Substantial Performance

Terms:

Substantial Performance:
Performance of the primary, necessary terms of a contract that fulfills the essential purpose of the contract so that, even if the performance does not precisely match the terms of the agreement, the performance will be considered complete.


“Perfect Tender” Rule:
A U.C.C. rule which says that, in contracts for the sale of goods, the seller must supply the buyer with goods that conform perfectly to the buyer’s demands.

Usually, substantial performance, as opposed to perfect performance, is enough to satisfy an implied condition of performance.

In other words, if the first party’s performance is required in order to obligate the second party to perform, the second party will be obligated to perform only if the first party substantially performs.

The issue that arises is in determining when imperfect performance is adequate to be considered substantial performance and when is imperfect performance simply a flat out breach of the contract?

In determining the answer to this question, the courts will look to see whether or not the performance that was given fulfills the essential purpose of the contract. See Plante v. Jacobs, 103 N.W.2d 296 (Wis. 1960).

This is determined on a case by case basis. However, the court does use certain guidelines in coming to its conclusion, some of which are:

1) how much of the contracted for benefits did the innocent party receive,
2) to what extent will awarding damages to the innocent party adequately make up for the imperfect performance and,
3) the extent to which the breach was either wrongful or in bad faith.

For example:

(1) Paul and Bill, two business partners, hire SevenSeas, Inc. to build them a boat. The contract says that SevenSeas will build the boat according to Paul and Bill’s specifications and Paul and Bill will pay SevenSeas $2 million. One of the specifications that Paul and Bill lay out is that the boat must contain bullet-proof windows. SevenSeas builds the boat exactly according to specification except for the windows, which are ordinary glass. Here, it is likely that the court will consider SevenSeas’ performance substantial. Bill and Paul have basically received the contracted for benefits they were interested in (the boat is exactly how they wanted it other than the windows). Also, it is safe to say that any damages they are awarded for the imperfect performance will be enough to compensate them for the imperfect performance.

(2) Paul and Bill, two business partners, hire SevenSeas, Inc. to build them a boat. The contract says that SevenSeas will build the boat according to Paul and Bill’s specifications and Paul and Bill will pay SevenSeas $2 million. Some of the specifications that Paul and Bill lay out are that the boat must be two hundred fifty feet long and three stories high with ten private cabins, a movie theater and a swimming pool. SevenSeas builds the boat one hundred twenty five feet long with three cabins, no movie theater and a small dipping pool. Here, it is most likely that this imperfect performance will be considered a flat out breach of the contract since Bill and Paul will receive little or none of the benefits that they bargained for, any kind of damages they would receive in a breach of contract suit would not be adequate compensation for the imperfect performance and, given the extent of the breach, the breach was probably in bad faith.

Up to now we have discussed performance in a contract for a service. Where the sale of goods is concerned, the rules are somewhat different.

The general rule under the U.C.C., called the “perfect tender” rule, basically says that substantial performance is inadequate for contracts for the sale of goods. Under the perfect tender rule, the seller must supply the buyer with goods that conform perfectly to the buyer’s demands in order to trigger the buyer’s obligation to accept the goods and pay for them. See U.C.C 2-601.

However, this rule is subject to two exceptions.

First, where the seller sends goods that do not conform perfectly to the contract but the time for performance has not yet expired, the seller has the right to inform the buyer that he will cure the imperfect tender. The seller then has the right to make a delivery of conforming goods within the contract time. See U.C.C. 2-508(1). For example:

On April 1st, Sunshine and Squeeze Me enter into a contract under which Sunshine agrees to send Squeeze Me five thousand bushels of navel oranges by May 1st and Squeeze Me agrees to pay $5 per bushel. On April 15th, Sunshine ships five thousand bushels of grapefruits to Squeeze Me. According to the perfect tender rule, Squeeze Me is not obligated to accept and pay for the grapefruits because Sunshine has not conformed perfectly to the contract. However, the time for performance has not yet expired. Therefore, Sunshine still has the right to tell Squeeze Me that they will cure the imperfect tender and then actually send the oranges by May 1st. If Sunshine informs Squeeze Me of their intention to cure and then actually does cure the imperfect tender, Squeeze Me will be obligated to accept the oranges and pay the $5 per bushel.

The second exception to the perfect tender rule involves installment contracts.

According to the U.C.C., if a contract for the sale of goods is an installment contract, the buyer cannot reject an installment, even if that installment does not conform to the contract so long as,

1) the nonconforming installment does not substantially impair the value of the contract as a whole,

2) the imperfect tender can be cured and

3) the seller gives the buyer assurances that they will in fact cure. See U.C.C. 2-612.

For example:

Sunshine and Squeeze Me enter into a contract under which Sunshine will send Squeeze Me one thousand bushels of oranges per month for two years and Squeeze Me will pay $5 per bushel. Both parties perform for the first two months. At the beginning of month number three, Sunshine sends Squeeze Me eight hundred bushels of oranges and two hundred bushels of grapefruits. This installment of the contract does not perfectly conform to the contract. However, if this non-perfect tender does not substantially affect the value of the overall contract and can be cured, and if Sunshine gives Squeeze Me adequate assurances that they will cure the non-perfect tender, Squeeze Me cannot reject this installment of the contract.

As far as damages are concerned, as we have said before, while the party who gives substantial performance has a right to collect on the contract, the innocent party can sue for whatever damages they suffered because of the imperfect performance.

Normally, what the innocent party will recover is the cost of completion. In other words, the court will award them the amount of money it would take to fix the inadequacy of the performance. For example:

Paul and Bill, two business partners, hire SevenSeas, Inc. to build them a boat. The contract says that SevenSeas will build the boat according to Paul and Bill’s specifications and that Paul and Bill will pay SevenSeas $2 million. One of the specifications that Paul and Bill lay out is that the boat must contain bullet-proof windows. SevenSeas builds the boat exactly according to specification except for the windows, which are ordinary glass. In this case, the court would most likely award Paul and Bill the amount of money it would cost to replace the regular window with bullet-proof windows.

However, if fixing the imperfect performance would cost too much money or create too much damage to the object of the contract, then the amount of damages to be awarded will be the difference in value of the product as it is and the value of the product as it would have been had perfect performance been given. For example:

Paul and Bill, two business partners, hire SevenSeas, Inc. to build them a boat. The contract says that SevenSeas will build the boat according to Paul and Bill’s specifications and that Paul and Bill will pay SevenSeas $2 million. One of the specifications that Paul and Bill lay out is that the boat must be made of oak wood being that it is the strongest and most durable wood used in boat making. SevenSeas uses pine wood instead, which is softer and less durable. The value of the boat with oak wood would be $3 million. The value of the boat with pine wood is $2 million. The cost of fixing the imperfect tender of performance is $1.5 million and it would also require tearing the boat apart and rebuilding it. In this case, because the cost of fixing the imperfect performance is disproportionate to the purpose fixing the boat will serve and because it will destroy the boat, the court will award Bill and Paul the $1 million difference between the value of an oak boat and the value of a pine boat.

©2003 - 2014 National Paralegal College / National Juris University