Doctrine of Substantial Performance

The doctrine of substantial performance will not be applied when the contract makes it clear that a literal and exact compliance is required.  The doctrine of substantial performance does not apply to a condition precedent.  Example: Say a lender is obligated to lend money if a specific number of leases are signed (like on a loan to build a building).  The Bank will have no obligation if the specific number of leases are not signed.

Dick contracted to build a house for Mike.  When it was approximately 25 to 40 percent completed, Mike would not let Dick work any further because he was not following the building plans and specifications, and there were many defects.  Mike hired another contractor to correct the defects and finish the building.  Dick sued Mike for breach of contract, claiming that he had substantially performed the contract up to the point when he had been discharged.  Was Dick correct?  No. There was no substantial performance because the substantial performance of a building contract implies that the building be usable for the purpose for which it was intended.  Because a performance that is only 25% to 40% complete would not produce a usable building, the substantial performance doctrine could not be applied.

With regard to a contract requiring performance to the satisfaction of the other party, the courts are divided as to:

  • Whether the promisor must perform the contract to the satisfaction of the promisee; or
  • Whether it is sufficient that the performance would satisfy a reasonable person under the circumstances.

When personal taste is an important element, the courts generally hold that the performance is not sufficient unless the promise is actually satisfied. Personal satisfaction is generally required when a person promises to make clothes or paint a portrait to the satisfaction of the other party. With respect to things mechanical, courts are more likely to hold that the performing party has performed satisfactorily if a reason­able person should be satisfied with what was done. In most instances, the courts require that the dissatisfaction be shown to be in good faith rather than the “dissatisfied” customer just trying to avoid paying for the work that has been done.

It is common for a person to guarantee the performance of a contract.  For example, a builder may guarantee for one year that certain work will be satisfactory.  Such a guarantee may also be made by a third person.  For example, a surety company may guarantee to the owner that a contractor will perform a contract.  In such a case, the obligation of the surety is in addition to the liability of the contractor, but the contractor is also still liable.  However, a plaintiff cannot recover twice.  He can recover only the amount of the liability. For example, a plaintiff can recover part from contractor and part from surety, or all from surety. However, the plaintiff cannot recover all from surety and all (again) from contractor.

A contract may be discharged pursuant to a provision in the contract or by a subsequent agreement.  For example, there may be a discharge by the terms of the original contract when it says it will end on a certain date.  There may be a mutual cancellation when both parties agree to end their contract.  There may be a mutual rescission when both parties agree to annul the contract and return to their original positions as if the contract had never been made.  This would require returning any consideration (for example, money) that had changed hands.

Inside Doctrine of Substantial Performance