What Constitutes Substantial Performance?
Substantial performance, as it is known in contract law, occurs when a party has entered into and performed most of the terms of a contract. When a party has substantially performed all of the material terms of a contract, courts generally will not allow the party to be held liable for the immaterial terms that have not been fulfilled.
Substantial performance could be best described in a construction contract. Imagine a homeowner hires a contractor to build a new home. The homeowner and contractor agree that the home is to be one story with a basement and with three bedrooms. The parties also agree that the house is to be built in four months. In this example , suppose the contractor builds the house and even meets the specifications of the three bedrooms but fills in the basement instead of constructing it into a livable area.
In this instance the contractor has substantially performed his obligations under the contract because it’s obvious from the contract’s specification that the essential terms have been satisfied by the defendant, in the example, the contractor. The subsequent finishing of the basement should not bar the owner from acceptance of the house nor entitle the owner to any damages.
Key Features of Substantial Performance
Generally speaking, there are three characteristics that make up substantial performance:
- The party in question must have made a good faith effort to abide by the contract.
- The defect in their performance in regard to the contract is relatively minor, and does not greatly affect the intended purpose of the contract, for example, the construction of a building.
- The benefits of the contract as a whole must outweigh the defects.
A party has substantially performed on a contract if that party has performed all the essential purposes of the contract. Courts have found that a party has substantially performed when the defects in the performance of the contract do not deprive the other party of the benefit of the bargain. In most circumstances, a party’s performance is considered to be vital to the contract as a whole, because when one party fails to perform while the other party has performed, it defeats the party’s purpose of entering into the contract. However, when the difference between the party’s performance and the appellations of the contract are minor, and the other party has received nearly the full benefit of the bargain, a court may find that the party has substantially performed.
Comparison Between Substantial and Full Performance
When a party in a contract or construction dispute asserts that the breach did not constitute a breach of contract because of substantial performance, it is important to verify that the contract was in fact substantially performed. Whether performance rises to the level of substantial or complete performance is a question of fact, to be determined by the trier of fact. While the trier of fact is to consider the information and evidence presented and determine whether a particular degree of performance was indeed achieved, the standards governing substantial and complete performance are clear.
Generally, substantial performance is one that, while having a few minor defects and/or omissions, sufficiently performs to meet the purpose and goals of the contract. Substantial performance is most commonly found in construction contracts. For example, in a construction contract, a contractor may fail to omit caulking between a bathtub and the adjoining wall. The remaining, uncaulked area is only a minor defect in performance acting as a minor annoyance, and does not impede the intended function of the bathtub. The construction contract has been substantially performed.
In contrast with substantial performance, a complete performance is exactly that – complete. A construction contract in which the caulking has not been omitted would be deemed to be a complete performance of the contract.
Legal Meaning and Consequences
The legal implications of substantial performance primarily concern the extent to which a party has a right to withhold performance from, or suspend performance of its contractual obligations to, a party who has claimed as a defence that the contract requirements were not met. While it is generally accepted that a party cannot rely on a failure by the other to comply with a condition precedent in order to escape from their obligations, the doctrine of substantial performance allows parties to withhold performance if failure to satisfy the breach does not go to the root of the contract. As stated in the technician case of Crest Nicholson Ltd v Portland (Hackney) Ltd, it is the "materiality" or "essence" of the breach which informs whether the right to withhold performance can fairly be asserted. To use the house builder analogy again, a builder who has failed to connect a sink drain in an en suite bathroom cannot claim that their payment for the whole en suite should be withheld because they have failed to connect the sink, provided that another possible remedy is available to the owner. Where failure to provide the agreed service results in damage to the innocent party, they may Instead sue for damages for the loss suffered as a result. The precise scope of the remedies available for breach of contract will depend on how substantial the performance was. However, a breach will generally not be deemed trivial where it is symptomatic of part performance which is less than (but approximates to) what was originally promised. In other words, so long as the breach is more substantial than it is minor, it is more likely that the doctrine of substantial performance will apply.
Examples Illustrating Substantial Performance
In McCullough v. Luu, 166 P.3d 135 (Colo. App. 2006), the plaintiff retained the defendant to supervise the installation of two new HVAC systems in his home. The HVAC systems were not installed according to the contract specifications, as there was no written approval for the changed location of the day-night thermostat. As a result, the plaintiff contended that the new HVAC systems were unreasonably noisy, creating a nuisance. The district court held that the defendant’s supervision did not substantially comply with the contract specification regarding installation of the thermostats. In reversing the district court’s decision, the court of appeals performed the following analysis: A substantial performance doctrine is common to the law of contracts. . . . [J]ust because an obligor has not performed a contract according to its terms does not mean that the obligor has not been in good faith and substantially performed the contract. . . . [T]he substantial performance doctrine provides a means of determining when an obligor’s good-faith failure to perform should not permit a contract-obligee to escape liability when the obligor otherwise has performed in material part. . . . To invoke the doctrine, however, there must be evidence that the performance was in good faith and that the failure to supply goods or services according to contract specifications was not willful or in bad faith. . . . The total benefit derived from performance must be weighed against the harm resulting from the breach. In McCullough v. Luu, the court of appeals weighed the harm arising from the plaintiff’s installation of a loud, audible signal instead of a thermosetting device against the plaintiff’s "complaints about excessive noise arising from physical changes to the HVAC system" that were made after the installation . In this case, the defendant did not substantially perform the contract as a matter of law, despite the defendant’s testimonial evidence that he supervised the installation and observed the day-night thermostat installed by the contractor. Because this evidence was based on hearsay, the court of appeals gave it no weight. Further, the court reasoned that "[t]he mere fact that both the defective and nondisputed equipment conformed to the contract terms does not, by itself, establish substantial performance of the contract, and the court cannot consider the conformity of the nondisputed system without also considering the harm, or lack thereof, to the plaintiffs flowing from the defective system." In Martin v. Art Van Furniture, 672 N.W.2d 612 (Mich. Ct. App. 2003), the plaintiff purchased kitchen cabinets from the defendant. When the cabinets were delivered, they were scratched and damaged, so the defendant returned them to the manufacturer and sent the plaintiff new cabinets. However, the replacements were too small, so the defendant had to install them in a vertical rather than horizontal fashion. The trial court awarded the plaintiff $16,000 for the defendant’s breach of the contract. On appeal, the defendant contended that the plaintiff received the benefit of the bargain in that the cabinets complied with the standards of the National Kitchen and Bath Association. However, the court concluded that the defendants breached the contract by supplying cabinets that were of a lesser quality and not suitable for horizontal use. The court emphasized that "[a]rriving at a judgment here is not a simple, math-like process because any money awarded to defendant must be proportional and reasonable in relation to the injuries and damages caused."
Damages Evaluation for Substantial Performance by Courts
When a court determines that a party has substantially performed under a contract, the assessment of damages is critical. The general rule is that the amount of damages will be measured by the cost of completing performance, but in some instances, the damages may be measured by the loss in value to the landowner. For example, if the owner contracted for the performance of excavation at a certain depth, but the defects amounted to a failure to complete excavation to 9 feet when the contract required completion to a depth of 10 feet, the owner would be entitled to recover any additional costs incurred in requiring the contractor to complete the work.
However, where the damages incurred are grossly disproportionate to the benefit obtained by the receiving party as in the case of grossly defective building construction of a unique structure, the party who has substantially performed may only be entitled to the quantum meruit measure for the benefit conferred. For example, if a builder performs $9000 worth of work on a $10000 contract before the owner terminates the contract, the builder is only entitled to $9000 even if it would cost the owner another $20000 to give a perfect building to the owner.
Avoiding Disagreements Over Performance
It is crucial that the contract clearly defines the level of performance required for each party. If the contract requires that payment only happens once a party has performed its obligations, then the other party will not be able to force payment if it turns out that the first party has only partially performed its obligations. While the other party may be entitled to damages, the potential damages may not be as preferable as the receiving of payment.
Contracts may include provisions to allow the non-breaching party to terminate the contract if the other party has only partially complied with its contractual obligations. The contract can also limit the manner in which either party can seek damages. For example , the availability or non-availability of certain forms of damages can be defined and limited in the contract.
By clearly defining the requirements of performance expected in the contract, a court may be more likely to award damages even where there may be some question as to whether the contract was fully complied with. If the court identifies clear obligations in the parties’ contract, it may find that the contract has been substantially complied with even if the defendant has failed to strictly comply with its duty in the contract. The court may find that since the parties have agreed to certain terms, they have effectively waived or modified certain strict contractual requirements.