In the law of contracts, any failure to perform any promised duty is a breach. Historically, whether a breach justified a complete refusal to pay the breaching party for goods or services furnished depended on whether the nonbreaching party received or refused the benefits of partial performance. If he accepted them, he was obliged to pay for them; but if he opted to refuse them, he need not pay any of the agreed contract price. This was dubbed the “perfect tender” rule: if a contract is made to do X for an agreed price, and X isn’t perfectly done, the nonbreaching party could refuse to pay any part of the price.
The first case to alter this rule was Britton v. Turner, 6 N.H. 481 (1834). Britton had agreed to work for Turner for a full year, at the end of which Turner had agreed to pay him $120. Britton quit after ten months and Turner refused to pay him a cent. The court held that Turner must pay the fair value of Britton’s services (minus any damages from his failure to perform completely). Justice demanded that the divisible nature of the contract’s day-to-day performance precluded Turner’s rejection of their benefits, which were automatically deemed accepted.
Britton v. Turner limited its holding to “divisible” contracts (benefits accrue as performance is rendered) as opposed to “entire” contracts (benefits accrue only upon completion), and appeared to place construction contracts in the latter category: “[W]here the party has contracted to furnish materials, and do certain labor, as to build a house in a specified manner, if it is not done according to the contract, the party for whom it is built may refuse to receive it--elect to take no benefit from what has been performed.” Eventually the courts abandoned this fallacy, and began treating construction contracts the same as labor contracts. Danforth v. Freeman, 69 N.H. 466, 468 (1899) (“in special contracts for labor day by day, or for labor and materials in erecting a building upon the land of another, the person for whom the work is done necessarily receives the value of the work done as it is done, and if any advantage has accrued to him therefrom, is liable to pay for the benefit received,--the worth to him of the partial performance of the contract by the other party.”).
This has now morphed into the doctrine of “substantial performance,” which is “intended to protect the right to compensation of those who have performed in all material and substantive particulars, so that their right to compensation may not be forfeited by reason of mere technical, inadvertent, or unimportant omissions or defects.” 15 Samuel Williston, A Treatise on the Law of Contracts § 44:52, at 220-21 (4th ed. 2000). The nonbreaching party is entitled to offset any costs of completion or correction – but he may not reject the performance and refuse to pay anything just because the finished product was not delivered 100% to his specifications. Today the right of rejection due to lack of perfect tender is restricted to contracts for the sale of goods.
In the construction context “substantial performance” is equivalent to “substantial completion.” Contracts will often define the phrase (the stage of construction at which the owner may use the work for its intended purposes being a particularly popular definition), and many contracts use it as a trigger for various things ranging from the initial release of retainage, to the cessation of liquidated damages, to the beginning of the warranty period. It also starts the commencement of the eight-year statute of repose under RSA 508:4-b. And most importantly, it renders the contractor’s breaches insufficiently material to justify terminating his contract. As one leading commentator put it, “Substantial performance is performance without a material breach, and a material breach results in performance that is not substantial.” E. Allen Farnsworth, Contracts § 8.12 (4th ed. 2004). Upon achieving substantial completion, an unpaid contractor may sue for breach of contract and recover damages measured by the agreed contract price less any costs of completing or correcting the work (i.e., punch list items).
The first case to alter this rule was Britton v. Turner, 6 N.H. 481 (1834). Britton had agreed to work for Turner for a full year, at the end of which Turner had agreed to pay him $120. Britton quit after ten months and Turner refused to pay him a cent. The court held that Turner must pay the fair value of Britton’s services (minus any damages from his failure to perform completely). Justice demanded that the divisible nature of the contract’s day-to-day performance precluded Turner’s rejection of their benefits, which were automatically deemed accepted.
Britton v. Turner limited its holding to “divisible” contracts (benefits accrue as performance is rendered) as opposed to “entire” contracts (benefits accrue only upon completion), and appeared to place construction contracts in the latter category: “[W]here the party has contracted to furnish materials, and do certain labor, as to build a house in a specified manner, if it is not done according to the contract, the party for whom it is built may refuse to receive it--elect to take no benefit from what has been performed.” Eventually the courts abandoned this fallacy, and began treating construction contracts the same as labor contracts. Danforth v. Freeman, 69 N.H. 466, 468 (1899) (“in special contracts for labor day by day, or for labor and materials in erecting a building upon the land of another, the person for whom the work is done necessarily receives the value of the work done as it is done, and if any advantage has accrued to him therefrom, is liable to pay for the benefit received,--the worth to him of the partial performance of the contract by the other party.”).
This has now morphed into the doctrine of “substantial performance,” which is “intended to protect the right to compensation of those who have performed in all material and substantive particulars, so that their right to compensation may not be forfeited by reason of mere technical, inadvertent, or unimportant omissions or defects.” 15 Samuel Williston, A Treatise on the Law of Contracts § 44:52, at 220-21 (4th ed. 2000). The nonbreaching party is entitled to offset any costs of completion or correction – but he may not reject the performance and refuse to pay anything just because the finished product was not delivered 100% to his specifications. Today the right of rejection due to lack of perfect tender is restricted to contracts for the sale of goods.
In the construction context “substantial performance” is equivalent to “substantial completion.” Contracts will often define the phrase (the stage of construction at which the owner may use the work for its intended purposes being a particularly popular definition), and many contracts use it as a trigger for various things ranging from the initial release of retainage, to the cessation of liquidated damages, to the beginning of the warranty period. It also starts the commencement of the eight-year statute of repose under RSA 508:4-b. And most importantly, it renders the contractor’s breaches insufficiently material to justify terminating his contract. As one leading commentator put it, “Substantial performance is performance without a material breach, and a material breach results in performance that is not substantial.” E. Allen Farnsworth, Contracts § 8.12 (4th ed. 2004). Upon achieving substantial completion, an unpaid contractor may sue for breach of contract and recover damages measured by the agreed contract price less any costs of completing or correcting the work (i.e., punch list items).
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