Contracts II

Material Breach


Common Law
Restatement Second of Contracts § 241
Restatement Second of Contracts § 241

Circumstances Significant in Determining Whether a Failure Is Material

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In determining whether a failure to render or to offer performance is material, the following circumstances are significant:

  1. the extent to which the injured party will be deprived of the benefit which he reasonably expected;
  2. the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived;
  3. the extent to which the party failing to perform or to offer to perform will suffer forfeiture;
  4. the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances;
  5. the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.
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  • Factors (a) & (b) are about the non-breaching party.
  • Factors (c) & (d) are about the breaching party.
  • Factor (e) is about a party acting in bad faith.
Total Breach

If a material breach is not cured, the aggrieved party can elect to treat the breach as total or as partial.

Electing to treat a breach as total will terminate the contract.

Electing to treat a breach as partial will still allow the aggrieved party to withhold its performance until the conditions for it are met, but still obligates both parties to fulfill their obligations.

Restatement Second of Contracts § 242
Restatement Second of Contracts § 242

Circumstances Significant in Determining When Remaining Duties Are Discharged

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In determining the time after which a party's uncured material failure to render or to offer performance discharges the other party's remaining duties to render performance under the rules stated in [R2C § 237 and R2C § 238], the following circumstances are significant:

  1. those stated in [R2C § 241];
  2. the extent to which it reasonably appears to the injured party that delay may prevent or hinder him in making reasonable substitute arrangements;
  3. the extent to which the agreement provides for performance without delay, but a material failure to perform or to offer to perform on a stated day does not of itself discharge the other party's remaining duties unless the circumstances, including the language of the agreement, indicate that performance or an offer to perform by that day is important.
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Restatement Second of Contracts § 237
Restatement Second of Contracts § 237

Effect on Other Party's Duties of a Failure to Render Performance

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Except as stated in [R2C § 240], it is a condition of each party's remaining duties to render performances to be exchanged under an exchange of promises that there be no uncured material failure by the other party to render any such performance due at an earlier time.

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Sales of Goods under the UCC
Perfect Tender Rule
UCC § 2-601

Buyer's Rights on Improper Delivery.

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Subject to the provisions of this Article on breach in installment contracts ([UCC § 2-612]) and unless otherwise agreed under the sections on contractual limitations of remedy ([UCC § 2-718 and UCC § 2-719]), if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may

  1. reject the whole; or
  2. accept the whole; or
  3. accept any commercial unit or units and reject the rest.
Official Comment

. . .

  1. . . . Partial acceptance is permitted whether the part of the goods accepted conforms or not. The only limitation on partial acceptance is that good faith and commercial reasonableness must be used to avoid undue impairment of the value of the remaining portion of the goods. . . . In this respect, the test is not only what unit has been the basis of contract, but whether the partial acceptance produces so materially adverse an effect on the remainder as to constitute bad faith.
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UCC § 2-602

Manner and Effect of Rightful Rejection.

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  1. Rejection of goods must be within a reasonable time after their delivery or tender. It is ineffective unless the buyer seasonably notifies the seller.
  2. Subject to the provisions of the two following sections on rejected goods ([UCC § 2-603 and UCC § 2-604]),
    1. after rejection any exercise of ownership by the buyer with respect to any commercial unit is wrongful as against the seller; and
    2. if the buyer has before rejection taken physical possession of goods in which he does not have a security interest under the provisions of this Article ([UCC § 2-711(3)]), he is under a duty after rejection to hold them with reasonable care at the seller's disposition for a time sufficient to permit the seller to remove them; but
    3. the buyer has no further obligations with regard to goods rightfully rejected.
  3. The seller's rights with respect to goods wrongfully rejected are governed by the provisions of this Article on Seller's remedies in general ([UCC § 2-703]).
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Tender

Tender is a formal offer to buy or sell something.

UCC § 2-503

Manner of Seller's Tender of Delivery.

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  1. Tender of delivery requires that the seller put and hold conforming goods at the buyer's disposition and give the buyer any notification reasonably necessary to enable him to take delivery. The manner, time and place for tender are determined by the agreement and this Article, and in particular
    1. tender must be at a reasonable hour, and if it is of goods they must be kept available for the period reasonably necessary to enable the buyer to take possession; but
    2. unless otherwise agreed the buyer must furnish facilities reasonably suited to the receipt of the goods.
  2. Where the case is within the next section respecting shipment tender requires that the seller comply with its provisions.
  3. Where the seller is required to deliver at a particular destination tender requires that he comply with subsection (1) and also in any appropriate case tender documents as described in subsections (4) and (5) of this section.
  4. Where goods are in the possession of a bailee and are to be delivered without being moved
    1. tender requires that the seller either tender a negotiable document of title covering such goods or procure acknowledgment by the bailee of the buyer's right to possession of the goods; but
    2. tender to the buyer of a non-negotiable document of title or of a record directing the bailee to deliver is sufficient tender unless the buyer seasonably objects, and except as otherwise provided in Article 9 receipt by the bailee of notification of the buyer's rights fixes those rights as against the bailee and all third persons; but risk of loss of the goods and of any failure by the bailee to honor the non-negotiable document of title or to obey the direction remains on the seller until the buyer has had a reasonable time to present the document or direction, and a refusal by the bailee to honor the document or to obey the direction defeats the tender.
  5. Where the contract requires the seller to deliver documents
    1. he must tender all such documents in correct form, except as provided in this Article with respect to bills of lading in a set ([UCC § 2-323(2)]); and
    2. tender through customary banking channels is sufficient and dishonor of a draft accompanying or associated with the documents constitutes non-acceptance or rejection.
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UCC § 2-307

Delivery in Single Lot or Several Lots.

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Unless otherwise agreed all goods called for by a contract for sale must be tendered in a single delivery and payment is due only on such tender but where the circumstances give either party the right to make or demand delivery in lots the price if it can be apportioned may be demanded for each lot.

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UCC § 2-504

Shipment by Seller.

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Where the seller is required or authorized to send the goods to the buyer and the contract does not require him to deliver them at a particular destination, then unless otherwise agreed he must

  1. put the goods in the possession of such a carrier and make such a contract for their transportation as may be reasonable having regard to the nature of the goods and other circumstances of the case; and
  2. obtain and promptly deliver or tender in due form any document necessary to enable the buyer to obtain possession of the goods or otherwise required by the agreement or by usage of trade; and
  3. promptly notify the buyer of the shipment.

Failure to notify the buyer under paragraph (c) or to make a proper contract under paragraph (a) is a ground for rejection only if material delay or loss ensues.

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UCC § 2-507

Effect of Seller's Tender; Delivery on Condition.

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  1. Tender of delivery is a condition to the buyer's duty to accept the goods and, unless otherwise agreed, to his duty to pay for them. Tender entitles the seller to acceptance of the goods and to payment according to the contract.
  2. Where payment is due and demanded on the delivery to the buyer of goods or documents of title, his right as against the seller to retain or dispose of them is conditional upon his making the payment due.
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UCC § 2-511

Tender of Payment by Buyer; Payment by Check.

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  1. Unless otherwise agreed tender of payment is a condition to the seller's duty to tender and complete any delivery.
  2. Tender of payment is sufficient when made by any means or in any manner current in the ordinary course of business unless the seller demands payment in legal tender and gives any extension of time reasonably necessary to procure it.
  3. Subject to the provisions of this Act on the effect of an instrument on an obligation ( Section 3-310), payment by check is conditional and is defeated as between the parties by dishonor of the check on due presentment.
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Exceptions to the Perfect Tender Rule
  1. Bad Faith
  2. Cure
    • UCC § 2-508

      Cure by Seller of Improper Tender or Delivery; Replacement.

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      1. Where any tender or delivery by the seller is rejected because non-conforming and the time for performance has not yet expired, the seller may seasonably notify the buyer of his intention to cure and may then within the contract time make a conforming delivery.
      2. Where the buyer rejects a non-conforming tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance the seller may if he seasonably notifies the buyer have a further reasonable time to substitute a conforming tender.
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  3. Installment Contract
    • UCC § 2-612

      "Installment Contract"; Breach.

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      1. An "installment contract" is one which requires or authorizes the delivery of goods in separate lots to be separately accepted, even though the contract contains a clause "each delivery is a separate contract" or its equivalent.
      2. The buyer may reject any installment which is non-conforming if the non-conformity substantially impairs the value of that installment and cannot be cured or if the non-conformity is a defect in the required documents; but if the non-conformity does not fall within subsection (3) and the seller gives adequate assurance of its cure the buyer must accept that installment.
      3. Whenever non-conformity or default with respect to one or more installments substantially impairs the value of the whole contract there is a breach of the whole. But the aggrieved party reinstates the contract if he accepts a non-conforming installment without seasonably notifying of cancellation or if he brings an action with respect only to past installments or demands performance as to future installments.
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  4. Acceptance
    • UCC § 2-606

      What Constitutes Acceptance of Goods.

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      1. Acceptance of goods occurs when the buyer
        1. after a reasonable opportunity to inspect the goods signifies to the seller that the goods are conforming or that he will take or retain them in spite of their non-conformity; or
        2. fails to make an effective rejection ([UCC § 2-602(1)]), but such acceptance does not occur until the buyer has had a reasonable opportunity to inspect them; or
        3. does any act inconsistent with the seller's ownership; but if such act is wrongful as against the seller it is an acceptance only if ratified by him.
      2. Acceptance of a part of any commercial unit is acceptance of that entire unit.
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      UCC § 2-607

      Effect of Acceptance; Notice of Breach; Burden of Establishing Breach After Acceptance; Notice of Claim or Litigation to Person Answerable Over.

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      1. The buyer must pay at the contract rate for any goods accepted.
      2. Acceptance of goods by the buyer precludes rejection of the goods accepted and if made with knowledge of a non-conformity cannot be revoked because of it unless the acceptance was on the reasonable assumption that the non-conformity would be seasonably cured but acceptance does not of itself impair any other remedy provided by this Article for non-conformity.
      3. Where a tender has been accepted
        1. the buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of breach or be barred from any remedy; and
        2. if the claim is one for infringement or the like ([UCC § 2-312(3)]) and the buyer is sued as a result of such a breach he must so notify the seller within a reasonable time after he receives notice of the litigation or be barred from any remedy over for liability established by the litigation.
      4. The burden is on the buyer to establish any breach with respect to the goods accepted.
      5. Where the buyer is sued for breach of a warranty or other obligation for which his seller is answerable over
        1. he may give his seller written notice of the litigation. If the notice states that the seller may come in and defend and that if the seller does not do so he will be bound in any action against him by his buyer by any determination of fact common to the two litigations, then unless the seller after seasonable receipt of the notice does come in and defend he is so bound.
        2. if the claim is one for infringement or the like ([UCC § 2-312(3)]) the original seller may demand in writing that his buyer turn over to him control of the litigation including settlement or else be barred from any remedy over and if he also agrees to bear all expense and to satisfy any adverse judgment, then unless the buyer after seasonable receipt of the demand does turn over control the buyer is so barred.
      6. The provisions of subsections (3), (4) and (5) apply to any obligation of a buyer to hold the seller harmless against infringement or the like ([UCC § 2-312(3)]).
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      • Unless later revoked
        UCC § 2-608

        Revocation of Acceptance in Whole or in Part.

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        1. The buyer may revoke his acceptance of a lot or commercial unit whose non-conformity substantially impairs its value to him if he has accepted it
          1. on the reasonable assumption that its non-conformity would be cured and it has not been seasonably cured; or
          2. without discovery of such non-conformity if his acceptance was reasonably induced either by the difficulty of discovery before acceptance or by the seller's assurances.
        2. Revocation of acceptance must occur within a reasonable time after the buyer discovers or should have discovered the ground for it and before any substantial change in condition of the goods which is not caused by their own defects. It is not effective until the buyer notifies the seller of it.
        3. A buyer who so revokes has the same rights and duties with regard to the goods involved as if he had rejected them.
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UCC § 2-605

Waiver of Buyer's Objections by Failure to Particularize.

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  1. The buyer's failure to state in connection with rejection a particular defect which is ascertainable by reasonable inspection precludes him from relying on the unstated defect to justify rejection or to establish breach
    1. where the seller could have cured it if stated seasonably; or
    2. between merchants when the seller has after rejection made a request in writing for a full and final written statement of all defects on which the buyer proposes to rely.
  2. Payment against documents made without reservation of rights precludes recovery of the payment for defects apparent in the documents.
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