13.1 Discharge of Contract Duties by Performance or Breach

Discharge by Performance

The term performance refers to the fulfillment of obligations specified in a contract. When parties enter into a contract, they agree to perform certain actions or provide certain goods or services as outlined in the contract terms. Once the contractual duty is fulfilled, the contract can be discharged by performance. The modern trend at common law (and explicit under the Uniform Commercial Code (UCC), Section 1-203) is that the parties have a good-faith duty to each other perform. There is in every contract “an implied covenant of good faith” (honesty in fact in the transaction) that the parties will deal fairly, keep their promises, and not frustrate the other party’s reasonable expectations of what was given and what was received.

Full Performance

Full performance occurs when one party fulfills all of its obligations under the contract in the exact manner specified and without any deviation. Full performance, also called complete performance, of the contractual obligation discharges the duty. For example, in a contract to plumb a new bathroom, if Ralph the plumber does a fine job of plumbing Betty’s new bathroom, she pays him. Both are discharged by full performance.

Under the UCC, Section 2-601 requires that the goods delivered according to the contract be the exact things ordered—that there be a perfect tender (unless the parties agree otherwise).

Substantial Performance

Sometimes, a party may not fulfill every detail of the contract, but the performance is significant enough that the other party receives what was essentially bargained for. In such cases, the performance is considered substantial performance, and will serve to discharge a contract. However, damages may be owed in an amount that would compensate for the minor deficiencies in performance. These minor deficiencies would amount to a breach of contract, but the breaches would not be material. Therefore, these minor breaches would not prevent the duty from being discharged. If Ralph does all the plumbing for Betty’s new bathroom but does not return once the bathroom is completely finished to hook up the toilet feed, he has not really “plumbed the new bathroom.” He has left a small portion of the agreed upon work undone. In this situation where there has been substantial, although not full performance, the plumber would receive payment for the value of the plumbing services that were completed, and the homeowner would have a claim for damages for whatever it will cost to have the hook-up completed.

At classic common law, a duty could be performed completely or breached, with no middle ground. This would mean that the plumber in the scenario above would not be entitled to any payment at all. But under modern theories, the doctrine of substantial performance developed: if one side has substantially, but not completely, performed, so that the other side has received a benefit, the nonbreaching party owes something for the value received. What constitutes substantial performance is a question of fact, with the contest being whether a breach has gone beyond substantial performance and become a material breach.

Satisfactory Performance

Satisfactory performance in contract law refers to the fulfillment of contractual obligations to a degree that is acceptable to the other party in a contract. If the other party is satisfied with the performance and it meets their expectations, it is generally considered satisfactory and will discharge the contract. In other words, the standard to discharge the obligation is personal satisfaction. Using the plumbing example, if Ralph installs a Rainforest showerhead that is very different than the one Betty selected, but Betty decides she likes this showerhead better, her personal satisfaction will discharge the contractual obligation even though the performance does not meet the requirements of the contract as originally agreed.

Parties may contract to perform to one side’s personal satisfaction. Andy tells Anne, a prospective client, that he will cut her hair better than her regular hairdresser, and that if she is not satisfied, she need not pay him. Andy cuts her hair, but Anne frowns and says, “I don’t like it.” Assume that Andy’s work is excellent. Whether Anne must pay depends on the standard for judging to be employed—a standard of either objective or subjective satisfaction. The objective standard is that which would satisfy the reasonable purchaser. Most courts apply this standard when the contract involves the performance of a mechanical job or the sale of a machine whose performance is capable of objective measurement. So even if the obligee requires performance to his “personal satisfaction,” the courts will hold that the obligor has performed if the service performed or the goods produced are, in fact, satisfactory. By contrast, if the goods or services contracted for involve personal judgment and taste, the duty to pay will be discharged if the obligee states personal (subjective) dissatisfaction. No reason at all need be given, but it must be for a good-faith reason, not just to escape payment.

Student video on satisfactory performance

“Satisfactory Performance” created by Dayna Goldstein and Jeffrey Godwin

Material Breach

In addition to being discharged by performance as described above, a contract can be discharged by material nonperformance of the contractual duty. A material breach is a significant failure to fulfill the terms of a contract that goes to the root or essence of the agreement. It occurs when one party fails to perform a substantial and essential obligation under the contract. That failure of performance deprives the other party of the benefit they reasonably expected to receive from the agreement. Material breach substantially impairs the value of the contract for the non-breaching party. The non-breaching party has the right to consider the contract terminated and is generally released from further performance obligations under the contract. Going back to the plumbing example, if Ralph doesn’t do any work at all on Betty’s bathroom, or almost none, then Betty owes him nothing. She—the non-breaching party—is discharged, and Ralph is liable for breach of contract.

Under UCC Section 2-106(4), a party that ends a contract breached by the other party is said to have effected a cancellation. The cancelling party retains the right to seek a remedy for breach of the whole contract or any unperformed obligation. The UCC distinguishes cancellation from termination, which occurs when either party exercises a lawful right to end the contract other than for breach. When a contract is terminated, all executory duties are discharged on both sides, but if there has been a partial breach, the right to seek a remedy survives.

Anticipatory Breach and Demand for Reasonable Assurances

Anticipatory breach, also known as anticipatory repudiation, occurs in contract law when one party to a contract clearly and unequivocally communicates to the other party that they do not intend to fulfill their contractual obligations before the performance is due. In other words, this is when a promisor announces, before the time his performance is due, that he will not perform a contractual duty owed. Using the plumbing example again, we know that if Ralph doesn’t do any work at all on Betty’s bathroom there is a material breach. But, say that Ralph calls Betty a week before he is supposed to show up to work on her bathroom and tells her that he isn’t going to do any work on her plumbing, this is an anticipatory breach.

A person cannot fail to perform a duty before performance is due, but the law allows the promisee to treat the situation as a material breach that gives rise to a claim for damages and discharges the obligee from performing duties required of him under the contract. The common-law rule was first recognized in the well-known 1853 British case Hochster v. De La Tour. In April, De La Tour hired Hochster as his courier, the job to commence in June. In May, De La Tour changed his mind and told Hochster not to bother to report for duty. Before June, Hochster secured an appointment as courier to Lord Ashburton, but that job was not to begin until July. Also in May, Hochster sued De La Tour, who argued that he should not have to pay Hochster because Hochster had not stood ready and willing to begin work in June, having already agreed to work for Lord Ashburton. The court ruled for the plaintiff Hochster:

[I]t is surely much more rational, and more for the benefit of both parties, that, after the renunciation of the agreement by the defendant, the plaintiff should be at liberty to consider himself absolved from any future performance of it, retaining his right to sue for any damage he has suffered from the breach of it. Thus, instead of remaining idle and laying out money in preparations which must be useless, he is at liberty to seek service under another employer, which would go in mitigation of the damages to which he would otherwise be entitled for a breach of the contract. It seems strange that the defendant, after renouncing the contract, and absolutely declaring that he will never act under it, should be permitted to object that faith is given to his assertion, and that an opportunity is not left to him of changing his mind.

Another type of anticipatory breach consists of any voluntary act by a party that destroys, or seriously impairs, that party’s ability to perform the promise made to the other side. If a seller of land, having agreed to sell a lot to one person at a date certain, sells it instead to a third party before that time, there is an anticipatory breach. If Ralph the Plumber is supposed to plumb Betty’s bathroom in June, but he announces that he is taking a month-long trip to Europe in June, this is an anticipatory breach. In the first instance, there would be no point to showing up at the lawyer’s office when the date arrives to await the deed, so the law gives a right to sue when the land is sold to the other person. In the second instance, there would be no point to waiting until June for the plumber to not do the job, so the law gives the right to sue when the future nonperformance is announced.

These same general rules prevail for contracts for the sale of goods under UCC Section 2-610.

Related to the concept of anticipatory breach is the idea that the obligee has a right to demand reasonable assurances from the obligor that contractual duties will be performed. If the obligee makes such a demand for reasonable assurances and no adequate assurances are forthcoming, the obligee may assume that the obligor will commit an anticipatory breach, and consider it so. That is, after making the contract, the obligee may come upon the disquieting news that the obligor’s ability to perform is shaky. A change in financial condition occurs, an unknown claimant to rights in land appears, a labor strike arises, or any of a number of situations may arise that will interfere with the carrying out of contractual duties. Under such circumstances, the obligee has the right to a demand for reasonable assurance that the obligor will perform as contractually obligated. The general reason for such a rule is given in UCC Section 2-609(1), which states that a contract “imposes an obligation on each party that the other’s expectation of receiving due performance will not be impaired.” Moreover, an obligee would be foolish not to make alternative arrangements, if possible, when it becomes obvious that his original obligor will be unable to perform. The obligee must have reasonable grounds to believe that the obligor will breach. The fear must be that of a failure of performance that would amount to a total breach; a minor defect that can be cured and that at most would give rise to an offset in price for damages will not generally support a demand for assurances.

Under UCC Section 2-609(1), the demand must be in writing, but at common law the demand may be oral if it is reasonable in view of the circumstances. If the obligor fails within a reasonable time to give adequate assurance, the obligee may treat the failure to do so as an anticipatory repudiation, or she may wait to see if the obligor might change his mind and perform.