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Fulfilling a Contract

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Section 4 Fulfilling the contract

If 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.
  • The 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 matter. See N.D.C.C. 9-01-16.
  • 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 ... ).

    Many 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.

  • The remedy should place the non-breaching party where it would have been had the contract been completed.

    A 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 an agreement.

  • 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 agreement.
  • 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.

    Accepting 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.

    [13] 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

    Also see N.D.C.C. 41-02-06(3) for definition of conforming.

    Improperly 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.
    • Anticipatory Repudiation -- I tell you that I will not perform; see N.D.C.C. §9-01-16 and 41-02-73.
      • A 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 feed supply?
    • Retracting 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).
      • The 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?
  • In 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)).
  • "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 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."

  • Does the nonbreaching party have to fuflill their obligations once the breaching party has failed to fulfill theirs?
    • Example:  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?
    • See N.D.C.C. §§9-01-11, -12, and -13
    • Also see N.D.C.C. §41-02-82:  "If the buyer wrongfully rejects or revokes acceptance or fails to make a payment ..., the aggrieved seller may:  1. Withhold delivery of such goods ..."
  • Hopefully the parties will talk to one another in an attempt to reconcile their differences.
  • Unilateral steps the nonbreaching party can take 
    • Nonbreaching party can release the breaching party; N.D.C.C. §9-13-01; one party discharges/releases the other's obligations.
    • Nonbreaching 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
    • Parties agree that one party will accept something different or less than originally agreed to; see 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. 
    • Parties agree to replace original agreement with a new one; see novation (N.D.C.C. §§9-13-08, -09, and -10)
      • "The 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))
      • Rescission 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 party.
      • Rescission 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.
    • Parties can agree to alter their contract (N.D.C.C. 9-09-05 and -06).

      Is additional consideration required to alter contract?  Are there any special rules for the parties to modify their contract?

Parties 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.

  • See N.D.C.C. chapter 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 ...
  • O&K 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."

If 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 lawful."

    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 implied.

  • 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.

    • "The 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."  Evenson v. Quantum Industries, Inc., 2004 ND 178, 687 N.W.2d 241.
    • Recommendation: be certain to include every expectation or requirement in the written document.
    • Exception -- Parol evidence rule:
      • The court will consider additional information if the written contract is ambiguous.
      • "Section 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.  Campbell 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).
    • "Under 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).

Are there times when a court may not enforce the contract as originally agreed to?

  • 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, or consideration 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).

Unjust enrichment (implied contract)

"[8] 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

Also see Apache Corporation v. MDU Resources Group, 1999 ND 247, 603 N.W.2d 891

Also see excerpts from Schroeder v. Buchholz.

  • Impossibility 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?

  • Breach of Warranty -- performance did not fulfill the contract

Dakota 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 farmer.

"Under 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 the performance have to be perfect? Substantial Performance

    • Often times, it is difficult to complete the performance of a contract without some shortfall.  Does the law require perfect performance of the agreement, or is it acceptable to perform slightly different than what was agreed to?

    • [6] A contractor who fails to substantially perform may not recover at all under the contract. ... Substantial performance means a contractor has performed in good faith, except as to unimportant and unintentional omissions or deviations that are the result of mistake or inadvertence.  Circle B Enterprises, Inc. v. Steinke, 1998 ND 164, 584 N.W.2d 97

  • Does the performance have to be completed by an exact time:  "time of performance?"

    • "Where time is not of the essence, a reasonable delay in performance does not constitute a breach of contract; however, an unreasonable delay constitutes a breach and justifies the remedy of cancellation." Keller v. Hummel, 334 N.W.2d 200 (N.D. 1983)
  • Does partial performance fulfill the contractual obligation?
    • Partial performance 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).
    • The party providing partial performance is entitled to partial payment (N.D.C.C. 9-11-06).
    • Partial 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).

What 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.
      • "The 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)
    • Fixing (liquidated) damages; N.D.C.C. 9-08-04; 41-02-97
      • Parties 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.
      • See Fisher v. Schmeling, 520 N.W.2d 820 (N.D. 1994)
      • "Contractual 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?" ...

      "The 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.
  •  

  • Specific performance (N.D.C.C. 32-04-07 to -14)

    Kuntz v. Kuntz, 1999 ND 114, 595 N.W.2d 292

    "to 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.

    1. Specific performance may be decreed where the goods are unique or in other proper circumstances.

    2. 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.

    3. 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."

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.

 

Section 5 Conclusion

A 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.

When 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.

  • Is 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?

Last updated December 16, 2008

   
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