Best if printed in landscape.
4 Fulfilling the contract
all terms and requirements of a contract are fulfilled as agreed upon,
the parties will have no problem. But, what if something goes wrong? What if one of the parties fails to perform, refuses to perform, or is
unable to perform? What if one party is not satisfied with the performance
of the other party? What if the contract is broken or breached?
- Failure to fulfill
a contract is referred to as a breach or default.
nonbreaching party (that is, the party that is dissatisfied with the
performance of the other party) must take steps to resolve the dispute;
no one else has the legal standing to initiate action to resolve the
- The nonbreaching
party generally will demand that the breaching party 1) perform the
terms of the contract or 2) compensate the non-breaching party for not
fulfilling the agreement; alternatively, the non-breaching party may
ask 3) to be relieved of having to continue performing on the contract.
- Also see
N.D.C.C. §41-02-82 et seq (...
the aggrieved seller may withhold delivery; resell and recover damages;
recover damages for nonacceptance, or cancel) and N.D.C.C. §41-02-90 et seq (...
the buyer may cancel; cover (by reasonably purchasing substitute
goods) and have damages; or recover damages for nondelivery ...
of the examples will involve the sale of personal property and will
cite to N.D.C.C.
41-02 (also known as Article 2 of the Uniform Comercial Code);
however, most of the basic legal concepts addressed in this section
also apply to other contractual relationships, such as leases, or
the sale of land.
remedy should place the non-breaching party where it would have been
had the contract been completed.
contract that has been fully performed by all parties is referred
to as an executed contract; a contract that has
not be fully performed is an executory contract. For example, I delivered some grain but have not yet delivered all
the grain I agreed to deliver; that is an executory contract. The
contract will be considered executed when I have delivered all the
grain and you have paid me the full amount. See N.D.C.C. §9-05-05. Executed, in this setting, does not mean we have signed
- The contracting
parties are responsible for initially determining whether the performance
or actions of the other party fulfill the contact. For example,
the contract is considered fulfilled if the second party accepts the
first party's performance (N.D.C.C. §9-12-01).
- Also, an offer
of performance that conforms with the contract fulfills the obligation;
see N.D.C.C. §9-12-08.
- This responsibility
also empowers the contracting parties to reject the performance of the
other party. For example, the second party can reject the first
party's performance if the performance does not meet the terms of the
- Similarly, the
law allows the parties to retract their acceptance if they subsequently
find (within a reasonable time) that the performance is unacceptable.
- Also see N.D.C.C. chapter 41-02 for similar principles as they apply to sale
of personal property, especially in a business setting: accepting
performance (N.D.C.C. §41-02-69),
rejecting performance (§41-02-65), and revoking acceptance (§41-02-71).
- For example,
you initially accept the grain I deliver, but once you begin to
use it, you realize that it is unacceptable; you are now entitled
to retract your acceptance and reject the grain. The buyer must
notify the seller that the goods are unacceptable and this must
all occur within a reasonable time.
performance of a contract is different than accepting an offer to
enter into a contract; this point may be obvious but since both
are referred to as "acceptance," it is important that
this be clear.
A buyer may reject goods that "fail in any respect to conform
to the contract." NDCC 41-02-64. "Rejection of goods must
be within a reasonable time" and "is ineffective unless
the buyer seasonably notifies the seller." NDCC 41-02-65. Without
seasonable notification of rejection, a buyer's rejection of nonconforming
goods is ineffective. Under NDCC 41-02-71, a buyer may revoke an acceptance
of nonconforming goods. A "[r]evocation of acceptance must occur
within a reasonable time after the buyer discovers or should have
discovered the ground for it and ... is not effective until the buyer
notifies the seller of it." Id. Campbell
Farms v. Wald, 1998 ND 85, 578 N.W.2d 96
see N.D.C.C. §41-02-06(3) for definition of conforming.
rejecting performance also is a breach. See N.D.C.C. §41-02-82
- Occasionally, there
will be no question that the contract was breached; that is, the first
party informs the other (the second) party that the first party does
not intend to fulfill their obligations.
Repudiation -- I tell you that I will not perform; see
feed supplier might say "I realize I have a contract to
deliver grain to you next week, but I can see now that I will
not be able to make that delivery." Does
this mean the livestock producer should try to find another
repudiation -- after indicating that you will not perform (you
had already repudiated the contract), you change your mind and indicate you
again intend to perform; that is, you indicate you intend to reinstate
the contract (N.D.C.C. §41-02-74).
feed supplier contacts the livestock producer a second time several
days later and states that things have changed and the company
will be able to deliver the feed. What
if the livestock producer has already arranged for another supplier
to provide the feed?
a sale of personal property, if one party becomes concerned whether
the other party will perform, the concerned party can request an assurance
of performance (N.D.C.C. §41-02-72(1)).
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 party may in writing demand adequate assurance
of due performance and until the demanding party receives such assurance
may, if commercially reasonable, suspend any performance for which
the demanding party has not already received the agreed return."
the nonbreaching party have to fuflill their obligations once the breaching
party has failed to fulfill theirs?
you are obligated to make several deliveries to me and I am obligated
to pay you after each delivery. I do not pay you after a delivery. Do you have to make the subsequent deliveries or can you stop making
the deliveries until I pay?
-12, and -13.
- Also see
"If the buyer wrongfully rejects or revokes acceptance or fails
to make a payment ..., the aggrieved seller may: 1. Withhold
delivery of such goods ..."
the parties will talk to one another in an attempt to reconcile their
steps the nonbreaching party can take
party can release the breaching party; N.D.C.C. §9-13-01; one
party discharges/releases the other's obligations.
party accepts partial performance in writing (N.D.C.C. §9-13-07).
- Rescission (N.D.C.C. §9-09-02) but must return everything of value received as
part of the agreement.
- The parties can
also agree to alter the contract
agree that one
party will accept something different or less than originally agreed
accord and satisfaction (N.D.C.C. §§9-13-04 and -05)
- "An accord is defined in Section 9-13-04, N.D.C.C., as "an agreement
to accept [as satisfying] an obligation something different
from or less than that to which the person agreeing to accept
is entitled." Section 913-05, N.D.C.C., provides that "[a]cceptance
by the creditor of the [performance] of [the] accord extinguishes
the obligation and is called satisfaction." "The 'accord' is
the agreement [to accept something less] and the 'satisfaction'
is its execution or performance."" footnote 1 of Herb
Hill Insurance, Inc. v. Radtke, 380 N.W.2d 651 (N.D. 1986).
- Until the
accord is performed, the original contract is still binding.
agree to replace original agreement with a new one;
see novation (N.D.C.C. §§9-13-08, -09, and -10)
term "novation" is statutorily defined as "the substitution
of a new obligation for an existing one." Section 9-13-08, N.D.C.C.
A novation is made by the substitution of a new obligation between
the same parties with intent to extinguish the old obligation.
Section 9-13-10, N.D.C.C. To have a novation, the parties must
intend to extinguish the old obligation, there must be mutual
assent, and there must be sufficient consideration. Butler
v. Roberts , 437 N.W.2d 839 (N.D. 1989)." Schmitt
v. Berwick Township, 488 N.W.2d 398 (ND 1992).
- All obligations
under the original contract are extinguished; only the terms
of the new contract are now binding.
- The parties
agree to terminate (rescind) the contract (N.D.C.C. §9-09-02(5))
means ending the contract and returning the parties to where
they were prior to the contract; rescission implies returning
the parties to where they were as if the contract had never
been entered into. Rescission requires the parties to
return everything of value that they received from the other
is available if both parties agree; if both parties do not agree
to rescind their contract, rescission is available in only limited
circumstances, as described below.
can agree to alter their contract (N.D.C.C. §§9-09-05 and -06).
additional consideration required to alter contract? Are
there any special rules for the parties to modify their contract?
can agree that in case of a dispute, they will request that a third party
to resolve their differences. This is referred to as arbitration.
32-29.3 UNIFORM ARBITRATION ACT
- N.D.C.C. §32-29.3-06. An agreement contained in a record to submit to arbitration
any existing or subsequent controversy arising between the parties
to the agreement is valid, enforceable, and irrevocable except ...
Glass Co. v. Innes Construction Co., 2000 ND 56, 608 N.W.2d 236
- "an arbitration
award may be vacated if the "arbitrators exceeded their powers";
however, we will vacate an arbitration award under this subsection
only if it is "completely irrational." ... "[A] decision is completely
irrational if it is either mistaken on its face or so mistaken as
to result in real injustice or constructive fraud." ... An
arbitrator's mere mistake as to fact or law is not a sufficient
ground for overturning an arbitration award."
the parties are not able to resolve their differences and one party initiates
a lawsuit, the court will likely address three issues: 1) what was the agreement, 2) did the parties' performances align with the
agreement, and 3) what should the court do to resolve the differences.
- Recommend that the parties attempt to resolve their dispute through negotiations before initiating a legal action (lawsuit). Also recommend that the parties investigate what might be the likely outcome of a lawsuit and use that as a basis for their negotiations. Restated, the parties need to keep in mind that if they are not able to resolve their dispute, a lawsuit is an alternative; accordingly, the likely outcome of a lawsuit often becomes the basis for settlement negotiations.
What was the agreement?
- When interpreting
a contract, the court will try to assure contract is executed (fulfilled).
N.D.C.C. §9-07-08 "A contract must receive such an interpretation
as will make it lawful, operative, definite, reasonable, and capable
of being carried into effect, if it can be done without violating
the intention of the parties."
- The court will
try to identify the parties intent
N.D.C.C. §9-07-03 "A contract must be so interpreted as to
give effect to the mutual intention of the parties as it existed
at the time of contracting so far as the same is ascertainable and
N.D.C.C. §9-07-15 Clauses subordinate to general intent.
N.D.C.C. §9-07-17 Repugnancies reconciled with intent.
N.D.C.C. §9-07-20 Stipulations necessary to make contract reasonable
- The court will
rely on the document if the contract is written.
N.D.C.C. §9-07-02 "The language of a contract is to govern
its interpretation if the language is clear and explicit and does
not involve an absurdity."
N.D.C.C. §9-07-04 Intention ascertained from writing alone if possible.
execution of a contract in writing ... supersedes all the oral negotiations
or stipulations ... which preceded or accompanied the execution
of the instrument." N.D.C.C. §9-06-07.
- "All preliminary
negotiations, conversations, and verbal agreements are merged into
and superseded by the subsequent written contract. The rule is founded
on experience and public policy, created by necessity, and designed
to give certainty to a transaction that has been reduced to writing
by protecting the parties against the doubtful veracity and uncertain
memory of interested witnesses."
v. Quantum Industries, Inc., 2004 ND 178, 687 N.W.2d 241.
be certain to include every expectation or requirement in the written
- Exception --
Parol evidence rule:
court will consider additional information if the written contract
41-02-09, N.D.C.C., changes the common law of contracts and
liberalizes the application of the parol evidence rule to writings
evidencing a contract for the sale of goods." ... A sale
contract need not be ambiguous for the admission of evidence
of course of dealing, course of performance, or usage of trade.
Farms v. Wald, 1998 ND 85, 578 N.W.2d 96
- Also see
N.D.C.C. §9-07-05 "When through fraud, mistake, or accident a written contract fails
to express the real intention of the parties, such intention is to be
regarded and the erroneous parts of the writing disregarded."
- Court will interpret
contract against party who wrote it.
N.D.C.C. §9-07-19. Uncertainty interpreted against party causing it
- Presumption as to cause.
- If the language
of the contract conflcts, "written part will prevail over printed
part" (assuming the parties used a form or some type of standard
document with 'fill-in' blanks)
N.D.C.C. §9-07-16. Written part of contract controls printed part.
- The court will
interpret the agreement based on course of dealings, course of performance,
and usage of trade (as discussed previously).
N.D.C.C. 41-02-09, the trial court could consider extrinsic evidence
of the commercial context of the parties' agreement ... to determine
that the written invoices were not a final expression of their agreement
... The court could also consider extrinsic evidence of the parties'
course of dealing and course of performance ..." Herman
Oil, Inc. v. Peterman, 518 N.W.2d 184 (N.D. 1994)
- The court will
also apply statutory requirements (as discussed previously).
there times when a court may not enforce the contract as originally agreed
- N.D.C.C. §32-04-17 authorizes reformation for mutual mistake: "When,
through fraud or mutual mistake of the parties, or a mistake of one
party which the other at the time knew or suspected, a written contract
does not truly express the intention of the parties, it may be revised
on the application of a party aggrieved so as to express that intention
so far as it can be done without prejudice to rights acquired by third
persons in good faith and for value."
Generally, "[f]or a mutual mistake to justify reformation of an agreement,
'it must be shown that, at the time of the execution of the agreement
... both parties intended to say something different from what was
said in the instrument.'" Mau
v. Schwan, 460 N.W.2d 131 (ND 1990)
- N.D.C.C. §9-09-02 party may rescind the contract because their consent
was given by mistake or under duress, menace, fraud or undue influence,
of the other party fails or is void.
- This statute
specifies the [limited] circumstances when one party may rescind
the contract (return the parties to where they were as if the contract
had never been entered into).
enrichment (implied contract)
Still, we have recognized a contractor who has not substantially performed
may often be entitled to recover outside the contract for the value
of the benefit conferred under a theory of quantum meruit or unjust
enrichment. ... We ... recognized such an action was an equitable
one governed by considerations of natural justice, and we said [ that
previous decisions] did not necessarily preclude recovery in quantum
meruit, as distinguished from recovery in contract, for the reasonable
value of goods and services rendered." Circle
B Enterprises, Inc. v. Steinke, 1998 ND 164, 584 N.W.2d 97
Corporation v. MDU Resources Group, 1999 ND 247, 603 N.W.2d 891
Also see excerpts from
Schroeder v. Buchholz.
of performance -- I
have no obligation to perform my part of the contract because it is
impossible for me to perform
N.D.C.C. §9-04-03 "When a contract [is] ... wholly impossible of
performance ..., the entire contract is void."
N.D.C.C. §9-11-04 "The want of performance ..., in
whole or in part, or any delay therein, is excused ... 2.
When it is prevented or delayed by an irresistible superhuman cause
or by the act of public enemies of this state or of the United States,
unless the parties have agreed expressly to the contrary; or ...
Did the performance
fulfill the contract?
Grain Co. v. Ehrmantrout, 502 N.W.2d 234 (N.D. 1993); farmer agreed
to deliver spring wheat but he delivered winter wheat which was then
sold to other producers as "spring wheat seed." The
winter wheat did not grow when planted in spring. Elevator sues
the Uniform Commercial Code, a bargain that includes a description
of the goods to be sold creates an express warranty that the goods
will conform to that description."
- Does partial performance
fulfill the contractual obligation?
will be considered to have partially fulfilled the contract if the
other party accepts it as partially fulfilling the contract (N.D.C.C. §9-12-05).
party providing partial performance is entitled to partial payment
performance will be considered full satisfaction of the obligation
if the other party accepts it as full satisfaction (N.D.C.C. §9-13-07).
might the court do to resolve the matter?
- Compensatory solutions
- Court orders
the breaching party pay the nonbreaching party enough money to place
the nonbreaching party where it would have been had the breaching
party fulfilled the contract.
- The measure of compensatory damages for a breached contract is similar, but not identical to the measure of compensatory damages for a tort case. In a tort situation, the measure of compensatory damages is "to return the injured person to where he or she would have been had the tort not been committed." In the situation of a breached contract, the measure of compensatory damages is "place the nonbreaching party where he or she would have been had the contract not been breached."
- But the nonbreaching
party has a duty to mitigate its damages.
party injured by the breach of a contract must make every reasonable
effort to minimize damages and may not recover for damages which
could have been avoided by reasonable efforts under the existing
circumstances ... These decisions stand for the proposition
that the duty to mitigate or minimize damages arises after there
has been a breach of contract." Atlas
Ready-Mix of Minot, Inc. v. White Properties, Inc., 306 N.W.2d
212 (N.D. 1981)
(liquidated) damages; N.D.C.C. § 9-08-04;
specify in the contract the amount one party will owe the other
if the contract is breached. Such clauses will be enforced
if determining the amount of damages will be difficult if the
contract is breached. Such clauses may not be enforced
if the amount specified in the contract does not align with
the actual loss suffered by the non-breaching party, that is,
if the amount of damages specified in the contract penalizes
the breaching party.
v. Schmeling, 520 N.W.2d 820 (N.D. 1994)
clauses which impose penalties for nonperformance are void ...
As a general rule, a contractual provision fixing damages also
is invalid ... However, ... "the parties may agree therein upon
an amount presumed to be the damage sustained by a breach in
cases where it would be impracticable or extremely difficult
to fix the actual damage." Regarding
the determination of whether a liquidated damages provision
is valid or is, in fact, a penalty, we have observed, "three
'foundational facts' ... 1) Were the damages upon breach very
difficult to estimate at the time the contract was entered?;
2) Was there a reasonable endeavor by the parties to fix compensation?;
and, 3) Does the amount stipulated bear a reasonable relationship
to the damages reasonably to be anticipated upon breach?" ...
modern trend appears to be to uphold reasonable liquidated damages
clauses ... Although our statute has not been amended to clearly
reflect the modern trend, we nevertheless construe it to be
receptive to the interests of those who, in good faith, endeavor
to avoid the traditional recourse to the court system by negotiating
liquidated damages provisions."
- In the situation of unjust enrichment, the defendant pays the plaintiff the amount of the defendant's benefit, not the amount of the plaintiff's loss.
- See Connecticut Civil Jury Instructions, 4.5-13 Unjust Enrichment (Restitution).
- I mistaken improve your property (e.g., I paint your house or apply fertilizer to your farm land). If it is determined that you have been unjustly enriched, you need to pay me the value of the improvement; you will not have to pay me the cost that I incurred nor the amount that I usually charge for the service. Continuing the example of mistakenly painting a house: it may have cost me $600 to paint your house and I normally charge $2,200 but your house did not need to be painted because it had been painted two years earlier. I would only be entitled to be paid the amount by which a new coat of paint is more valuable than a two-year old coat of paint, perhaps $500.
performance (N.D.C.C. §§32-04-07 to -14)
v. Kuntz, 1999 ND 114, 595 N.W.2d 292
be specifically enforceable, an oral agreement must be just and
reasonable to the party against whom enforcement is sought, and
the agreement must be sufficiently certain that the act to be
done is clearly ascertainable."
N.D.C.C. §41-02-95. "Buyer's right to specific performance or replevin.
Specific performance may be decreed where the goods are unique or
in other proper circumstances.
The decree for specific performance may include such terms and conditions
as to payment of the price, damages, or other relief as the court
may deem just.
The buyer has a right of replevin for goods (demand delivery of the
goods) identified to the contract if, after reasonable effort, 1)
the buyer is unable to effect cover for such goods, or 2) the circumstances
reasonably indicate that such effort will be unavailing, or 3) if
the goods have been shipped under reservation and satisfaction of
the security interest in them has been made or tendered."
may excuse nonbreaching party's obligation because other party has not
performed; other party had to perform first; see N.D.C.C. §§9-01-11, -12 and -13.
Summary of Key Points
- Failure to fulfill a contract is a breach or default. The nonbreaching party must take steps to resolve the dispute. The nonbreaching party generally will demand that 1) the breaching party perform the terms of the contract, 2) the breaching party compensate the non-breaching party for not fulfilling the agreement, or 3) that they (the non-breaching party) be relieved of having to continue performing on the contract.
- A solution to a breached contract is for the contracting parties to agree on a resolution that may involve amending the original agreement.
- The contracting parties may also want to include a provision in their original agreement specifying how they will resolve a dispute should one arise during the execution of the contract.
- If the parties cannot resolve their contactual dispute and a lawsuit is initiated, the court will attempt to specify a resolution that fulfills the contract as completely as possible. Issues will focus on 1) what were the agreed upon terms, 2) did the performance of the parties fulfill the agreement, and 3) what remedy will most closely fulfill the agreement, as understood by the court.
case you may finding interesting -- Eggl
v. Letvin Equipment Co., 2001 ND 144, 632 N.W.2d 435. It involves
questions of breach of warranty, reasonably fit for the purpose for which
it was purchased, whether a contract of purchase has been rescinded within
a reasonable time, nonconformity, substantial impairment of value, timely
notice of revocation, time for discovering a breach of warranty, and what
is a reasonable time for revocation of acceptance.
negotiating, think about the future - what you want to accomplish by entering into the agreement and what you want
to be the outcome if something goes wrong after the agreement has been created. Specify assumptions and address contingencies.
specifying assumptions enough to justify altering the contract if the
assumptions turn out to be wrong? Does the role of the assumptions (that
is, if they are wrong, the contract will be implemented differently)
need to be explained in the contract?
December 16, 2008