Does your client have the right to withhold payment because you failed to meet immaterial terms?
Despite your best efforts you failed to meet an immaterial term of your contract. Now your customer takes advantage of the situation and claims a breach of contract to withhold payment. How do you handle this?
A perfect world would be one in which a contract is signed, all parties are happy, and no disputes emerge. In reality, however, there are numerous ways for the performance of a contract to cause dissatisfaction or delays resulting in conflicts and disputes.
This article will examine the notion of a "breach of contract" and the options available.
What is a breach of contract?
Substantial performance; Material breaches vs. Immaterial breaches.
A party's failure to fulfill a contractual obligation to be considered a breach of contract must be "Material," meaning substantial enough to affect the desired outcome.
Substantial performance is a legal doctrine that entitles a business to be paid even if it technically fails to comply with the contract's terms. In other words, substantial performance, while not complete performance, can be sufficient enough to satisfy a contract. As long as a good faith attempt to completely fulfill the agreement was made and the breach is not a "material" breach of the contract.
Complete performance
Under U.S. contract law (Uniform Commercial Code Article 2), a doctrine known as the 'perfect tender rule' implies that a buyer of goods can insist that the goods be delivered according to their specifications. In some cases, this is very logical, as a buyer might need an exact match of the item he ordered.
For example, suppose a company is ordering parts to manufacture a delicate product, even a tiny change in the component could make the product useless. In this example, substantial performance will not satisfy the contract terms.
Substantial performance
The perfect tender rule is not absolute, there are exceptions. Substantial performance is an alternative principle to the perfect tender rule that holds precise performance is not mandatory to satisfy a party's obligations under a contract. Instead, the doctrine allows a court to assume a partial, substantial or similar performance to honor the contract.
In general, the principle is as follows:
When a party's performance is slightly deficient but in a manner that is not material to the contract, their obligations have been satisfied. The main point is that the breach must be non-material in nature.
Material vs. Immaterial Breach of Contract.
Suppose United Systems contracts with ABC Wholesale to purchase aluminum to be delivered on Monday evening. However, ABC Wholesale delayed delivery until Tuesday morning. In such a case, ABC Wholesale is unlikely to be liable for monetary damages since a reasonable delay by one of the parties is likely to constitute only a minor breach. (Unless United Systems can show the delay caused damages).
Assume, however, that the contract clearly stipulated that "time is of the essence" and ABC Wholesale must deliver the aluminum by Monday; In this case, ABC Wholesale's failure to deliver on Monday would likely constitute a material breach, making ABC Wholesale's breach of contract more significant, thus relieving United Systems from paying for the aluminum.
Several factors will be taken into account when determining whether a matter is material:
Did a contract exist?
What were the parties' responsibilities under the agreement?
What damages were caused by the breach?
Were there benefits received by the non-breaching party?
How far the breaching party has performed.
Hardship to the breaching party.
Whether the breaching party acted negligently or willfully.
An immaterial breach does not relieve a non-breaching party of their obligation to perform under the contract. However, they may recover damages caused by the breach. For example, a buyer must still pay for the goods a seller delayed in delivery, assuming it only constitutes a minor breach. However, he may be entitled to recover any damages caused by the delay.
Remedies for a Breach of Contract
When a company breaches a contract, the other party to the agreement may be entitled to recover compensation for damages. The most common compensations for a breach of contract are:
Damages
Specific Performance
Cancellation and Restitution
Damages
Compensation damages are the most common ways to compensate for a breach of contract. Compensation damages are intended to put the non-breaching party in the position the non-breaching party would have been in if the breach hadn't occurred.
A judge can also award punitive, nominal, and liquidated damages. They are, however, very rare.
Specific Performance
A judge may order a party to perform its promise to the best of its ability.
If the subject of the agreement is unusual or unique and financial compensation will not be sufficient to place the non-breaching party in the same position they would have been in without the breach.
Restitution and Cancellation
A non-breaching party is entitled to cancel the contract and seek restitution if the non-breaching party benefited the breaching party.
"Restitution" as compensation for breach means that the non-breaching party is put back in its position as before the breach. In contrast, "cancellation" of the agreement voids the contract and releases all parties of any obligation under the agreement.
