21. What is performance of a contract?
Performance of a contract relieves a person from further duties under the contract. There are three levels of performance:
• Complete Performance – Complete performance by a party means that the contracting party has fulfilled every duty required by the contract. A completely performing party is entitled to a complete performance by the other party.
⁃ Example: I enter into a contract to build a house for Ellen. I build the house and complete all of the material and non-material requirements of the contract.
• Substantial Performance – Substantial performance of a contract means less than complete performance; but, the level of performance is sufficient to avoid a claim of breach of contract. More specifically, it means that a party has performed all material elements of the contract, but there are non-material aspects left uncompleted.
⁃ Note: The other party may be entitled to seek offset or recovery from the substantially performing the party for the aspects of the contract not completed.
⁃ Example: I enter into a contract to build a house for Ellen. I build the house, but fail to paint the interior the color described in the contract. This contract is substantially performed and does not give rise to an action for breach. Ellen may, however, recover or offset the cost of painting the walls when paying me.
• Breach of Contract – Any performance that is not complete or substantial performance is a material breach. This entails performance at a level below what is reasonably acceptable. The materially breaching party cannot sue the other party for performance and is liable for damages to the other party for the breach.
⁃ Example: I enter into a contract to build a house for Ellen. I distracted by another contract and make material errors in laying the foundation. It causes the house not to meet standards and pass inspection by the building inspector. In this case, I have breached the contract by failing to perform a material duty under the agreement.
• Discussion: How do you feel about the concept of substantial performance? Do you believe that failure to perform certain duties under a contract should not constitute a breach? Why or why not?
• Practice Question: Missy enters into a contract to perform auditing functions for ABC Corp. She does reconciliation of many of the accounts, which takes substantial time. She is satisfied that the books are accurate, so she skips performing many of the key tasks required of external auditors. What is the status of Missy’s duties under the contract?