8th Ed. (2014)

O’Sullivan, Hilliard, The law of contract. 6th Ed. (2014)

Peel, and Treitel, The law of contract. 13th Ed. (2011).

Poole, J.Casebook on contract law. 12th Ed. (2014).

Poole, J.  Textbook on contract law. 12th Ed. (2014)

Richards, P Law of contract. 10th Ed. (2011)

Stone, R.  The Modern law of Contract. 10th Ed. (2013)

Treitel, G. H.  An outline of the law of contract. 6th Ed (2014).

Turner, C Unlocking contract law. 4th Ed. (2014).

Upex, R. V., Bennett, G Chuah, J, Davies, F. R. Davies on contract. 10th Ed. (2008).

UK Casebooks

Stone,Devenney, Text, Cases and Materials on Contract Law 3rd Ed (2014)

McKendrick, Contract Law Text, Cases and Materials 6th Ed (2014)

Stone, R, Devenney, J Cunnington, R Text, cases and materials on contract law. 3rd Ed (2014)

Burrows, A. S.  A Casebook on Contract. 4th Ed.

Beale, H. G., Bishop, W. D. and Furmston, M. P. Contract: cases and materials. 5th ed. (2008)

Blackstone’s Statutes on Contract, Tort & Restitution 2017 (Blackstone’s Statute Series)

UK Practitioners Texts

Chitty on Contracts 32nd Edition, 2 Volumes & Supplement (2016)

The above are not necessarily the latest edition.

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