Contract Law: Understanding the Doctrine of Substantial Performance

Contracts are at the basis of most major commercial transactions. When parties enter into a legally binding agreement, they must understand their rights and responsibilities. The breach of a contract can lead to business litigation. Though, it is not always clear as to whether or not a contract breach actually occurred. 

Substantial performance is a common law doctrine that holds that a performance that is not technically complete may still be legally sufficient—assuming that the defects are not “material” to the agreement. In this blog post, our North Carolina business law attorney provides a comprehensive overview of the contract law doctrine of substantial performance. 

Substantial Performance: Precise Performance Not Always Required to Fulfill Contract 

When parties agree upon a valid contract, they have a legal obligation to fulfill the terms of the agreement. If either party fails to perform their duties, they may be liable for damages through a breach of contract claim. Of course, what constitutes a breach of contract is not always clear. 

Under the common law doctrine of substantial performance, a party may still be deemed to have “fulfilled” its contractual obligations even if its performance is non-perfect. To rely on the doctrine of substantial performance, the deviation from the agreed-upon terms must be “immaterial.”

It is important to emphasize that “immaterial” is not a synonym for “small” or “minor.” Indeed, a very small deviation in the specifications for a part could render that part completely unusable. A variation in performance is only immaterial if it does frustrate the purpose of the agreement. 

North Carolina Case Law and the Doctrine of Substantial Performance

To best understand how the doctrine of substantial performance applies to contracts in North Carolina, it is useful to consider a real-world example. In the 1978 North Carolina Court of Appeals case of Black v. Clark, a contractor and a property owner were locked in a dispute over the use of certain nails. The contract called for aluminum nails, but the company subbed in steel-coated nails. 

The plaintiff (contractor) wanted payment for the work that was completed—nearly 80 percent of the project. The defendant (property owner) wanted to deny such payment. The plaintiff accepted that a technical breach had occurred but asserted the doctrine of substantial performance, arguing that the technical deviation was not material to the agreement. 

The court determined that the doctrine did indeed apply to this commercial dispute. It ordered a new trial. In doing so, the court emphasized that the substantial performance doctrine applied as a matter of law in North Carolina. However, the appeals court also noted whether or not the deviation in question—use of the wrong nails—was actually a substantial performance or was a material breach was a matter for a jury to decide. 

The Counterparty May Deduct Reasonable Costs for Non-Complete Performance

Substantial performance can serve as a “defense” to a breach of contract claim in North Carolina. If the burden of substantial performance was met—meaning there was no material breach of the agreement—then the party is entitled to complete the terms of the agreement and receive payment for goods or services rendered. 

That being said, the counterparty has the right to deduct reasonable costs to account for the non-technical performance. As stated by the North Carolina Court of Appeals in the aforementioned case of Black v. Clark, it has long been established in the state that substantial performance can entitle a party to payment “less allowances for defects in performance or damages for failure to comply with the contract strictly.”

The Specific Language of a Contractual Agreement is Extremely Important

Commercial disputes over the alleged breach of a contract are always highly fact-specific. The precise language of a business contract will determine whether or not a breach occurred. What constitutes a “material breach” depends on exactly what is written in the agreement that was negotiated by the parties. 

Further, North Carolina law allows parties to contract for a specific type of performance. Under NC Gen Stat § 25-2-716, the buyer has a general right to demand a specific form of performance when “the goods are unique or in other proper circumstances.” When specific performance is reasonably required by a contract, the substantial performance doctrine may not apply. 

Consult With Our North Carolina Business Law & Litigation Attorney Today

At Green Mistretta Law, PLLC, our North Carolina business lawyers are skilled, solutions-focused advocates for clients. If you have any questions about the contract doctrine of substantial performance, we can help. Give us a call now or contact us online to set up a strictly confidential consultation. With a law office in Wake Forest, we provide commercial law and commercial litigation services throughout the area, including Raleigh, Durham, and Chapel Hill.