Business Law Journal

Background

In September 2015, Kevin T. Jennings (“Jennings”) entered into a purchase and sale agreement (the “Agreement”) with Rugger Investment Group, LLC (“Rugger”), through which Jennings agreed to purchase an aircraft from Rugger.  The Agreement stated: “Unless specifically stated to the contrary herein, time shall be of the essence for all events contemplated hereunder.”  The Agreement also required Rugger to transfer the aircraft on the closing date free and clear of all liens and encumbrances; however, Rugger was unable to comply with this requirement due to a mechanics lien filed against the aircraft by Cutter Aviation Phoenix, Inc. (“Cutter”).

Consequently, Magic Carpet Ride, LLC (“MCR”) and Rugger entered into an amendment (the “Amendment”) to the Agreement which identified MCR as the buyer instead of Jennings, and gave Rugger ninety (90) days from the date of closing by which to provide one of three means for releasing the Cutter lien.  This included a fully executed lien release by Cutter in its original form, delivered to the escrow agent, recognized and accepted by the Federal Aviation Administration (“FAA”).  MCR took title to and possession of the aircraft the day after the Amendment was signed.  Then, despite diligent and good-faith efforts, Rugger obtained a lien release from Cutter only eight days after the expiration of that 90-day period, and delivered the lien release (on a FAA-accepted form) to escrow at that time.

Thereafter a lawsuit was filed by Jennings and MCR (collectively “Plaintiffs”) against Rugger, including a breach of contract claim due to Rugger’s failure to obtain a release of the Cutter lien within the requisite 90-day period.  Rugger filed a cross-complaint against Jennings.  Plaintiff filed a motion for summary adjudication on their breach of contract claim, which the trial court granted.  Plaintiffs dismissed the remaining causes of action, and a judgment awarding MCR $90,000 in damages was subsequently entered.  Rugger timely appealed claiming substantial performance.

Factors of Substantial Performance

Substantial performance is considered a category of failure to render performance and five factors are considered in determining whether a failure to perform is material.  Those factors are: (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”; and (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.”

In this context, it is well held that substantial performance is sufficient to satisfy the terms of a contract, even when delayed; though the other party is entitled to a reduction in the contract amount to compensate for any defects due to such performance.  What constitutes substantial performance is a question of fact, but there must be no wilful departure from the terms of the contract, and the defects must be easily remedied or compensated such that the promisee may get practically what the contract calls for.  The doctrine of substantial performance applies even where a party substantially performs after missing a deadline.  Where time is not of the essence in a contract, substantial performance constitutes compliance so long as the payment is made within a reasonable time after any due date in the contract.

When time is of the essence in a contract, traditionally, a failure to perform within the time specified was considered a material breach of the contract.  However, this traditional rule has been tempered, as Courts have recognized that the inclusion of “time is of the essence” language does not automatically make any untimely performance a breach — for example, such a provision will not be enforced if doing so would work a forfeiture on an otherwise substantially complying party.

Here, the Court of Appeal held to the extent that it was unclear whether the “time is of the essence” provision was intended to apply to Rugger’s deposit of the lien release, particularly where MCR had taken title to and possession of the aircraft the day after the Amendment was signed, a triable issue of fact remained.  Moreover, a strict interpretation of the 90-day period deadline would give Plaintiffs not only possession of the aircraft free of liens and encumbrances, but also a $90,000 reduction in price.  The Amendment had contemplated that MCR would get one or the other, but not both.  As Rugger had already cured its failure in good faith, and there was no evidence that Plaintiffs had suffered any damages due to the eight-day delay, a triable issue as to whether Rugger would suffer an unjust forfeiture and MCR would receive a windfall remained.

Conclusion

Where time is of the essence, simply including a general “time is of the essence” clause may not necessarily convey the Parties’ intent to make any untimely performance a material breach.  And even if it did, a delay in performance (so long as substantial performance is made in good faith) may not be used to enforce an unjust forfeiture.  Accordingly, if you find yourself in such a situation, time is of the essence — please promptly contact your counsel at Atkinson, Andelson, Loya, Ruud & Romo for a thorough analysis of your options moving forward.

This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process. 

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