Professional Documents
Culture Documents
Termination of Contract
A. Upon Performance
Obligations are taken seriously and are to be performed. An obligation is
extinguished upon its proper and complete performance, because the creditor
has no right to anything more.
What constitutes full performance?
The obligation must be performed
according to the criteria set forth in the contract or by law, or according to the
principles of good faith and reasonability1.
An obligor does not have the right to perform his obligation in parts unless so
provided by agreement or by law.
Performance is a matter of proof. There is no magic incantation which the
parties must recite to terminate the contract upon performance; there is no
legal requirement for the parties to write up a statement that the performance
has been fully rendered.
The corrollary of this rule is that if a contract does set a term of expiration, it
may not be terminated in such a manner before that date (unless otherwise
provided for in the agreement).
Example: Parties enter into a ten-year contract. After five years, one party
gives the other reasonable notice that it is terminating the agreement. This
termination is not effective and indeed is a material breach.
Example: Parties enter into a contract. The contract is silent as to the period it
has been entered into. It does state that a party may terminate the contract at
will upon six months notice. A party does give such notice. The contract will
then terminate with the expiration of the period.
D. Release
Both under Anglo-American law as well as Continental law, a release by the
creditor of the debtor's obligation acts to discharge it completely. In England as
well as in some U.S. states, the release must be under seal to be effective. 2 The
provision of the Lithuanian Civil Code are illustrative.
The reader is cautioned to note that in the United States, unless the release is under seal
(which is unlikely) a release, to be valid, must be supported by new consideration. See Accord
and Satisfaction, p. Error: Reference source not found.
E. Unilateral Withdrawal
The parties may agree during the formation of the contract that one or both of
them can withdraw from a contract if he so chooses. This is called in French
law a clause de ddit. In practice it is coupled with an earnest money clause
(see infra).
Example: A landlord and a tenant agree on Day One that, beginning in six
months, the tenant shall rent certain premises from the landlord.
The
agreement contains both an earnest money provision and a clause de ddit,
allowing the tenant to change his mind. Thus, if the tenant changes his mind,
the landlord keeps the money paid under the earnest money provisionbut the
landlord cannot successfully sue the tenant for damages caused by the
tenants backing out of the contract.
They preferred to deny to the defaulting employee recovery for the benefit
conferred on the injured employer by part performance and to deny the
defaulting purchaser recovery for the benefit conferred upon the injured vendor
by part payment.
In an historic opinion, the Supreme Court of New Hampshire in the year 1834
forcefully stated the opposite view in Britton v. Turner. Britton, who had agreed
to work for Turner for a year for $120, left his service without cause after less
than ten months and sued for the value of the work done. The court pointed
out that, under the traditional view, the forfeiture a party suffers on its breach
increases as the partys performance continues, so that the party who
attempts performance may be placed in a much worse position that he who
wholly disregards his contract. In addition, the injured party might receive a
windfall since that party may receive much more, by the breach of the
contract, than the injury which he has sustained by such breach. The court
concluded that if a party actually receives labor, or materials, and thereby
derives a benefit and advantage, over and above the damage which has
resulted from the breach of the contract by the other party, the law
thereupon raises a promise to pay to the extent to the reasonable worth of
such excess. 8 N.H. 481, 487, 492 Since then, this liberal view has become
widely accepted.
This view is now the law in all Western jurisdictions as well as Russia. The
Lithuanian code sets forth the applicable rules explicity, while the Russian code
does so implicitly.
Thus the general rule is that a debtor must perform his obligation perfectly.
See, e.g., Russian Civil Code 408.1.
A subsidiary rule is that if a debtor has performed his obligation substantially
but not exactly as promised, although the debtor is indeed in breach, this
substantial performance will preclude the other party from terminating the
contract. This in turn means that the non-breaching party will have an
absolute duty to perform. The non-breaching party will be able to offset their
own performance for the damages done by the breaching party.
Example: Henry agrees to put aluminum sideing upon the outer walls of
Esthers house, including all of the windowsills, for $5000. Note that since the
contract does not otherwise specify, this sum would be payable only upon
completion of the performance. Henry does a workmanlike job, but he misses
a windowsill on an upper floor. Esther calls another firm and determines that it
would cost $100 for the windowsill to be covered with aluminimun sideing. Can
Esther terminate the contract and not pay Henry anything? No, because it is
clear that Henry has substantially performed, and therefore Esthers duty to
pay the consideration has arisen. Nevertheless, Esther can assert a setoff
against Henry for breach of her promise and reduce the amount of her
obligation. Note that Henry, because of his substantial performance, has a
right to the full amount contracted-for minus the monetary equivalent of her
breach.
Thus, if a party can prove it has substantially performed, it is entitled to the full
price, minus the monetary equivalent of the damages.
In some cases, the condition must occur exactly as the parties contemplated it
before a duty to perform matures. If the parties have expressly stated a
condition in the contract or the court imposes an impliedin-fact condition, the
condition must be completely satisfied. This is another way of saying that not
every contract contemplates a possibility of substantial performance.
Example: Ben promises to buy Sams house if Ben obtains financing of 80%
of the purchase price, with interest no greater than 8%. If, after reasonable
efforts to secure financing, Ben can only find financing for 75% of the purchase
price at 8%, or can only find 80% financing at 8.125%, Ben will not be obligated
to perform.
As stated by T. Antony Downs (Textbook on Contract p. 275), the payment
obligation is a strict obligation, so that in theory the exact amount must be
made available unconditionally and in legal tender (English case: Betterbee v.
Davis 1811 3 Camp 70. See Lithuanian Civil Code 6.217.2.2, 6.314.4.
If a breach is willful it will be treated as material, whereas if the same non- or
faulty performance had been merely negligent (non-willful), it would have been
treated as a less-than material breach.3
This principle, for example, is
enunciated in the Lithuanian Civil Code at 6.222.1.
Example: Henry agrees to put aluminum sideing upon the outer walls of
Esthers house, including all of the windowsills, for $5000. Henry does a
workmanlike job, but he purposely leaves a windowsill on an upper floor
uncovered, stating that they will never notice. Esther calls another firm and
determines that it would cost $100 for the windowsill to be covered with
aluminimun sideing, but that if it had not been discovered, there would have
been a serious risk of rain damage. Henry has materially breached the
contract and forfeits the $5000.
Study Note: While a material breach will allow a creditor to lawfully terminate
the contract, he does not have to do so. He may simply offset the amount of
damage from his own performance.
There is some movement away from this position. See Restatement 2 nd, 374.
Its real difficulty lies in relation to third parties. If a good was transferred to the debtor, and if
the contract is treated as rescinded, then title would immediately vest in the creditor.
Retrospective Systems:
Some systems influenced by the French model are retrospective in this sense.
The general rule is that only the court can terminate a contract; a party can
terminate the contract only if this is provided for by the contract itself. (Note
that in practice the vast majority of contracts contain such a provision.)
Thus, the 1964 Civil Code of (occupied) Lithuania 5 and the 1964 Civil Code of
the Russian Soviet Federated Republic both followed the French model. The
present-day Russian civil code continues to do so (406 and 450).
Example: A contract is silent as to termination for material breach. Under
French law as well as Russian law, in the event of material breach the
aggrieved party must apply to the court for termination (rescission); it cannot
terminate the contract by serving notice. If, however, the contract states that
the parties can unilaterally terminate the contract for material breach (without
a court proceeding) then they may do so.
In cases where the parties are to perform their obligations in instalments,
restitution will be given only prospectively. Thus in a contract of rental with
monthly payments, restitution would be only prospective.
If however the parties are to perform their obligations over time, but the court
holds that the contract is one of the entirety, then restitution will be given
retrospectively, almost as if there had been no contract formed. In certain
cases this can result in over-compensation to the aggrieved party.
Example: Father pays 1000 Fr to Company X which agrees to teach Fathers
Son how to drive, with the teaching to continue until Son passes the requisite
exams to obtain his licence. Company X materially breaches the contract after
having given a complete course of instruction to Son, subsequent to which Son
failed the drivers exam and demanded more lessons. The court found that this
contract was not one of instalments. Thus the Father received full restitution
(the full 1000 Fr), and he has a claim for damages. France: Cass.civ. 1re, 13
January 1987. (Other systems would merely give the father a claim for
damages.)
The difference between regular nullity and this type of rescission is that the
aggrieved party has a right to obtain damages and may enforce a penalty
clause.
Prospective Systems:
In the English and American legal systems, however, termination is
prospective. Hence the general rule is that a party can terminate a contract for
material breach on its own, without the need for a court order.
5
1964 Civil Code of (occupied) Lithuania 312, 313 (rent); 262 (purchase-sale); 371 (nonpaying rental).
Additionally, since the termination is prospective, the termination does not act
to re-vest the ownership of property which has been transferred to the debtor
by the aggrieved party. The aggrieved party ordinarily only has a right to sue
for the (unpaid) purchase price.
Thus, if services have been provided by the breaching party, if there has not
been substantial performance, he is not entitled to any recovery. If services
were rendered by the aggrieved party, the aggrieved party has an action for
damages, or may recover the value of the services rendered (quantum meruit).
In the case of money paid by the aggrieved party: since the general rule is that
damages are rewarded, an aggrieved party will be able to recover the amount
paid only in the total absence of consideration. (This does not mean the
aggrieved party cannot obtain an award for damages.)
The Principles of European Contract Law have also adopted this prospective
regime.
Principles of European Contract Law
9:303: Notice of Termination
(1) A party's right to terminate the contract is to be exercised by notice to
the other party.
(2) The aggrieved party loses its right to terminate the contract unless it
gives notice within a reasonable time after it has or ought to have become
aware of the non-performance.
(3) (a) When performance has not been tendered by the time it was due,
the aggrieved party need not give notice of termination before a tender
has been made. If a tender is later made it loses its right to terminate if it
does not give such notice within a reasonable time after it has or ought to
have become aware of the tender.
(b) If, however, the aggrieved party knows or has reason to know that the
other party still intends to tender within a reasonable time, and the
aggrieved party unreasonably fails to notify the other party that it will not
accept performance, it loses its right to terminate if the other party in fact
tenders within a reasonable time.
From 2001, with the advent of the new Civil Code, this is also the Lithuanian
position.
Civil Code of Lithuania
6.218.1 In cases provided for under 6.217 [i.e., in the vast majority of
cases] the aggrieved party can terminate the contract unilaterally, without
court action. The other party must be given the time period for notice of
termination set forth in the contract, and if the contract does not set forth
any such period, then the period will be 30 days.
The Lithuanian code has an unusual time-delay built into its system of
termination which diverges from the European Principles (and also from
American law), wherein when in the case of material breach, a party terminates
the contract by giving notice to the other party, the contract nevertheless
remains in effect until expiration of a time period set out in the contract or for
thirty days. Only after this delay is the contract is terminated. In other words,
the notice of termination, once served upon the other party, goes into effect
upon the expiration of the time set out in the contract or in thirty days.
Example. Lithuanian law: A contract between Moneypenney and Goodnight
provides that, in the case of material breach, notice of termination must be
given forty days in advance. Moneypenney commits a material breach.
Goodnight serves a notice of termination upon Moneypenney. The termination
goes into effect after forty days.
Note: Because of the doctrine of non adimpleti contractu (the defense of nonexecution), Goodnight can withhold her performance from the time of
Moneypennys breach. The delay built into the statute is in order to allow a
contract to be cured (see our section on Cure at p.44 and our section on
Termination for Delay immediately below at p.9). This rule is set out as well in
the Lithuanian Civil Code 6.209.2.
Note: In the case of anticipatory repudiation (see p.18), no notice is required.
Termination for Delay
The Principles of European Contract law set out a very interesting section on
termination for delay. The underlying idea is that a delay is not usually a
material breach; time is not usually of the essence. By use of this section, time
can be made to be of the essence, and therefore any uncertainty as to the
materiality of the delay can be avoided.
Example: A contract calls for the debtor to provide a service by a certain date.
The debtor is late. The creditor would like to terminate the contract for
material breach. But it may not at all be clear that the delay in truth
constitutes a material breach. Therefore if he does terminate the contract, he
may very well himself be committing a material breach.
The Principles of European Contract Law addresses this problem as follows:
In both the Principles and the Lithuanian Code, the effect of the additional time
period allows the aggrieved party to set a condition which, if not fulfilled, is
clearly a material breach.
Note that the Principles are explicitthe aggrieved party may provide in its
notice that unless the wrongdoer performs within the additional time period
that the contract will terminate automatically. Here the Lithuanian code
diverges from the European Principles. Unfortunately this greatly undercuts
the utility of the article in question, since in every case the Lithuanian
aggrieved party will have to terminate the contract according to the general
provisions regarding terminationmeaning that it will have to provide notice of
termination, which will come into effect only upon the expiration of the time
period set forth in the contract or in thirty days.6
This second waiting period poses interesting questions regarding the power of cure: see p.44.
Case # 1
Mass. 364, 370, 89 N.E. 542, 133 Am. St. Rep. 302. The distinction is akin to
that between dependent and independent promises, or between promises and
conditions. Anson on Contracts (Corbin's ed.) 367; 2 Williston on Contracts,
842. Some promises are so plainly independent that they can never by fair
construction be conditions of one another. Rosenthal Paper Co. v. Nat. Folding
Box & Paper Co., 226 N.Y. 313, 123 N.E. 766; Bogardus v. N.Y. Life Ins. Co., 101
N.Y. 328, 4 N.E. 522. Others are so plainly dependent that they must always be
conditions. Others, though dependent and thus conditions when there is
departure in point of substance, will be viewed as independent and collateral
when the departure is insignificant. 2 Williston on Contracts, 841, 842;
Eastern Forge Co. v. Corbin, 182 Mass. 590, 592, 66 N.E. 419; Robinson v.
Mollett, L.R., 7 Eng. & Ir. App. 802, 814; Miller v. Benjamin, 142 N.Y. 613, 37 N.E.
631. Considerations partly of justice and partly of presumable intention are to
tell us whether this or that promise shall be placed in one class or in another.
The simple and the uniform will call for different remedies from the multifarious
and the intricate. The margin of departure within the range of normal
expectation upon a sale of common chattels will vary from the margin to be
expected upon a contract for the construction of a mansion or a "skyscraper."
There will be harshness sometimes and oppression in the implication of a
condition when the thing upon which labor has been expended is incapable of
surrender because united to the land, and equity and reason in the implication
of a like condition when the subject-matter, if defective, is in shape to be
returned. From the conclusion that promises may not be treated as dependent
to the extent of their uttermost minutiae without a sacrifice of justice, the
progress is a short one to the conclusion that they may not be so treated
without a perversion of intention. Intention not otherwise revealed may be
presumed to hold in contemplation the reasonable and probable. If something
else is in view, it must not be left to implication. There will be no assumption of
a purpose to visit venial faults with oppressive retribution.
Those who think more of symmetry and logic in the development of legal rules
than of practical adaptation to the attainment of a just result will be troubled by
a classification where the lines of division are so wavering and blurred.
Something, doubtless, may be said on the score of consistency and certainty in
favor of a stricter standard. The courts have balanced such considerations
against those of equity and fairness, and found the latter to be the weightier.
The decisions in this state commit us to the liberal view, which is making its
way, nowadays, in jurisdictions slow to welcome it. Dakin & Co. v. Lee, 1916, 1
K.B. 566, 579. Where the line is to be drawn between the important and the
trivial cannot be settled by a formula. "In the nature of the case precise
boundaries are impossible." 2 Williston on Contracts, 841. The same omission
may take on one aspect or another according to its setting. Substitution of
equivalents may not have the same significance in fields of art on the one side
and in those of mere utility on the other. Nowhere will change be tolerated,
however, if it is so dominant or pervasive as in any real or substantial measure
to frustrate the purpose of the contract. Crouch v. Gutmann, 134 N.Y. 45, 51, 31
N.E. 271, 30 Am. St. Rep. 608. There is no general license to install whatever,
in the builder's judgment, may be regarded as "just as good." Easthampton
L.&C. Co., Ud., v. Worthington, 186 N.Y.407, 412, 79 N.E. 323. The question is
one of degree, to be answered, if there is doubt, by the triers of the facts
MCLAUGHLIN, J. I dissent. The plaintiff did not perform its contract. Its failure to
do so was either intentional or due to gross neglect which, under the
uncontradicted facts, amounted to the same thing, nor did it make any proof of
the cost of compliance, where compliance was possible.
Under its contract it obligated itself to use in the plumbing only pipe (between
2,000 and 2,500 feet) made by the Reading Manufacturing Company. The first
pipe delivered was about 1,000 feet and the plaintiff's superintendent then
called the attention of the foreman of the subcontractor, who was doing the
plumbing, to the fact that the specifications annexed to the contract required
all pipe used in the plumbing to be of the Reading Manufacturing Company.
They then examined it for the purpose of ascertaining whether this delivery
was of that manufacture and found it was. Thereafter, as pipe was required in
the progress of the work, the foreman of the subcontractor would leave word at
its shop that he wanted a specified number of feet of pipe, without in any way
indicating of what manufacture. Pipe would thereafter be delivered and
installed in the building, without any examination whatever. Indeed, no
examination, so far as appears, was made by the plaintiff, the subcontractor,
defendant's architect, or any one else, of any of the pipe except the first
delivery, until after the building had been completed. Plaintiffs architect then
refused to give the certificate of completion, upon which the final payment
depended, because all of the pipe used in the plumbing was not of the kind
called for by the contract. After such refusal, the subcontractor removed the
covering or insulation from about 900 feet of pipe which was exposed in the
basement, cellar, and attic, and all but 70 feet was found to have been
manufactured, not by the Reading Company, but; by other manufacturers,
some by the Cohoes Rolling Mill Company, some by the National Steel Works,
some by the South Chester Tubing Company, and some which bore no
manufacturer's mark at all. The balance of the pipe had been so installed in the
building that an inspection of it could not be had without demolishing, in part at
least, the building itself.
I am of the opinion the trial court was right in directing a verdict for the
defendant. The plaintiff agreed that all the pipe used should be of the Reading
Manufacturing Company. Only about two-fifths of it, so far as appears, was of
that kind. If more were used, then the burden of proving that fact was upon the
plaintiff, which it could easily have done, since it knew where the pipe was
obtained. The question of substantial performance of a contract of the
character of the one under consideration depends in no small degree upon the
good faith of the contractor. If the plaintiff had intended to, and had, complied
with the terms of the contract except as to minor omissions, due to
inadvertence, then he might be allowed to recover the contract price, less the
amount necessary to fully compensate the defendant for damages caused by
such omissions. Woodward v. Fuller, 80 N.Y. 312; Nolan v. Whitney, 88 N.Y. 648.
But that is not this case. It installed between 2,000 and 2,500 feet of pipe, of
which only 1,000 feet at most complied with the contract. No explanation was
given why pipe called for by the contract was not used, nor that any effort
made to show what it would cost to remove the pipe of other manufacturers
and install that of the Reading Manufacturing Company. The defendant had a
right to contract for what he wanted. He had a right before making payment to
get what the contract called for. It is no answer to this suggestion to say that
the pipe put in was just as good as that made by the Reading Manufacturing
Company, or that the difference in value between such pipe and the pipe made
by the Reading Manufacturing Company would be either "nominal or nothing."
Defendant contracted for pipe made by the Reading Manufacturing Company.
What his reason was for requiring this kind of pipe is of no importance. He
wanted that and was entitled to it. It may have been a mere whim on his part,
but even so, he had a right to this kind of pipe, regardless of whether some
other kind, according to the opinion of the contractor or experts, would have
been "just as good, better, or done just as well." He agreed to pay only upon
condition that the pipe installed were made by that company and he ought not
to be compelled to pay unless that condition be performed. Schultze v.
Goodstein, 180 N.Y. 248, 73 N.E. 21; Spence v. Ham, supra; Steel S.&E.C. Co. v.
Stock, 225 N.Y. 173, 121 N.E. 786; Van Clief v. Van Vechten, 130 N.Y. 571, 29
N.E. 1017; Glacius v. Black, 50 N.Y. 145, 10 Am. Rep. 449; Smith v. Brady, 17
N.Y. 173, and authorities cited on page 185, 72 Am. Dec. 442. The rule,
therefore, of substantial performance, with damages for unsubstantial
omissions, has no application. Crouch v. Guimann, 134 N.Y. 45, 31 N.E. 271, 30
Am. St. Rep. 608; Spence v. Ham, 163 N.Y. 220, 57 N.E. 412, 51 L.R.A. 238.
What was said by this court in Smith v. Brady, supra, is quite applicable here:
I suppose it will be conceded that every one has a right to build his house,
his cottage or his store after such a model and in such style as shall best
accord with his notions of utility or be most agreeable to his fancy. The
specifications of the contract become the law between the parties until
voluntarily changed. If the owner prefers a plain and simple Doric column,
and has so provided in the agreement, the contractor has no right to put in
its place the more costly and elegant Corinthian. If the owner, having
regard to strength and durability, has contracted for walls of specified
materials to be laid in a particular manner, or for a given number of joists
and beams, the builder has no right to substitute his own judgment or that
of others. Having departed from the agreement, if performance has not
been waived by the other party, the law will not allow him to allege that he
has made as good a building as the one he engaged to erect. He can
demand payment only upon and according to the terms of his contract,
and if the conditions on which payment is due have not been performed,
then the right to demand it does not exist. To hold a different doctrine
would be simply to make another contract, and would be giving to parties
an encouragement to violate their engagements, which the just policy of
the law does not permit. (17 N.Y. 186, 72 Am. Dec. 442).
I am of the opinion the trial court did not err in ruling on the admission of
evidence or in directing a verdict for the defendant.
For the foregoing reasons I think the judgment of the Appellate Division should
be reversed and the judgment of the Trial Term affirmed.
Order affirmed, etc.
Exercises
1.
2.
3.
4.
5.
C. Anticipatory Repudiation
Principles of European Contract Law
9.304: Anticipatory Non-Performance
Where prior to the time for performance by a party it is clear that there will
be a fundamental non-performance by it the other party may terminate the
contract.
Lietuvos Civilinis kodeksas 6.219I anksto numatomas sutarties
nevykdymas
alis gali nutraukti sutar, jeigu iki
sutarties
vykdymo
termino
pabaigos i konkrei aplinkybi ji
gali numanyti, kad kita alis paeis
sutart i esms.
Adapted from a problem in Crandall Whaley, Cases, Problems, and Materials on Contracts, 2 nd
Ed. (Boston: Little, Brown, and Co., 1993.
Example: The contract calls for Builder to construct a building and calls for
periodic payments. Owner tells Builder that there will be no more money for
him after December 15. This is an anticipatory repudiation.
Example: Builder goes to a party where Owner is not in attendance. While
there, he states to witnesses that he does not intend to comply with the
requirements of the contract with Owner.
This is not an anticipatory
repudiation, because Builder has not communicated it to Owner directly.
Good Faith: Good faith is not a defense. Therefore if a party mistakenly
asserts a right it does not have, or demands a performance which is not in the
contract, while threatening not to perform unless its demands are satisfied, this
will be considered anticipatory repudiationeven if done in good faith.
Example: X mistakenly believes it has the right to have a certain computer
program called Program WWW installed as part of the purchase price of the
computers it has purchased. X tells the Seller that Unless you install Program
WWW in all of these computers we are cancelling the deal. X has repudiated.
Repudiation by Conduct
A wrongdoers voluntary action which renders him prospectively unable to
perform can also be an anticipatory repudiation.
Example: Owner enters into a contract by which he obligates himself to lease
certain premises to Lessee One by Day Ten. On Day Five Owner leases the
premises to another lessee for one year. Even though Owner could conceivably
come to an agreement with the other lessee to rescind or cancel their
agreement and then perform without breach, nevertheless Lessee One is
justified in treating this as an anticipatory breach because satisfactory
performance by the Owner is so unlikely.
Anglo-American law and Continental law both distinguish between anticipatory
repudiation that is a result of voluntary action and a partys apparent inability
to perform that is not a result of his voluntary action.
Example: If John has agreed to plow Farmers fields on March 10 th, but Johns
tractor is destroyed on March 5th, there is no repudiation of the contract. John
may still be able to perform by replacing the lost equipment before the March
10th date for performance.
Thus, if an anticipatory breach is verbal or caused by the voluntary actions of
the party, it is the general rule that the non-breaching party has the right to
terminate the contract immediately, without the need to give advance notice to
the breaching party (the notice would allow the breaching party to give
adequate assurance of his performance). The Lithuanian Civil Code treats of
the matter in a separate section, 6.219, from the general case, which does
require such advance notice. The separate section does not require notice to
CISG
Article 72
10
For a discussion of mis en demeure, see infra at p.___. See also John Bell, et al., Principles of
French Law. Oxford University Press 1999 at p.337.
Netherlands Law:
Anticipatory breach is known in Netherlands law.
6.83 Default commences without the formality of putting into default:
... c. Where the creditor must conclude from a communication by the
debtor that the latter will fail in the performance of the obligation.
6.80.1 The consequence of non-performance take effect even before the
claim is exigible:
a. if it is certain that performance without failure will be impossible;
b. if the creditor must conclude from a communication by the debtor
that the latter will fail in performance ... .
D. Assurance
Sometimes, however, a partys conduct, while shaking the confidence of the
other party that the obligation will be performed, falls short of being clearly a
repudiation. This brings us to the matter of assurance.
Principles of European Contract Law
8:105: Assurance of Performance
(1) A party who reasonably believes that there will be a fundamental nonperformance by the other party may demand adequate assurance of due
performance and meanwhile may withhold performance of its own
obligations so long as such reasonable belief continues.
(2) Where this assurance is not provided within a reasonable time, the
party demanding it may terminate the contract if it still reasonably believes
that there will be a fundamental non-performance by the other party and
gives notice of termination without delay.
***
Unequivocable
verbal
renunciation =
reasonable
belief that party
will not perform
Voluntary
act
leading
to
reasonable
belief
that
wrongdoer will
not perform
Voluntary
act Under CISG a
leading
to demand
for
reasonable
assurance
belief
that must be made
wrongdoer will IF
time
not perform
permits; under
LT Civil Code
and UCC no
such demand
is necessary
12
the --then
the
nonbreaching party may
not terminate the
contract.
Under LT Civil
Code and the
UCC the nonbreaching party
has the right to
terminate
at
once.
Under CISG the
non-breaching
party has the
right to terminate
if
adequate
assurance is not
received
within
30 days
If a demand is
made under any
of
the
three
codes described,
under
these
circumstances, if
a
reasonable
assurance
is
given, then--
--the non-breaching
party
may
not
terminate
the
contract
Reasonable
belief that the
wrongdoer
may not be able
to perform, not
result
of
a
voluntary act
Reasonable
belief that the
wrongdoer
may not be able
to perform, not
result
of
a
voluntary act
Party
seeking
assurance
actually has no
reasonable
basis to believe
the
wrongdoer
will not be able
to perform
Under LT Civil
Code and the
UCC,
a
demand
for
assurance
must
be
made.
Under CISG, a
demand
for
assurance
must be made
IF
time
permits
Under LT Civil
Code and the
UCC,
a
demand
for
assurance can
be made.
Under CISG, a
demand
for
assurance
must be made
IF
time
permits
In
all
3
systems, if an
assurance is
demanded
If a demand is
made under any
of
the
three
systems
described, under
these
circumstances, if
a
reasonable
assurance
is
given, then
--the non-breaching
party
may
not
terminate
the
contract
If a less than
commercially
reasonable
assurance
is
given (under the
UCCas between
merchants)
And
if
assurance
given
no Party
having
is demanded
assurance will be in
material breach if he
terminates
the
contract as a result
of their having been
no assurance given
Case # 2
Marek v. McHardy
Louisiana: Supreme Court (1958)
and equipment will have been purchased by the three years of service the
individual has dedicated to the group". Plaintiff was requested by Dr. McHardy
to give his reaction to this offer as early as possible.
Following receipt of this letter, further telephonic conversations were had
between plaintiff and Dr. McHardy, culminating in a letter written by the latter
to plaintiff on March 23, 1948, stated to be a confirmatory letter "which we will
each consider equivalent to a contract". The terms of this contract were that
plaintiff was to join the Browne-McHardy Medical Group as a roentgenologist on
October 1, 1948 and as a salaried member of the organization for 36 months,
the yearly salary being $8,000 with the understanding that, at the end of each
year, an evaluation of the financial structure of the organization would be
reviewed to consider the possibility of an increase of the salary. It was further
provided in the letter that "Beginning October 1, 1951, having completed
thirty-six months of your contract with us as specified, it is agreed that
thereafter you will be a participating partner to the extent of ten percent in all
income, equipment and accounts payable to the Browne-McHardy Medical
Group. This partnership agreement drawn up in the proper form will be
completed on October 1, 1951 at which time it goes into effect". On March 27,
1948 plaintiff accepted the proposition in writing and stated in his letter that
"My wife and I are looking forward to October when we will come home to New
Orleans to live."
On October 1, 1948, plaintiff joined the group and remained in its service for
some 34 months when, according to his allegations, he was informed by Dr.
McHardy that the defendants had no intention of granting him a one-tenth
interest in the medical enterprise on October 1, 1951 but that, instead, he
would have to buy this interest from them. Plaintiff asserts that his expectancy
of being made a partner constituted a material part of the consideration for the
three years employment and that, except for this promise, he would not have
worked at the salary paid by defendants.
[The court first addressed a question concerning whether the action was barred
by a three year statute of limitation for actions based on the services provided
by medical doctors. The court decided the matter was governed by the
general statute of limitation and hence the action was maintainable.]
We pass on to a consideration of the exception of no cause of action which was
referred to the merits by the trial judge and which has been reurged by
defendants in their answer to the appeal. This exception is founded on several
legal propositions which will be hereinafter discussed.
At the outset, it is appropriate to point out that, although plaintiff initially prays
for a specific performance of the partnership feature of the contract, it is plain
from a consideration of the alleged facts and the nature of the obligation that
the case is not one in which a specific performance could or should be ordered.
Whereas, Article 1926 of the Civil Code provides that, on the breach of any
obligation to do or not to do, the obligee is entitled to damages or, at his
option, to a specific performance of the contract in cases which permit it, the
following Article 1927 limits the remedy in ordinary cases of breach of contract,
declaring that the party aggrieved is entitled only to damages unless this
would be inadequate, in which instance specific performance may be granted if
the defaulting party has the power of performing the contract. Manifestly, in a
case like this involving personal services coupled with a promise of the obligees
to make the plaintiff their business partner, the court would not order the
exceptional relief of a specific performance. See Snyder v. Wilder, 146 La. 811,
84 So. 104. Hence, plaintiff's remedy is for dissolution of the contract (see
Articles 2046 and 2047 of the Civil Code) and for the damages (Articles 1926
and 1927) he has occasioned by defendants' breach. This relief he has prayed
for and we think he would be entitled to it if he is able to sustain the wellpleaded allegations of his petitions.
Defendants contend that plaintiff states no cause of action for these alleged
damages for a number of reasons. They specify, first, that the alleged promise
for the formation of a partnership was too vague and indefinite to support its
enforcement in that, among other things, no provision was made for the
duration of the partnership.
We find no merit in this postulation. The contract evidenced by McHardy's letter
of March 23, 1948 is clear and concise, constituting a valid working agreement
supported by adequate consideration. The omitted details, which defendants
assert were essential, were such matters as hours, days off, vacations, sick
leave, retirement and plans depending on contingencies such as death or
retirement of partners, all of which were susceptible of agreement or controlled
by law without need for stipulation. In any case, subsequent failure to reach an
agreement as to these details would not be destructive of the legal
effectiveness of defendants' promise and bar an action by plaintiff for the
damages he is able to prove he suffered as a consequence of the breach.
The next contention of defendants that their offer was never accepted by
plaintiff is without basis in view of the letter of March 23, 1948 which
denominates it as a contract. This letter contains succinct statements of a prior
verbal understanding reached by the parties and the agreement was later
placed in execution, apparently in good faith, when plaintiff came to New
Orleans and took charge of defendants' radiology department.
We also find untenable defendants' next argument that the latter of March 23,
1948 was intended to be a contract only insofar as the three years employment
was concerned and that the mention of the partnership was only by way of a
proposal which would be negotiated after three years if both parties were still
interested. The letter itself refutes this proposition as it states that " having
completed thirty-six months of your contract with us as specified, it is agreed
that thereafter you will be a participating partner to the extent of ten percent
".
Defendants further contend that plaintiff is not entitled to damages because
the petitions show that he is admittedly in default. They say that plaintiff was
bound under the contract to complete his three years of employment in order
to entitle him to a 10% interest in the partnership and yet, according to his own
allegations, he left his employment on August 10, 1951, or before the end of
400 and 509-533. It is only where damages would not furnish adequate
compensation and the defaulting party has the power of performing the
contract, that specific performance will be allowed in the absence of a special
statute authorizing this relief, such as Article 2462 of the Civil Code, as
amended, dealing with an agreement to sell. (It is to be noted that Article
1927 is not contained in the Code Napoleon and the jurisprudence construing
the Article is that specific performance has never been favored in our law. See
Pratt v. McCoy, 128 La. 570, 54 So. 1012 and the many authorities cited
therein.)
On the other hand, Articles 2046 and 2047 of the Civil Code provide that in
every commutative contract there is a resolutory condition to take effect if
either party does not perform and, in cases where there is a willful breach, the
contract is resolved only by suit in which the court may, in its discretion, allow
a further time for performance. These Articles, we think, have no effect on
Article 1927, declaring that damages are the rule and specific performance the
exception, as this Article establishes the ordinary remedy accorded by law,
whereas Articles 2046 and 2047 refer to the judicial discretion which may be
exercised after a hearing where the defendant is pleading for a chance to
perform.
From all of this we deduce that an anticipatory breach of contract is actionable
in Louisiana. Whether the contract will be resolved depends upon the facts and
circumstances of each particular case. Accepting as true the allegations of fact
in the case at bar, we are of the opinion that plaintiff was legally justified in
treating the contract breached when he was informed by defendants in August
of 1951 that they would repudiate their promise to include him as a partner on
October 1, 1951 and, therefore, he was not required to continue in their service
until October 1st as a condition precedent to the assertion of a claim for
damages. The question of whether plaintiff's discontinuance of performance in
August of 1951 deprived defendants of the right to retract their repudiation and
perform the contract is a matter of defense and does not affect the cause of
action stated by plaintiff. Obviously, this would be a matter of importance only
if it is shown on the trial that defendants were willing to perform their promise
on the due date.
Finally, defendants' argument that no contract came into being until the writing
of a partnership agreement, is without merit for the reasons stated above. The
letter of March 23, 1948 is a complete contract containing an executory
promise of a 10% interest in the partnership. No new written agreements were
absolutely essential to carry into effect the covenants contained therein.
The exception of no cause of action is not well taken and should have been
overruled.
The judgment appealed from is reversed and the case remanded for further
proceedings consistent with the views herein expressed.
Case # 3
Footnote in original:The record indicates that as of April 22, 1969, the foundation, the
construction of which was the obligation of Brookhaven, had been completed and two-thirds of
the required tankage parts, which were the obligation of PDM, had been fabricated. However, it
is also noted that as late as March 19, 1969, PDM had written Betke that upon the receipt of
the guarantee, the shop could immediately set in motion fabrication. It is not clear whether
PDM did anything to dispel the clear inference to Betke that there would be no fabrication, or at
least further fabrication, until the guarantee had been received.
procedure for the situation where one party feels insecure as to the other's
performance" reads in pertinent portion as follows:
"Right to Adequate Assurance of Performance. (1) A contract for sale
imposes an obligation on each party that the other's expectation of
receiving due performance will not be impaired. When reasonable grounds
for insecurity arise with respect to the performance of either party the
other may in writing demand adequate assurance of due performance and
until he receives such assurance may if commercially reasonable suspend
any performance for which he has not already received the agreed return.
"(2) Between merchants the reasonableness of grounds for insecurity and
the adequacy of any assurance offered shall be determined according to
commercial standards.
"(4) After receipt of a justified demand failure to provide within a
reasonable time not exceeding 30 days such assurance of due
performance as is adequate under the circumstances of the particular case
is a repudiation of the contract."
"There is no evidence in the record that defendant's finances or ability to pay
changed in any way after the contract was accepted on November 26, 1968 or
that plaintiff had any objective grounds to feel insecure. Plaintiff began
inquiring about defendant's financing soon after the contract was signed, but
no adverse information was found. Ultimately plaintiff refused to erect the
fabricated parts of the tank, but it showed no justification for this."
The question [] is whether PDM's actions subsequent to the execution of the
contract were within the protection provided by 2-609. We hold that they
were not.
The performance to which PDM was entitled was the full payment of the
purchase price within a specified time after the completion of the tank. While
we have a substantial question as to whether PDM made a written demand as
required by the statute, in keeping with our concept that the UCC should be
liberally construed, we do not desire to rest our decision on a formalistic
approach. Letters were written which conveyed what PDM wanted done before
they would pursue their obligations under the contract. The fundamental
problem is that these letters, if they be deemed to be in the nature of a
demand, demanded more than that to which PDM was entitled and the demand
was not founded upon what in our opinion was an actuating basis for the
statute's applicability.
We do not construe 2-609 as being a vehicle without more for an implied term
being inserted in a contract when a substantially equivalent term was expressly
waived in the contract. The something more to trigger applicability of the
statute is that the expectation of due performance on the part of the other
party entertained at contracting time no longer exists because of "reasonable
grounds for insecurity" arising. We find that PDM's actions in demanding either
the escrowing of the purchase price or a personal guarantee lacked the
Footnote in original: [W]e find no merit in PDM's argument that even if its January action
could be construed as an anticipatory repudiation under 2-610, its subsequent actions
demonstrated a retraction of the anticipatory repudiation pursuant to 2-611. That section
requires a clear indication to the aggrieved party "that the repudiating party intends to
perform." PDM only made it clear throughout that it intended to perform if Brookhaven gave
assurances not required of it legally or contractually.
case, the breach of the condition gives a party "reasonable grounds for
insecurity" is a question of fact for the jury.
UCC 2-609, however, does not give the alarmed party a right to redraft the
contract15. Whether the party invoking that provision is merely requesting an
assurance that performance will be forthcoming or whether he is attempting to
alter the contract is a mixed question of law and fact, depending in part upon
the court's interpretation of the obligations imposed on the parties. In this case,
PDM would have been assured only if significant changes in the contract were
made, either by receiving Betke's personal guarantee, by attaining escrow
financing or by purchasing an interest in Brookhaven. The district court could
properly conclude as a matter of law that these requests by PDM demanded
more than a commercially "adequate assurance of due performance."
Note:
Both the Uniform Commercial Code and the Lithuanian Civil Code require
A. That the party demanding assurance have a reasonable basis to believe
that the other party will breach the agreement.
B. That the party demanding assurance has a right only to demand
assurance and therefore has no right to demand further guarantees of
performance.
The UCC is explicitly requires that the assurance be commercially reasonable;
however, the same result would be reached under the Lithuanian Civil Code as
a function of the requirement of good faith and the fact that the assurance
must in some reasonable way overcome a reasonable fear of the innocent
party.
Exercises
1. Placidus and Fromo enter into a contract pursuant to which Fromo is to
perform certain services within 60 days of the date of signing. Placidus is
told by a fortune-teller that Fromo will not perform the services. Placidus
demands assurance from Fromo. Fromo does not provide any assurance.
Placidus terminates the contract.
A. What can Placidus recover from Fromo?
B. Can Fromo recover from Placidus?
C. Who committed the material breach? When and how?
2. Placidus and Fromoenter into a contract pursuant to which Fromo is to
perform certain services within 60 days of the date of signing. Several days
after the formation of the contract, Fromo says to Placidus, Ive been
having headaches. I dont think Ill be able to finish the project on time.
Placidus terminates the contract.
A. What can Placidus recover from Fromo?
15
D. Cure
Alan Farnsworth, Contracts 3rd Ed. Aspen Law and Business: New York (1999). p.587-590.
continental Europe have some form of the right of cure, but these are,
generally speaking, limited to certain contracts; this is true as well for Russian
law.
Almost nowhere is the matter addressed in the general terms found in the
European Principles. For instance the Dutch require the debtor, in order to cure,
to contemporaneously offer payment for damages, and debtors right to cure
ends upon notification from the creditor that he is claiming damages instead of
performance.
New Netherlands Civil Code
6.86 The creditor may refuse performance offered after the beginning of
the default, so long as the offer does not also comprise the payment of
damages which have, in the meantime, become due, as well as of costs.
6.87
To the extent that performance is not already permanently
impossible, the obligation is converted into one to pay damages by
equivalence where the debtor is in default and the creditor notifies him in
writing that he claims damages instead of performance.17
Under Russian law, the buyer of goods is under a duty to notify the seller of the
non-conformity of transferred goods if the non-conformity is remediable, in
which case the seller has a right to remedy its performance. See Russian Civil
Code 475.
Under French law ( 1184), a delai de grce may be granted by the court to a
debtor: this is a last chance to perform. This formerly applied only to judicial
resolution (termination), but pursuant to a 1994 amendment is applicable to
unilateral termination provided by contract (1244-3).
This, however, is quite different from the right of cure contemplated by the
European Principles. Although the European Principles set forth a general right
of cure, [c]ure is not always possible, as in the case of a singer who fails to
show up on the night of the opera. 18 In such a case, the time of performance
has passed.
Thus, under the Principles and American law, a party may cure their faulty
performance up until the time for performance has actually arrived, or even if it
has, if the delay is immaterial. This is a right of the debtor and it may not be
defeated by a purported termination by the non-breaching party.
Example: (European Principles and American law): The contract specifies a
service is to be rendered by the 15th day of the month. The service provider
does not tender his performance until the 16 th. The court may find that the
delay, upon the particular circumstances, is immaterial 19, in which case the
debtor has cured his faulty performance (he will be liable only for moratory
17
P.P.C.Haanappel, Ejan Mackay. New Netherlands Civil Code: Patrimonial Law. Kluwer:
Deventer, Boston (1990, 1997) p.264.
18
Netherlands Civil Code 6.39: Where a term for performance has been set, it is presumed
only to prevent the obligation from being claimed earlier. P.P.C.Haanappel, Ejan Mackay. New
Netherlands Civil Code: Patrimonial Law. Kluwer: Deventer, Boston (1990, 1997)
20
It is interesting to speculate whether the curious delay period in the Lithuanian code between
notice of termination and effective termination is not an attempt at establishing a general
period of cure, somewhat like a genericdelai de grce. But it is not co-terminous with the
period allowed for cure, and thus its purpose is difficult to discern.
21
The corresponding section of the European Principles does indeed specify that in the case of
delay, the aggrieved party may give notice to the defaulting party, setting an additional time
period for performance, and if the performance is not rendered during that period, the
aggrieved party can consider the contract terminated at once. See 8.106.3.
22
Lithuanian Civil Code. 6.217.3. When a period for performance has expired, the aggrieved
party can terminate the contract, if the other party does not perform it during an additional
period of time. 6.218.1. In cases provided for under 6.217 the aggrieved party can
terminate the contract unilaterally, without court action. The other party must be given the
time period for notice of termination set forth in the contract, and if the contract does not set
forth any such period, then the period will be 30 days.
For most other material breaches (except as provided for by contract and in
cases of anticipatory repudiation) the termination will go into effect only after
thirty days or after the period provided for under the contract. This diverges
significantly from both American law and the European Principles, in which a
termination is operative immediately. During this period, if cure is possible, the
debtor (the party in breach) has the right to cure its performance; notification
of termination does not obviate the right of the debtor to cure ( 6.208.2). In
this regard, if the creditor (the aggrieved party) does not accept the tendered
cure, it itself is now in material breach of the contract.
Example: (Under Lithuanian law): A contract specifies a service is to be
rendered by Day 90. On Day 30 the debtor-service provider renders the
service, which is materially deficient. On Day 31 the creditor serves notice of
termination, which is to go into effect after 10 days as provided for by contract.
On Day 36 the debtor notifies the creditor that it intends to cure its
performance by Day 50. The creditor must accept the cure and the notice of
termination is without effect. Note that the original term for performance was
90 days and that the tendered cure is within that period and that it was the
performance, not the delay, which was material.
Example: (Under Lithuanian law): The contract specifies a service is to be
rendered by the 15th day of the month. Assuming under the circumstances that
time was not of the essence, on the 16 th sets an additional ten day period for
the performance. The debtor does not tender performance during this time
period. The creditor notifies the debtor of termination which is to go into effect
in 30 days. The debtor tenders within these 30 days. The creditor refuses
acceptance. The court should rule that the debtors right of cure had lapsed.
Note that it is conceivable, under certain circumstances, that the debtors
power to cure could lapse prior to the expiration of the time period set by the
notice of termination. It is unfortunate that the Lithuanian code is not specific
in terms of the fair possibility of cure: that is, for instance, the PECL states
outright that cure is possible "where the time for performance has not yet
arrived or the delay would not be such as to constitute a fundamental nonperformance." (8.104). This same idea is a fundamental part of the legal
concept of cure, but we do not know if it is to be read into the Lithuanian code,
which only has a provision stating that the promissee can refuse a tender if he
has a legitimate interest in doing so. This is not quite the same thing; the
Lithuanian code states a principle, but leaves the matter to the judge, whereas
the PECL and other codes make this a question of law.
American Law and the European Principles:
What exactly will constitute an effective cure? This is not described in the UCC
nor in its official comments. Clearly, the offer to cure itself must not be
defective: it cannot seek to impose upon the non-breaching party any costs,
such as shipping23. When the problem is easily repairable and minor, an offer
to repair the product will be sufficient. But a party may well be justified in
23
The
Charles L. Knapp and Nathan M. Crystal, Problems in Contract Law 3rd ed. Little, Brown & Co.
USA 1993 p.1165.
contract specifies that the services are to be performed within 30 days. The
company tenders performance on day 20. The client (purchaser, obligee)
immediately informs the company that the performance as rendered is
fundamentally deficient. The client also immediately serves notice of
termination. The very next day the company offers to cure its breach. The
cure would necessitate completely re-performing the service: the services
were for an audit, and the accountants doing the work were found to be
imposters not having the educational qualifications they had claimed to
have had. The company makes assurances that other accountants will be
assigned to the job. The client does not accept the tendered cure. The
company sues. What result?
Case # 4