Substantial Performance (Contract Law: All You Need To Know)

What is Substantial Performance?

How do you define substantial performance in contract law?

How does it work?

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What Is Substantial Performance

In contract law, the doctrine of special performance means that a contracting party can legally claim that his or her contractual obligations are satisfied and fulfilled although the contract has not been fully performed.

In other words, if a contract is “substantially performed” or “materially performed” in good faith, the contracting party will have satisfied the execution of his or her contractual obligations and could not be found to be in breach of contract.

This doctrine is used to determine if a party has satisfied its obligations under the contract or not.

If a party can demonstrate that he or she has in substance satisfied its obligations in the contract and where there may be slight deficiencies or very minor deviations, then the substantial performance bar is met.

On the other hand, if the minimum bar of substantial performance is not met, the party can be found to be in breach of contract.

Performance Evaluation Criteria

In the event of a contractual dispute, the courts will be required to evaluate whether or not a contract has been substantially performed or materially breached.

To assess a party’s performance, the courts will consider things like:

• How much did the non-breaching party receive in benefit
• Was the breaching party in bad faith 
• Will an award of damages adequately compensate the non-breaching party
• Did the parties include language in the contract to exclude substantial performance 

Every case is different and the facts of the case are different.

If you are dealing with a contractual dispute and need to assess if you have satisfied your obligations or not, you should consult with a litigation attorney specializing in contracts.

Substantial Performance Definition

According to the Legal Information Institute, substantial performance is defined as follows:

In essence, the legal definition of substantial performance can be summed up as:

• It’s a doctrine in common law
• It relates to the performance of contracts 
• If a party substantially satisfies its contractual obligations 
• Then the contractual obligations will be considered as satisfied 

Exceptions To The Rule

The principle of substantial performance, in the United States, does not apply to the sale of goods subject to the Uniform Commercial Code.

This means that if a contracting party is required to deliver goods of a certain characteristic, quality, and number, then the delivery must perfectly match the obligations of the contract.

If the buyer does not get the goods exactly as per the contract, he or she may reject the delivery of the goods.

The perfect and complete performance of obligations is called the “perfect tender rule”.

Recovery of Damages

If a party meets the minimum performance threshold for the contractual obligations to be considered as satisfied but with slight deviations or deficiencies, then the other contracting party its corresponding obligations.

However, the counterparty will have the right to deduct damages from the payment to account for the non-material breach of the contractual terms.

Typically, the deductions must be in proportion to the non-material deficiency in the contract and reasonable in the circumstances.

Substantial Performance Contract Law

Let’s look at how substantial performance is considered in contract law.

Substantial Performance Doctrine

Under the doctrine of substantial performance in contracts, a contracting party may not have to perform the contract precisely as stated in the contract for his or her contractual obligations to be satisfied. 

When a contracting party does not perfectly and precisely perform its obligations where there has been “substantial performance”, the other contracting party could not claim a breach of contract but will have the right to deduct reasonable damages to account for the slight deviation.

Performance in contract law must be as per the terms of the contract.

This means that a party cannot take advantage of a substantial performance law to execute its obligations in substance and not others when the remaining obligations are easy to perform or complete.

For instance, if a contract requires that a party deliver 10 units but only 9 are delivered, then the rule of substantial performance will not apply as the other party can have the 10th unit delivered without difficulty.

Perfect Tender Rule

In contract law, further to the “perfect tender rule”, a party is required to fully and completely satisfy its contractual obligations for its obligations to be satisfied.

In other words, if the perfect tender rule applies, a party’s obligations must “perfectly match” what was outlined in the contract. 

In the United States, when there is a sale of goods that is subject to the rules of the Uniform Commercial Code, then the perfect tender rule will apply. 

The buyer of goods can demand and insist that the seller deliver the goods with the right quality, quantity, and delivery method.

If the goods do not correspond to the buyer’s requirements and order, the buyer has the legal right to reject the goods.

When a party’s performance is perfect, it is said to be complete.

This means that based on the perfect tender rule, substantial performance is not adequate when the parties are involved in a contract for the sale of goods.

A seller cannot “substantially” conform to the buyer’s requirements but must “perfectly” conform to it.

UCC states that if the goods or the tender of delivery fails “in any respect” to conform to the contract, the buyer will have the right to reject the goods.

Substantial Performance Contract

To determine whether or not the substantial performance rule applies to a contract, it’s important to consider the intention of the parties by assessing the contractual language.

If the parties have specifically excluded the substantial performance in their contract but using express terms to this effect, then the perfect and complete execution of the contractual obligations will be required.

In other words, the parties have not bargained for a substantial performance contract but one where the obligations must be fully and completely performed as per the terms of the contract.

Substantial Performance Example

Let’s look at a few examples of contracts that are substantially performed to better illustrate the point.

Imagine that you ask for a company to build you a new house.

If the contractor builds the house in accordance with the specifications but where there are minor deficiencies in the finishing, then the contract will be considered as materially executed.

However, if the contract does not complete the construction of the property and fails to deliver the property as per the contractual specifications, then you have a breach of contract.

Let’s look at another example.

Imagine that you sign a contract with a contractor to renovate your kitchen.

The contractor renovates your entire kitchen but instead of installing a 36-inch sink, installs a 30-inch sink.

In this case, there is substantial performance and you must pay the contractor for the renovation job but you can deduct reasonable damages for the deficient sink.

On other hand, if the contractor fails to install the right cabinets, does not put the right counter-top quality, puts a wrong sink and has other significant deficiencies, then you have a breach of contract as the performance materially deviates from the contract.

Substantia Performance Meaning Takeaways 

So there you have it folks!

What does substantial performance mean?

What is required for substantial performance contracts?

In essence, when a party materially performs its obligations under a contract, although slight deviations may exist, the contractual obligations will be considered as complete in law.

The important factor to consider here is that the slight deviation must not be significant or material, otherwise, the obligations will not be considered as satisfied.

The main challenge in evaluating contractual performance is to assess whether the imperfect performance is considered as “substantial performance” or a “breach of contract”.

Typically, the courts will evaluate the nature of the contractual wording and the essential purpose of the contract to determine whether a party has substantially performed its obligations or not.

If the performance of the contract is not 100% complete but reaches a level that is good enough to avoid a breach of contract, that threshold is the substantial performance threshold. 

If you are dealing with a contract and need to get legal advice as to your obligations or the performance of the other party, you should consult with a qualified attorney as there are different rules and exceptions that may apply.

Good luck!

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Legal Definition Substantial Performance Overview

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