Huddleston Tax Weekly will continue to feature articles on contracts because it is very important for business owners to have at least a basic knowledge of contract law. Business owners negotiate and execute contracts on a recurring basis and so an understanding of fundamental contract principles is essential. Today we will discuss the concept of substantial performance and demonstrate how this concept informs how damages are settled when a contract has been breached.
Many people assume that when a breach of contract has occurred damages necessarily follow in all instances. In reality, this is not always the case. If an offending party violates a contract in such a way that the violation does not materially affect the goals of the contract then damages usually do not follow. The case of Jacob & Youngs v. Kent (1921) is a famous example of a breach which ended up not leading to any damages.
The plaintiff (Jacob & Youngs) contracted with defendant (Kent) to build a house. The defendant wished to have a specific brand of pipe installed and the contract reflected this wish. When the plaintiff was nearly completed with the project the defendant discovered that a different brand of pipe had been used. The pipe used by the plaintiff was of equal quality to the brand of pipe desired by defendant. The plaintiff originally brought suit in order to receive the remainder owed by the defendant on the original contract price. The defendant argued that the breach was material and requested that the existing pipe should be replaced with the desired brand. The plaintiff argued that using a different brand was a trivial error and that replacement would present an oppressive burden.
The doctrine of substantial performance prevents trivial offenses from totally wiping out an existing contract. When a breach of contract is deemed trivial such that it does not materially affect the goals of a contract the offending party must pay for whatever difference in value occurs as a consequence of its breach. The offending party is not required to redo every part of the contract.
The court (New York Court of Appeals, highest court in the state of New York) found that using a pipe of a different brand but of the same type and quality was a trivial error. Ordering the plaintiff to completely replace the existing pipe with the desired brand would be oppressively expensive. However, since the plaintiff did breach the contract, the defendant is entitled to the difference in value between the product received and the product promised. In this case, the difference in value was literally zero because the two brands of pipe were of the same quality.
In the world of business, these kinds of trivial mistakes are quite common. Having an awareness of the concept of substantial performance can give you a sense of what to expect when these sorts of errors happen.